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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


Form 10‑K

 

 

(MARK ONE)

 

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

OR

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

FOR THE TRANSITION PERIOD FROM              TO            

 

Commission File Number 000‑27261


CH2M HILL Companies, Ltd.

(Exact name of registrant as specified in its charter)

 

 

Delaware

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:

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   No 

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   No 

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    No 

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   No 

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. 

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.

 

 


reporting company)

 

Large accelerated filer 

Accelerated filer 

Non‑accelerated filer 

(Do not check if a smaller
reporting company)

Smaller reporting company 

 

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

The aggregate value of common stock held by non‑affiliates computed by reference to the price as of June 30, 2014 was $1,805,359,195.

As of February 13, 2015, there were 27,263,934 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 2015 Annual Meeting of Stockholders to be held on May 11, 2015.

 

 

 


 

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10‑K

TABLE OF CONTENTS

 

    

    

    

    

 

 

 

 

 

Page

 

PART I. 

 

 

 

 

 

Item 1. 

 

Business

 

 

Item 1A. 

 

Risk Factors

 

10 

 

Item 1B. 

 

Unresolved Staff Comments

 

26 

 

Item 2. 

 

Properties

 

26 

 

Item 3. 

 

Legal Proceedings

 

26 

 

Item 4. 

 

Mine Safety Disclosures

 

28 

 

PART II. 

 

 

 

 

 

Item 5. 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

28 

 

Item 6. 

 

Selected Financial Data

 

35 

 

Item 7. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

36 

 

Item 7A. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

49 

 

Item 8. 

 

Financial Statements and Supplementary Data

 

50 

 

Item 9. 

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

50 

 

Item 9A. 

 

Controls and Procedures

 

50 

 

Item 9B. 

 

Other Information

 

51 

 

PART III. 

 

 

 

 

 

Item 10. 

 

Directors, Executive Officers and Corporate Governance

 

51 

 

Item 11. 

 

Executive Compensation

 

52 

 

Item 12. 

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

52 

 

Item 13. 

 

Certain Relationships and Related Transactions, and Director Independence

 

52 

 

Item 14. 

 

Principal Accounting Fees and Services

 

52 

 

PART IV. 

 

 

 

 

 

Item 15. 

 

Exhibits and Financial Statement Schedules

 

53 

 

SIGNATURES 

 

 

 

 

 

 

 

2


 

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 Companys 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.

3


 

PART I

Item 1.  Business

Description of the Business

CH2M HILL Companies, Ltd. (“We”, “Our”, “CH2M HILL” or the “Company”) was founded in 1946 and is incorporated under the laws of the State of Delaware. We are an employee‑controlled professional engineering services firm providing engineering, construction, consulting, design, design‑build, procurement, engineering‑procurement‑construction (EPC), operations and maintenance, program management and technical services to United States (“U.S.”) federal, state, municipal and local government agencies, national governments, as well as private industry and utilities, around the world. A substantial portion of our professional fees are derived from projects that are funded directly or indirectly by government entities. Including craft and hourly employees as well as certain populated joint ventures, we have approximately 25,000 employees worldwide.

Since our founding in 1946, CH2M HILL has grown through organic growth as well as through acquisitionsWe 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.  The following is a brief description of our most recent key acquisitions, in chronological order:

·

On July 29, 2011, we acquired Booz Allen Hamiltons State and Local Government Transportation and Consulting (BAH) business. BAH provides management consulting, system engineering, vehicle engineering, asset management, train control and communication systems, systems safety and revenue system consulting to transit and rail agencies throughout North America.

·

On November 10, 2011, we purchased all the share capital of Halcrow Holdings Limited (“Halcrow”).  Halcrow is a United Kingdom (“U.K.”) headquartered engineering, planning, design and management services firm specializing in developing infrastructure and buildings.   Halcrow provides  services to clients in the United Kingdom, Middle East, Canada, the United States, China, India, Australia, South America, and Europe. Halcrows clients included public and private‑sector organizations around the world, including local, regional and national governments, asset owners, international funding agencies, regulators, financial institutions, contractors, developers and operators.

·

On April 4, 2014, we acquired certain assets and liabilities of TERA Environmental Consultants (“TERA”).  TERA is an employee-owned environmental consulting firm headquartered in Canada specializing in environmental assessment, planning, siting, permitting, licensing, and related services for the pipeline, electrical transmission, and oil and gas industries.

Restructuring

In September 2014, we commenced certain restructuring activities in order to achieve important business objectives, including reducing overhead costs, enhancing client service, improving efficiency, reducing risk, creating more opportunity for profitable growth, and providing more long-term value for Company stockholders.  These restructuring plans include such items as a voluntary retirement program, workforce reductions, facilities consolidations, reduction of corporate overhead costs and evaluation of certain lines of business. The following description of our business includes the results of these restructuring activities.    

Our Clients,  Key Markets, and Geographic Areas

Clients

We provide our services to a broad range of domestic and international clients, including federal governments, state, local and provincial governments, private sector businesses and utilities. We perform services as the prime

4


 

contractor, a subcontractor, or through joint ventures or partnership agreements with other service providers. The demand for our services generally comes from capital spending decisions made by our clients.

The following table summarizes our primary client types and revenue served by each of our markets during 2014.

 

 

 

 

 

 

 

 

 

 

% of 2014

 

 

 

 

Markets

 

Revenue

 

Client Type

Energy

    

19.5 

%      

    

Private Sectors and Utilities

 

 

 

 

 

Major oil and gas companies

 

 

 

 

 

 

 

Environment and Nuclear

 

25.4 

%      

 

U.S. Federal and Foreign Governments

 

 

 

 

 

Private and Public Sectors

 

 

 

 

 

 

 

Facilities and Urban Environment

 

14.6 

%  

 

Private Sector Manufacturing, Technology, and Sports

 

 

 

 

 

U.S. Federal Government

 

 

 

 

 

 

 

Transportation

 

17.5 

%  

 

U.S. Federal and Foreign Governments

 

 

 

 

 

Local and Municipal Transport Agencies

 

 

 

 

 

 

 

Water

 

23.0 

%  

 

State and Local Governments

 

 

 

 

 

Water and wastewater municipalities

The following table provides a summary of representative clients:

 

 

 

 

 

 

 

 

 

Public Sector Clients

Private Sector Clients

U.S. Department of Energy

    

U.K. Department for Transport

 

Major oil and gas companies, refiners

 

("DOE")

 

U.K. Nuclear Decommissioning

 

 

and pipeline operators

U.S. Department of Defense

 

 

Authority (“NDA”)

 

Power utilities

U.S. Department of the Interior

 

Republic of Korea Ministry of Defense

 

Chemicals, bioprocessing and refining

U.S. Air Force

 

U.S. and foreign cities

 

 

companies

U.S. Navy

 

U.S. and international airports and

 

Metals and mining

U.S. Army Corps of Engineers

 

 

seaports

 

Microelectronics manufacturers

U.S. Federal Emergency

 

U.S. and State Departments of

 

Pharmaceutical and biotechnology

 

Management Agency (“FEMA”)

 

 

Transportation

 

 

companies

Department of Homeland

 

U.S. state and international transit

 

Automotive, aircraft, food and

 

Security

 

 

authorities and agencies

 

 

beverage consumer product

U.S. Agency for International

 

Water and wastewater municipalities

 

 

manufacturers

 

Development

 

Panama Canal Authority

 

Renewable energy companies

U.S. Environmental Protection

 

Qatar Public Works Authority,

 

 

 

 

Agency

 

 

ASHGAL

 

 

 

National Aeronautics and Space

 

Qatar 2022 Supreme Committee

 

 

 

 

Administration

 

Rio 2016 Olympic and Paralympic

 

 

 

National Science Foundation

 

 

Games

 

 

 

U.K. Environment Agency

 

U.K. Highways Agency

 

 

 

Local and Municipal Transport

 

Transport for London

 

 

 

 

Agencies

 

 

 

 

 

 

In 2014, we derived approximately 21% of our total revenue from contracts with the U.S. federal government and agencies regulated by the U.S. federal government.

5


 

Key Markets

The following is a description of each of our key markets and the services we provide.

Energy

The Energy market is comprised of our Oil, Gas, and Chemicals business and our Power business.  The portfolio of services includes: consulting, design, engineering, design‑build, EPC, operations and maintenance, construction management, construction, and program management.

In our Oil, Gas, and Chemicals business, we serve the upstream, pipelines and terminals, and refining sectors of the oil and gas industry. For the upstream sector, we perform engineering, modular fabrication, erection, construction, and operations and maintenance services for oil and gas fields. We deliver compression and dehydration facilities, drilling and well support services, enhanced oil recovery infrastructure, field development, fleet support, natural gas gathering and processing, conventional oil production, sulfur recovery, acid gas treating, and heavy oil and steam‑ assisted gravity drainage facilities. In our pipelines and terminals sector, we focus on infrastructure projects that gather, store, and transport oil, natural gas, refined products, carbon dioxide, and other related hydrocarbons, liquids, and gases. These projects include pipelines, compression, pump stations, metering, tank farms, terminals, and related facilities for midstream (wellhead to central processing) and downstream (cross‑country transportation) systems. In our refining sector, we provide conceptual and preliminary engineering, front‑end and detail design, procurement, construction, and operations and maintenance services. Our refining experience includes 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; and process safety management. In our chemicals business, we serve all segments of the industry, including petrochemicals and derivatives, inorganics, specialties, and agricultural chemicals. We have substantial experience in polysilicon, chemicals from alternative feedstock, bioprocess, alkalis and chlorine, pigments and coating, monomers and polymers, resins and plastics, and synthetic performance fibers. This group also serves the biofuels market where we specialize in advanced fuel sources for biofuels development in the United States, Canada, and Latin America. We serve clients in North and South America, the Middle East, and Russia.

In our Power business, we have historically design and built power generation facilities that produce energy from natural gas, coal, solar, wind, biomass, and geothermal sources. Our portfolio has previously included combined‑cycle, simple‑cycle, coal/integrated gasification, clean air, alternative/waste fuels, transmission and cogeneration projects. We also have provided services to repower, upgrade, and modify existing plants to improve performance, reliability and achieve clean air standards. Our delivery of full‑service EPC services helped 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. We also have provided engineering studies, design, construction management, program management and consulting services.

During the first quarter of 2014, we shifted our focus away from pursuing and contracting fixed price EPC power projects, and later in 2014, in connection with our restructuring activities, we elected to exit the Power business.  However, we intend to complete our remaining few contracted EPC projects which we expect will continue into 2017.  Results of our power business are included in the results of operations for all periods presented.

Environment and Nuclear

The Environment and Nuclear market is comprised of the Environmental business, the Government, Facilities, and Infrastructure business, and the Nuclear business.  The portfolio of services includes: consulting, design, engineering, design‑build, EPC, operations and maintenance, construction management and program management.

Our Environmental business is dedicated to sustainability by protecting human health, preserving the environment, and restoring impacted natural resources. We achieve this mission by offering services through various global practices including: sustainability consulting, threat reduction management, environmental compliance, planning

6


 

and permitting, integrated waste solutions, munitions response, natural resources planning and management, sediment management and remediation, and site remediation and revitalization. A key differentiator for our services remains our innovation and complex problem solving capacities found in these practices. Clients include a broad spectrum of U.S. and state government agencies and departments; multinational commercial clients; and international clients in the public, private and government sectors. Another key differentiator for us, with both our government and multinational clients, is local project delivery with a global footprint—our ability to effectively and consistently deploy our systems and processes (especially safety, environmental compliance, and project management) throughout the world with minimal deviation, while addressing the unique local stakeholder and regulatory needs of each project.

Our Government Facilities and Infrastructure (“GFI”) business has historically planned, designed, constructed, operated and maintained various categories of facilities and infrastructure at all types of government and military installations.  We have offered contingency and logistics, planning and consulting engineering and design, design‑build, operations and maintenance, and program management services to government clients. We also provide a multitude of services to other government agencies such as the U.S. Federal Emergency Management Agency, National Science Foundation, U.S. Agency for International Development, DOE, and the National Aeronautics and Space Administration.  In 2015, the GFI business was consolidated into our Environment business.

Our Nuclear business serves three primary markets: nuclear remediation and decommissioning (liabilities management), nuclear power and national defense. We specialize in the management of complex nuclear programs and projects around the globe. Our experience includes managing and operating nuclear facilities and providing innovative cleanup and environmental remediation for commercial and government facilities and sites worldwide. We provide program management and program advisory services to national defense and commercial nuclear clients, as well as planning, permitting, and licensing of new nuclear energy generating stations. The DOE and NDA are our primary liabilities management clients, however, we have also decommissioned reactors for utilities and research reactors for universities and are beginning to expand our offering into the commercial nuclear power sector in countries outside the U.S., including the United Arab Emirates, that are interested in starting a nuclear power program. National defense clients include the U.S. National Nuclear Security Agency and U.K. Ministry of Defence’s Atomic Weapons Establishment and Submarine Operating Centre.

Facilities and Urban Environments

The Facilities and Urban Environments market is comprised of the Industrial and Advanced Technology business, the Buildings business and the Urban Environments business.  The portfolio of services includes: consulting, planning, design, engineering, design-build, program management and operations management.

In our Industrial and Advanced Technology (“I&AT”) business, we provide program management, consulting, planning, design, and construction management services to clients in the following manufacturing industries: semiconductor, wafer,  nanotechnology, photo voltaic, data center, flat panel display, automotive, aerospace and aviation, food and beverage, building materials, metals and consumer products. Our clients typically require integrated design and construction services for complex manufacturing systems, including clean rooms, ultrapure water and wastewater systems, chemical and gas systems and production tools. We also provide specialized consulting services to optimize the operating efficiency and return on investment for complex manufacturing facilities. We plan to expand our geographic footprint in this business in Asia, North 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.

Our Urban Environments business delivers large, complex urban projects and programs around the world with focus on the following services:  Master Planning and Consulting; Economic Development Planning; Project Development; Land Development; Program Management; and Community Operations.

Our Buildings business provides global consulting, planning and design, sustainability and façade services for complex vertical structures.

7


 

Transportation

Our Transportation market provides horizontal and vertical infrastructure development services for the Aviation, Highway and Bridge, Ports and Maritime, and Transit and Rail market sectors. Working with public and private clients around the world, our services support urbanization and population growth; the safe and efficient movement of people and goods; serviceability of aging infrastructure; resource extraction; infrastructure resilience to climatic changes/dramatic weather events; and signature infrastructure to stimulate regional economic growth. We offer a broad portfolio of services, including procurement and technical advisory, transportation planning, environmental studies and documentation, design engineering, design for design-build, project/program management, construction management, and operations and asset management services. In the Aviation sector, we deliver airside and landside services to commercial, general aviation and military airports.  For our municipal, state and national government Highway and Bridge clients, we specialize in motorways, freeways and complex interchanges; toll roads/HOT/HOV lanes; highway structures and footbridges; signature bridges and major crossings; highway tunnels; and bike and pedestrian facilities. In Ports and Maritime, we serve port operators, port authorities, government, and private sector clients developing containerized and cargo terminals; general cargo and break-bulk terminals; petrochemical, energy and mining marine facilities; government and military facilities; intermodal facilities; ferry terminals; urban waterfronts; and cruise line terminals. Our Transit and Rail services for municipal agencies, national governments and freight operators encompasses high-speed rail; metros and urban transit; commuter rail; light rail, trolleys and streetcars; bus rapid transit; freight rail; and intermodal facilities. Transportation’s employees are located in offices around the world delivering projects throughout Asia, Australia, Europe, India, Latin America, the Middle East, and North America.

Water

Our Water market is dedicated to solving our clients’ most complex water challenges with exceptional service and integrated, sustainable solutions as we serve the wastewater, drinking water, industrial water, conveyance and storage, water resources and ecosystem management, and intelligent water solutions markets. We support the water-related needs of clients in the utility, industrial, government, energy, and agricultural sectors. Our broad portfolio of water solutions help clients address the complex challenges created by extreme climate events, population growth, aging infrastructure, water supply uncertainty, regulatory changes, and increasing demand.  The integration of our industrial water and operations and management capabilities uniquely positions us to serve our clients across all markets and delivery platforms in the geographies on which we focus. Known for our full-service (consulting, program management, design-build, operations), innovative project approach and delivery, we work with clients to identify solutions for water and energy conservation, and to reevaluate processes to achieve cost savings and reduce environmental impacts. We plan to focus our capability on market drivers such as drought and water scarcity, aging infrastructure, global climate change, energy water needs and regulatory requirements.

Geographic Areas

We provide services to clients located in numerous countries across the globe.  Internally, we divide our operations into six geographic regions: Asia Pacific; Canada; Europe; Latin and South America; Middle East, North Africa and India (“MENAI”); and the United States.    Although the majority of our consolidated revenue is generated from our domestic operations, we provide services in numerous countries, including the United Kingdom which accounted for 10% of the total consolidated revenue in 2014. Total U.S. and international revenue for the years ended December 31 were as follows:

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

    

2014

    

2013

    

2012

U.S.

 

$

3,806,935 

 

$

3,915,091 

 

$

4,237,918 

International

 

 

1,606,534 

 

 

1,962,728 

 

 

1,922,635 

Total

 

$

5,413,469 

 

$

5,877,819 

 

$

6,160,553 

 

The fixed assets to support our business operations and our clients are located both domestically and internationally.  Total U.S. and international net property, plant and equipment for the years ended December 31 were as follows:

 

 

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($ in thousands)

    

2014

    

2013

    

2012

U.S.

 

$

215,689 

 

$

183,884 

 

$

131,684 

International

 

 

42,471 

 

 

42,541 

 

 

80,323 

Total

 

$

258,160 

 

$

226,425 

 

$

212,007 

 

Competition

The market for design, consulting, engineering, construction, design‑build, EPC, operations and maintenance, and program management services is highly competitive and consolidating. We compete primarily with large multinational firms but also compete with smaller firms on contracts within the private industry, national, and state and local government sectors. 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.

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, design‑build, EPC, operation and 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 believe we can 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.  As such, the industry is highly fragmented. 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 Item 1A. Risk Factors.

Backlog

Backlog represents the total dollar amount of revenue we expect to earn as a result of performing work under contracts that have been awarded. Our backlog also reflects the future activities related to consolidated 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 the U.S. Congress and fund various federal contracts only on an incremental basis. The same is true of many state, local and foreign contracts. Our policy is to include in backlog the full contract award, whether funded or unfunded.    Unexercised options under any contract are not included in our backlog.  In accordance with industry practice, substantially all of our contracts are subject to cancellation, termination, or suspension at the discretion of the client. See Item 1A. Risk Factors for further discussion.

The following table provides backlog revenue by market segment for the years ended December 31:

 

 

 

 

 

 

 

 

($ in millions)

    

2014

    

2013

Energy

 

$

1,291 

 

$

1,876 

Environment and Nuclear

 

 

3,138 

 

 

3,627 

Facilities and Urban Environments

 

 

732 

 

 

911 

Transportation

 

 

977 

 

 

1,130 

Water

 

 

2,064 

 

 

1,433 

 

 

$

8,202 

 

$

8,977 

The majority of our backlog will be performed in 2015 and 2016.

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Available Information

For information regarding our company, including free copies of filings with the Securities and Exchange Commission (SEC), please visit our web site at www.ch2mstockholder.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 made available as soon as practicable after they are filed with the SEC.

Item 1A.  Risk Factors

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

Project losses and other adverse operating results can constrain our cash flow and liquidity, which could reduce our ability to win new business or materially and adversely affect our business and results of operations, and our strategic initiatives may not be successful.

We have experienced project losses and other adverse operating results in recent periods, which have constrained our cash flow and liquidity. In response, our management has undertaken an initiative designed to help reduce costs and achieve important business objectives, including enhancing client service, improving efficiency, reducing risk, creating more opportunity for profitable growth and maximizing value for stockholders. We began to implement these activities in 2014, including the rationalization of certain lines of business, voluntary and involuntary employee terminations, reduction of corporate overhead cost, and the closure of certain facilities.  We also shifted our focus away from risker fixed price construction contracts in 2014. During the year ended December 31, 2014, we incurred $70.4 million of costs related to these restructuring activities. We expect restructuring activities to continue into 2015 and anticipate we will incur aggregate costs up to $120 million and resulting in annualized cost savings of greater than $120 million, although such cost savings may not materialize when expected or at all. In addition to the restructuring initiatives described above, we are considering the possibility of raising capital through  a third party, preferred stock investment in CH2M HILL's capital stock.  There can be no assurance, however, that such initiatives or capital raising efforts will be successful. If they are unsuccessful, or if we sustain additional project losses or other adverse operating results in the future, or if cash flow and liquidity continue to be constrained, we may have a reduced ability to win new business, which could materially and adversely affect our business, results of operations, cash flows and financial position.

If we are unable to continue to access credit on acceptable terms, our business may be adversely affected.

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 working capital, capital expenditures, acquisitions and stock repurchases in our internal market. Cash flows from operations primarily result from earnings on our operations and changes in our working capital. Earnings from our operations and our working capital requirements can vary significantly from period to period based primarily on the mix of our projects underway and the percentage of project work completed during the period. As a result of our current year operational challenges, we experienced a decline in our operating cash flow for the year ended December 31, 2014 compared to the year ended December 31, 2013. While we manage cash requirements for working capital needs, unpredictability in cash collections and payments has required us in the past and may require us to borrow on our line of credit from time to time to meet the needs of our operations.

Our borrowing capacity under the Amended Credit Agreement is limited by a maximum consolidated leverage ratio, which is based on a multiple of our adjusted earnings before interest, taxes, depreciation and amortization, and other outstanding obligations of the Company. Therefore, our remaining borrowing capacity is not simply a function of the amount of the Credit Facility less outstanding borrowings on the line of credit, outstanding letters of credit and bank guarantees. As of December 31, 2014, the remaining unused borrowing capacity under the Amended Credit Agreement was approximately $200.0 million. As a result of the operational challenges, charges associated with our ongoing restructuring and project losses experienced in 2014, some of which will continue to affect our business and results of

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operations in 2015, we anticipate that the amount of unused borrowing capacity under the Amended Credit Agreement may decline further in 2015.  While we believe our borrowing capacity is sufficient to fund our near-term operations, due to uncertainty about future operations, demands from our internal market and other capital requirements, we might need to alter certain practices associated with discretionary cash outlays.  We are exploring raising capital to bolster our working capital position.  There can be no assurance, however, if or when we might raise capital to increase liquidity.

Our credit agreement contains covenants that may restrict our operations and requires that we comply with certain financial ratios.

The Amended Credit Agreement contains customary affirmative and negative covenants, some of which limit or restrict our operations including our ability to incur additional indebtedness and other obligations, grant liens to secure obligations, make investments, merge or consolidate and dispose of assets, subject to certain customary exceptions. These restrictions could limit our ability to plan for or react to market or economic conditions or meet capital needs or otherwise restrict our activities or business plans, and could adversely affect our ability to finance our operations, acquisitions, investments or strategic alliances or other capital needs or limit our ability to take advantage of business opportunities.

In addition, our Amended Credit Agreement requires that we comply with a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio. Our ability to comply with these ratios may be affected by events beyond our control. If we fail to satisfy these requirements or if we are in default of the Amended Credit Agreement, our indebtedness under the Amended Credit Agreement could be accelerated and we may lose access to borrowings under the Amended Credit Agreement.  This would have a material impact on our business, our results of operations, cash flow and financial condition.

We may be unable to amend our credit facility or maintain or expand our credit capacity, which would adversely affect our operations and business.

We use credit facilities to support our working capital and acquisition needs. If we exhaust our borrowing capacity under the Amended Credit Agreement, and cash flows from operations do not increase sufficiently, our ability to fund the working capital and other needs of our existing operations could be constrained and our business and results of operations could be materially adversely affected.  In addition, there is no guarantee that we can continue to renew our credit facility on terms as favorable as those in our existing credit facility, which reaches maturity in 2019, and, if we are unable to do so, our costs of borrowing and our business may be adversely affected.  Furthermore, if we experience operational difficulties or our operating results do not improve, we may need to increase our available borrowing capacity or seek amendments to the terms of our existing Credit Agreement.  There can be no assurance that we will be able to secure any additional capacity or amendment to our Credit Agreement or to do so on terms that are acceptable to us, in which case, our costs of borrowing could rise and our business and results of operations could be materially adversely affected.

Our new awards and liquidity may be adversely affected by bonding and letter of credit capacity.

A portion of our new awards requires the support of bid and performance surety bonds or letters of credit, as well as advance payment and retention bonds. Our primary use of surety bonds is to support water and wastewater treatment in the U.S., while letters of credit are generally used to support other projects. A restriction, reduction, or termination of our surety bond agreements could limit our ability to bid on new project opportunities, thereby limiting our new awards, or increasing our letter of credit utilization in lieu of bonds, thereby reducing availability under our credit facilities. A restriction, reduction or termination of our letter of credit facilities could also limit our ability to bid on new project opportunities or could significantly change the timing of project cash flow, resulting in increased borrowing needs.  We currently have a negative tangible net worth, which could limit our bonding capacity or require us to use more of our letter of credit facility, and this could negatively impact our ability to win new business and achieve our business plans.

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An impairment of some or all of our goodwill and intangible assets could have a material adverse effect on our financial condition and results of operations.

As of December 31, 2014, we had $534.0 million of goodwill and $91.4 million of net intangible assets.  We conduct a test for impairment of goodwill as of October 1st of each year or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the future fair value of any of our reporting units is less than their carrying value, we are required to record an impairment charge. The amount of any impairment charge could be significant and could have a material adverse effect on our financial condition and results of operations.  As a result of our impairment test performed during the year ended December 31, 2014, we have recorded an impairment charge to goodwill of $64.2 million.    Additionally, during 2014, we identified an impairment in our tradename intangibles of $9.1 million related to our Power reporting unit within the Energy market.  Refer to Note 7 – Goodwill and Intangible Assets for additional discussion regarding the goodwill impairment testing.

Our restructuring activities may not be sufficient and could affect our project resourcing capability.

In 2014, we initiated restructuring activities to reduce operating expenses.  These restructuring activities consisted primarily of a voluntary retirement program, an involuntary reduction in force,  closure of certain facilities and reducing overhead costs.  There can be no assurance that we will meet our cost reduction goals, although we currently believe that we will, or that our goals were aggressive enough in the context of the Company’s needs to reduce expenses.  Moreover, we lost managers and engineers through the reduction in force and voluntary retirement program, and that could have a negative impact on our ability to deliver projects and, consequently, on our results of operations.

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 inside 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. For example, the most recent global economic downturn and governmental tax revenue declines resulted in a slowdown in demand for our services from local government clients.  Similarly, the decline in oil and other commodity prices in late 2014 could negatively affect demand for our services and associated pricing.

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 revenue 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 revenue 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. 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.

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Changes and fluctuations in the U.S. governments 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 revenue.

Our contracts with the U.S. federal government are subject to the uncertainties of U.S. Congressional funding. Since government contracts represent a significant percentage of our revenue (in fiscal 2014, our contracts with the U.S. federal government and the agencies regulated by the U.S. federal government represented approximately 21% of our total revenue), government budget deficits or a significant reduction in government funding could lead to continued delays in contract awards and termination or suspension of our existing contracts, which could have an adverse impact on our business, financial condition and results of operations. In addition, any government shutdown or other curtailment of funding, such as the U.S. federal government shutdown in October of 2013, could have an impact on our government projects including our ability to earn revenue on the projects already awarded, and could have an adverse impact on us.

Effective March 1, 2013, the Budget Control Act of 2011 imposed a process known as sequestration to implement $1.2 trillion in automatic spending cuts effective through fiscal year 2021, subsequently extended to 2023. Under sequestration the agencies of the U.S. federal government may be required to modify or terminate contracts and substantially reduce awards of new work to companies like us, which will likely impact our ability to earn revenue on projects already awarded, win new work from U.S. federal government customers and may have an adverse impact on us.  As a result of sequestration in 2013, we experienced a postponement in projects, at least one termination for convenience after contract award, and cancellations of planned projects prior to award. On January 15, 2014, the U.S. Congress passed a budget bill for the U.S. federal government fiscal year ending September 30, 2014. As part of this bill some of the automatic spending cuts described above were reduced and/or eliminated, which could lessen the effects of sequestration on many of our businesses. Because some of the spending cuts under the Act are continuing and others could be reinstated in future years, the U.S. federal government spending limitations and reductions from sequestration may continue to affect our operations for the foreseeable future.

Political instability in key regions around the world coupled with the U.S. federal government’s commitment to the war on terror put at risk U.S. federal discretionary spending, such as 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 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 priorities, such as unforeseen disaster response, rebuilding efforts in countries impacted by the 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 2014, we derived approximately 21% of our total revenue from contracts with the U.S. federal government and agencies regulated by the U.S. federal government. The following risks are inherent in U.S. federal government contracts:

·

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.

·

Due to 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 a number of 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

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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.

·

Our ability to earn revenue 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.

·

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.

·

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 may 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 revenue 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 laws governing this work, we would be subject to the risk of suspension or debarment from government contracting activities, which could have a material adverse effect 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 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 our entire enterprise 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

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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, 2014 was approximately $8.2 billion. We cannot assure that the revenue 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 multiple periods. In addition, our ability to earn revenue 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 revenue and profit 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 inside 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 revenue 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.

We face potential liability for faulty engineering services and we are subject to potential liability in other litigation, regulatory and legal proceedings.

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 are also a party to other lawsuits and other legal and regulatory proceedings that arise in the normal course of business, including employment‑related claims and contractual disputes. While we do not believe that any pending lawsuits or proceedings will have a material adverse effect on our results of operations or financial condition, there can be no assurance that this will not be the case.

Fluctuations in commodity prices may affect our customers’ investment decisions and therefore subject us to risks of cancellation or delays in existing work, or changes in the timing and funding of new awards.

Commodity prices can affect our customers and may have a significant impact on the costs and profitability of our projects. For projects that we perform on a guaranteed fixed price or “not to exceed” cost basis, unforeseen rising commodity prices can reduce our profit or cause us to incur a loss. Rising commodity prices can negatively impact the potential returns on investments for our customers and may lead to customers deferring new investments or canceling or delaying existing projects. Some of our customers are engaged in the production or processing of commodity products, particularly in the energy sector, and fluctuations in commodity prices can impact their business and their willingness to make new capital investments, which in turn may reduce demand for our services. Cancellations, delays and weakness in demand for our services in markets that are affected by commodity price fluctuations may affect our operating results in significant and unpredictable ways and could have a material adverse impact on our business, financial condition, and results of operations.

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Changes in the level of activity in the hydrocarbon industry may adversely affect our financial condition and results of operations.

Demand for our oilfield services and other services we provide to the hydrocarbon industry fluctuates, and depend in part on decisions by our customers about their current and future activities and expenditures which, in turn, depend largely upon prevailing industry and market conditions that are influenced by numerous factors over which we have no control, including:

·

current and projected prices of oil and natural gas and hydrocarbon products;

·

oil and natural gas supply and demand in different geographic areas around the world;

·

the cost of exploring for, developing, producing and delivering oil and natural gas;

·

availability of qualified personnel and lead times associated with acquiring equipment and products;

·

federal, state and local regulation of oilfield activities;

·

environmental concerns regarding oil and natural gas exploration and production activities and methods; and

·

seasonal limitations on access to work locations.

 

Anticipated future prices for natural gas and crude oil are a primary factor affecting activity and expenditure levels of our customers in the hydrocarbon industry. Lower prices or volatility in prices for oil and natural gas, as has recently occurred, typically decrease spending and drilling activity, which can cause rapid and material declines in demand for our oilfield services and in the prices we are able to charge for our services. Worldwide political, economic, military and terrorist events, as well as natural disasters and other factors beyond our control contribute to oil and natural gas price levels and volatility and are likely to continue to do so in the future.

We could sustain losses on contracts that contain a fixed price or guaranteed maximum price provision if our costs exceed the maximum prices.

In 2014, we derived approximately 33% of our revenue from fixed price and guaranteed maximum price contracts. Under fixed price contracts, we agree to deliver projects for a definite, predetermined price and under guaranteed maximum price contracts, we agree to deliver projects for a price that is capped regardless of our actual costs incurred over the life of the project. Under cost reimbursable contracts with maximum pricing provisions, we are typically compensated for the labor hours expended at agreed‑upon hourly rates plus cost of materials plus any subcontractor costs used; however, there is a stated maximum compensation for the services to be provided under the contract. Many fixed price or guaranteed maximum price contracts involve large industrial facilities and public infrastructure projects and present the risk that our costs to complete a project may exceed the guaranteed maximum or fixed price agreed upon with the client. The fees negotiated for such projects may not cover our actual costs and desired profit margins. In addition, many of our customers on fixed or maximum price contracts do not accept escalation clauses regarding labor or material cost increases, including commodity price increases. If our actual costs for a maximum price project or fixed price project are higher than we expect, our profit margins on the project will be reduced or we could suffer a loss.  See our discussion of losses incurred on material contracts included within Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Percentage‑of‑completion accounting requires the use of estimates in order to calculate profits and losses for our engineering and construction contracts.  Actual results could differ from those estimates.

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 revenue 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.

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Environmental regulations and related compliance investigations may adversely impact our project performance, expose us to liability and could adversely affect our revenue.

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 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 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 revenue. 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. In addition, there can be no assurance that the due diligence undertaken in connection with an acquisition will uncover all liabilities relating to the acquired business. 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:

·

the difficulty of assimilating the acquired operations and personnel and integrating them into our current business;

·

the potential impairment of employee morale;

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the potential disruption of our ongoing business;

·

preserving important strategic and customer relationships;

·

the diversion of management’s attention and other resources;

·

the risks of entering markets in which we have little or no experience;

·

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, the United Kingdom Bribery Act of 2010, and other anti‑corruption laws as a result of any acquisition or otherwise applicable to our business; and

·

the possibility that any acquired firms do not perform as expected.

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. As of December 31, 2014, $45.4 million of our cash included in our consolidated balance sheet was held in bank accounts of our consolidated 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 subcontractors 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.

Our defined benefit pension plans have significant deficits that may grow in the future; we may be required to contribute additional cash to meet any underfunded benefit obligations under these plans.

As a result of our acquisition of Halcrow, the Company acquired defined benefit pension plans (also known as “defined benefit pension schemes”) that have significant deficits. The ongoing funding obligations for the defined benefit pension plans vary from time to time depending on actuarial assumptions outside of the Company’s control, such as

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discount rates, inflation rates, plan investment returns, and life expectancy of the plan members. In order to maintain an adequate funding position over time, the Company continuously reviews these assumptions and mitigates these risks by working with the pension plan trustees and with actuarial and investment advisors. The Company maintains an ongoing dialog with its pension plan trustees to negotiate a reasonable schedule for cash contributions as required by local regulations. If, however, we are unable to agree such schedule in the future, or if certain assumptions that are outside our control, such as discount rates, inflation rates, plan investment returns or life expectancy change over time, the Company may need to make cash payments to such plans in order to meet such funding obligations, we could have material adverse effects on our financial position and/or cash flows.

We face special risks associated with our international business.

In both 2014 and 2013, we derived approximately 30% of our revenue from operations outside of the U.S. Conducting business abroad is subject to a variety of risks including:

·

Currency exchange rate fluctuations, restrictions on currency movement and impact of international tax laws could adversely affect our results of operations, if we are forced to maintain assets in currencies other than the U.S. dollar as our financial results are reported in U.S. dollars.

·

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.

·

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.

·

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, increase our cost of operations, and also result in cancellation of our contracts.

·

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.

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.

Limitations of or modifications to, indemnification regulations of the U.S. or foreign countries could adversely affect our business.

The Price‑Anderson Nuclear Industries Indemnity Act, commonly called the Price‑Anderson Act, (“PAA”) is a United States federal law, which, among other things, regulates radioactive materials and the nuclear energy industry, including liability and compensation in the event of nuclear related incidents. The PAA provides certain protections and indemnification to nuclear energy plant operators and DOE contractors. The PAA protections and indemnification apply to us as part of our services to the U.S. nuclear energy industry and the DOE for new facilities, maintenance, modification, decontamination and decommissioning of nuclear energy, weapons, and research facilities. We offer similar services in other jurisdictions outside the U.S., provided we believe similar protections and indemnities are available, either through laws or commercial insurance. These protections and indemnifications, however, may not cover all of our liability that could arise in the performance of these services. To the extent the PAA or other protections and indemnifications do not apply to our services, our business could be adversely affected because of the cost of losses associated with liability not covered by the available protections and indemnifications, or by virtue of our loss of business because of these added costs.

Foreign exchange risks may affect our ability to realize a profit from certain projects.

We attempt to minimize our exposure from currency risks by denominating our contracts in the currencies of our expenditures, obtaining escalation provisions for projects in inflationary economies, or entering into derivative (hedging) instruments. However, these actions may not always eliminate our currency risk exposure. Based on fluctuations in currency, the U.S. dollar value of our backlog may from time to time increase or decrease significantly. We do not enter into derivative instruments or hedging activities for speculative purposes. Our operational cash flows

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and cash balances may consist of different currencies at various points in time in order to execute our project contracts globally. In addition, our non‑U.S. asset and liability balances are subject to currency fluctuations when measured period to period for financial reporting purposes in U.S. dollars. Financial hedging may be used to minimize currency volatility for financial reporting purposes.

Special risks associated with doing business in highly corrupt environments and employee, agent or partner misconduct or failure to comply with anti‑bribery and other governmental laws could, among other things, harm our reputation.

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”), the United Kingdom Bribery Act of 2010, 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 addition, 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, the United Kingdom Bribery Act of 2010, 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, the United Kingdom Bribery Act, 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.

Misconduct could also include the failure to comply with government procurement regulations, regulations regarding the protection of classified information, regulations regarding the pricing of labor and other costs in government contracts, regulations on lobbying or similar activities, regulations pertaining to the internal controls over financial reporting, environmental laws and any other applicable laws or regulations. In addition, we regularly provide services that may be highly sensitive or that relate to critical national security matters; if a security breach were to occur, our ability to procure future government contracts could be severely limited. Failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties, loss of security clearances, and suspension or debarment from contracting, any or all of which could harm our reputation, reduce our revenue and profits and 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, 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.

Our businesses can be materially and adversely affected by severe weather.

Severe weather has in the past and can in the future create conditions that adversely affect our ability to

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complete specific projects on time or without excess costs. Such adverse weather conditions may include:

·

Evacuation of personnel and curtailment of services which may be temporary in nature;

·

Increased labor and materials costs in areas impacted by weather and subsequent increased demand for labor and materials for repairing and rebuilding;

·

Weather related damage to our jobsites or facilities;

·

Inability to deliver materials to jobsites in accordance with contract schedules;

·

Loss of productivity; and

·

Inability to complete projects in accordance with project schedules.

We typically remain obligated to perform our services after a natural disaster unless the contract contains a force majeure clause. We have force majeure clauses in the majority of our contracts that are at the highest risk of being impacted by a force majeure, which are our design‑build, program management and EPC contracts. In addition, we typically seek and frequently obtain force majeure clauses in our engineering and consulting contracts. If a contract contains a force majeure provision, we may be able to obtain an extension of time to complete our obligations under such contracts, but we will still be subject to our other contractual obligations in the event of such an extraordinary event. Because we cannot predict the length, severity or location of any potential force majeure event, it is not possible to determine the specific effects any such event may have on us. Depending on the specific circumstances of any particular force majeure event, or if we are unable to react quickly such an event, our operations may be affected significantly, our productivity may be affected, our ability to complete projects in accordance with our contractual obligations may be affected and we may incur increased labor and materials costs, which could have a negative impact on our financial condition, relationships with customers or suppliers, and our reputation.

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 revenue is earned from fixed price and guaranteed maximum 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 sometimes 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. Typically, we have had 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 discretion, and sureties usually rely on tangible net worth as an indication of their risk.  Currently, we have a negative tangible net worth, and this could materially impact our project bonding capacity. 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 have a material adverse effect on our results of operations or financial condition.

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Our present assessment of the insurance market is that there is adequate capacity to cover our insurance needs, but there are indications that the cost of insurance is likely to rise. 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, revenue and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by us include:

·

Recognition of contract revenue, costs, profit or losses in applying the percentage‑of‑completion method of accounting;

·

Recognition of recoveries under contract change orders or claims;

·

Collectability of billed and work‑in‑process unbilled accounts receivables and the need for and the amount of allowances for problematic accounts;

·

Estimated amounts for anticipated project losses, warranty costs and contract close‑out costs;

·

Determination of liabilities under pension and other postretirement benefit programs;

·

Accruals for self insurance programs for medical, workers compensation, general liability and professional liability;

·

Recoverability of deferred tax assets and the related valuation allowances, and accruals for uncertain tax positions;

·

Stock option valuation model assumptions;

·

Accruals for other estimated liabilities;

·

Employee incentive plans; and

·

Asset valuations.

We rely on information systems to conduct our business, and failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed.

Because of recent advancements in technology and well‑known efforts on the part of computer hackers and cyber terrorists to breach data security of 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, our operational capabilities and results, and 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.

In addition, as a global company, we rely heavily on computer, information and communications technology and related systems in order to operate. 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.

We rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent security breaches. Any significant interruption or failure of our information systems or any

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significant breach of security could damage our reputation and adversely affect our business and results of operations.

Further, there is increasing public attention on the importance of cyber security relating to critical infrastructure. This creates the potential for future developments in the regulatory approach to this area, which may impact our clients, and how we offer our services to our clients.

Risks Related to Our Internal Market

CH2M HILL Companies, Ltd. is an employee-controlled professional engineering services firm. As a result, ownership of our common stock and the ability to trade shares of our common stock on our internal market has been limited to “eligible employee stockholders,” which includes certain active and former employees, directors, eligible consultants and benefit plans and, under limited circumstances at our discretion other third-parties. At a special meeting held on February 19, 2015, our stockholders approved certain measures, including amendments to CH2M HILL’s restated certificate of incorporation, intended to facilitate investments in CH2M HILL's common or preferred stock, including preferred stock convertible into common stock, by third-party investors, who we refer to as “outside investors,” and to permit such outside investors to transfer CH2M HILL common stock other than through the internal market, subject to any contractual limitations CH2M HILL and the outside investor agree upon. In addition, certain other rights and restrictions in our restated certificate of incorporation are applicable to eligible employee stockholders, but are not applicable to outside investors who may hold common or preferred stock in CH2M HILL from time to time.

Unlike public companies whose stock is traded on a securities exchange, there is no public market for our common stock, which is traded exclusively on the internal market we established in 2000 to provide liquidity to eligible common stockholders.  The following are significant risks that arise from the restrictions on selling our common stock and the operation of the internal market and are not typical risks associated with publicly traded stock of other companies you may be familiar with. Accordingly, you should consider the following risks in connection with any investment in our common stock.  For a detailed discussion of the operation of our internal market and the transfer restrictions on our common stock, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.  Members of our Board of Directors and our management have historically participated in the internal market by purchasing and selling shares of our common stock on various trade dates.  We expect that members of our Board of Directors and our management will continue to trade shares on the internal market from time to time, although such transactions are solely at the discretion of each individual.

The price of our common stock is determined by our Board of Directors’ judgment of fair value and not by market trading activity.

The price of our common stock on each trade date is established by our Board of Directors based on the factors that are described in this Annual Report on Form 10-K under the heading Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our Board of Directors sets the common stock price in advance of each trade date, and all trades on our internal market are transacted at the price established by our Board, which is a significant difference between investing in CH2M HILL’s common stock and owning stock of a publicly-traded company. The market trading activity in our common stock on any given trade date, therefore, cannot affect the price of shares of our common stock on that trade date. This is a risk to eligible employee stockholders because our common stock price will not change to reflect the supply of, or the demand for, shares on a given trade date as it would in a public market. Eligible employee stockholders may not be able to sell their shares of common stock or may have to sell their 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. The common stock valuation methodology that our Board of Directors uses is intended to establish a price for shares of our common stock that represents fair value as of the applicable trade date. The valuation methodology used to determine fair value is subject to change at the discretion of our Board of Directors.

 

Transfer restrictions on our common stock could prevent eligible employee stockholders from selling their common stock and result in the loss of all or part of their investment.

Since all of the shares of our common stock held by eligible employee stockholders are subject to transfer

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restrictions, eligible employee stockholders will generally only be able to sell their common stock through our internal market on the scheduled trade dates each year.  In order to satisfy legal requirements for mandatory cash distributions or under other limited circumstances subject to our discretion, CH2M HILL may purchase shares from stockholders or permit stockholders to sell shares of common stock to third parties outside of the internal market. As a result, owning shares of CH2M HILL common stock is different from owning shares of stock that are publicly traded on a stock market because our eligible employee stockholders may not be able to sell their shares of CH2M HILL common stock on demand. Our common stock price could decline between the time eligible employee stockholders want to sell and the time they become able to sell, which would result in a partial or total loss of their investment.

Absence of a public market may prevent eligible employee stockholders from selling their stock at the time of their choosing and could result in the loss of all or part of their investment.

 

CH2M HILL elected in 2000 to establish the internal market to provide liquidity to our eligible employee stockholders, but we are under no obligation to continue to maintain the internal market in the future. While we intend the internal market to provide liquidity to eligible employee stockholders, there can be no assurance that there will be enough orders to purchase shares to permit eligible employee stockholders to sell their shares on the internal market at the time of their choosing. Our internal trading market generally experiences trade imbalances, with more sell orders than buy orders on each trade date. Under the internal market rules, 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, and we have generally elected to do so in the past, although we are under no obligation to do so and will not guarantee market liquidity.  During the second half of 2014, as result of adverse operating results, reduced liquidity and other factors, CH2M HILL has limited the amount of money allocated to purchasing shares in the internal market, resulting in limitations on the number of shares eligible employee stockholders could sell in the internal market on the September and December 2014 trade dates.  CH2M HILL expects that it will continue to impose limitations on the amount of funds allocated to purchasing shares on the internal market trade dates that are currently expected to occur in 2015.

 

CH2M HILL determines whether to participate in the internal market on a quarterly basis and does not set aside funds in advance to purchase shares of common stock in order to balance sell orders and buy orders on future trade dates. Prior to each quarterly trade date, we review the outstanding orders and any resulting imbalance between sell orders and buy orders and make a determination whether or not CH2M HILL should participate in the internal market by buying shares of common stock in order to help balance the number of sell orders and buy orders. In making that determination, CH2M HILL’s management and Board of Directors consider relevant factors in light of prevailing circumstances, including our financial condition and results of operations, our available cash and capital resources, including the borrowing capacity available pursuant to the terms of our existing unsecured revolving line of credit and other sources of liquidity, expected current and future needs for cash to fund our operations, anticipated contingencies and other factors. Any of those considerations, or other considerations that may arise in the future, could cause CH2M HILL’s management or Board of Directors to decide that CH2M HILL will participate in the internal market only on a limited basis (i.e. “partially clear” the market), in which case we would purchase some, but not all, of the shares of common stock subject to sell orders in excess of the number of buy orders on the applicable trade date, as has been the case on recent trade dates.  Furthermore, such considerations could cause CH2M HILL’s management or Board of Directors to decide not to purchase any shares of common stock in order to balance the internal market on any trade date, either on a one-time basis, or on a going-forward basis in accordance with internal market rules. In addition, in September 2014, CH2M HILL’s principal revolving credit facility was amended to include a limitation on the amount CH2M HILL may spend to repurchase its common stock in connection with its employee stock ownership program and to make legally required repurchases of common stock held in benefit plan accounts in the third and fourth quarters of 2014 and in 2015.  Furthermore, if CH2M HILL sells preferred stock or common stock to an outside investor, the contractual terms governing such investment could impose additional direct or indirect limitations on the ability of CH2M HILL to repurchase shares of common stock from eligible employee stockholders in the internal market or otherwise.

 

If CH2M HILL does not purchase any shares of common stock or only purchases enough shares to partially clear the market on any trade date, sell orders will be subject to limitations we refer to as proration and allocation in accordance with the internal market rules in effect at the time and eligible employee stockholders may only be able to sell a portion of the shares they want to sell on that trade date.  CH2M HILL’s Board of Directors has absolute authority to modify the internal market rules related to allocation of limits on sell orders in any way and at any time.

 

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On the September 26, 2014 internal market trade date, CH2M HILL’s Board of Directors and management allocated up to $10.7 million to repurchase shares of common stock on the internal market.  As a result, each order to sell more than 489 shares placed on such date was only partially filled, with 489 shares being sold and all remaining shares returned to the accounts of the selling stockholders.  On the December 16, 2014 internal market trade date, CH2M HILL’s Board of Directors and management allocated $6.3 million to repurchase shares of common stock and sell orders were similarly limited to 235 or fewer shares.  Together with prudent management of CH2M HILL’s resources for operating cash needs, we expect that the amounts CH2M HILL will be able to spend to clear sell orders on the trade dates that are currently expected to occur in 2015 will continue to be severely restricted. CH2M HILL’s Board of Directors and management anticipate that the internal market will only partially clear, and some sell orders will be only partially filled, on such trade dates.

 

Consequently, insufficient buyer demand could continue to cause sell orders to be limited, or could prevent the internal market from opening on any particular trade date, either of which could cause delay in eligible employee stockholders’ ability to sell their common stock. If our stock price declines from the time eligible employee stockholders want to sell to the time they become able to sell, they could suffer partial or total loss of their investment. No assurance can be given that eligible employee stockholders desiring to sell all or a portion of their shares of common stock will be able to do so.

 

Legal requirements to repurchase shares of our common stock held through our 401(k) plan may constrain our ability to purchase shares in order to balance the internal market, which could delay or prevent sales by eligible employee stockholders who want to sell their common stock and result in the loss of all or part of their investment.

 

A significant portion of our outstanding shares of common stock are owned by eligible stockholders, including former and retired employees, through the CH2M HILL Retirement and Tax-Deferred Savings Plan (the “401(k) Plan”), which is subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). We are legally required to repurchase shares of our common stock held through the 401(k) Plan under certain circumstances, primarily related to separation from employment or retirement of eligible employee stockholders, and within the time periods prescribed by ERISA and the documents governing the terms of the 401(k) Plan. In some cases, our obligation to repurchase such shares of common stock arises if the former employee makes a request to liquidate their holdings of our common stock and in other cases the requirement is automatically triggered upon the former employee reaching a certain age. Accordingly, we are not able to predict the precise timing or amount of legally required repurchases we will be required to make in any future period. As of December 31, 2014, the aggregate amount of our common stock that CH2M HILL could be legally required to repurchase had a value between $80 million and $100 million, at the then-current stock price established by our Board of Directors.  If we were to fail to make such legally required repurchases within the applicable time periods, we would be in violation of the terms of ERISA. In order to satisfy our obligation to make legally required repurchases, we could be required to expend significant funds, which could reduce our liquidity and limit the amount of funds available to purchase other shares of our common stock offered on the internal market on any trade date, or prevent such repurchases on the internal market entirely. Consequently, our obligation to make legally required repurchases could cause sell order amounts to be limited, or could prevent the internal market from opening on any particular trade date, either of which could cause delay in eligible stockholders’ ability to sell their common stock. If our stock price declines from the time eligible stockholders want to sell to the time they become able to sell, they could suffer partial or total loss of their investment. No assurance can be given that eligible stockholders desiring to sell all or a portion of their shares of common stock will be able to do so.

 

Changes in the operation of the internal market or a determination to stop maintaining the internal market would delay or prevent sales by eligible employee stockholders who want to sell their common stock, which could result in the loss of all or part of their investment.

Our Board of Directors could, in their absolute discretion, determine to change the internal market rules in any way, at any time. For example, our Board of Directors could change the method for prorating or otherwise allocating buy orders and sell orders in an under-subscribed market, prioritize certain orders to comply with applicable laws or other considerations or limit the number or percentage of a stockholder’s shares of common stock that such stockholder could sell on any given trade date. A determination to change the rules under which the internal market operates, could cause significant delays in stockholders’ ability to sell their common stock or prevent them from selling their common stock altogether. Moreover, changes to the rules under which the internal market operates, could affect different stockholders

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in different ways; for example, by prioritizing certain transactions in stock held through employee benefit plans over transactions in stock held directly. Similarly, if CH2M HILL sells preferred stock or common stock to an outside investor, the contractual terms governing such investment could impose additional direct or indirect limitations on the Board of Directors’ ability to change the internal market rules or require any such change to affect outside investors differently than it affects stockholders. If our common stock price declines from the time stockholders want to sell to the time they become able to sell, they could suffer partial or total loss of their investment.

The limited market and common stock transfer restrictions applicable to eligible employee stockholders, as well as rights and restrictions in our restated articles of incorporation and bylaws, will likely have anti‑takeover effects.

Only CH2M HILL and certain eligible employee investors may purchase our common stock through our internal market. We also have significant restrictions on the transfer of our common stock by stockholders outside of the 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 stockholders would be willing to sell at that price. In addition, other provisions in our restated certificate of incorporation and bylaws impose a sixty six and two thirds percent (66 2/3%) stockholder approval requirement for any amendment to our bylaws proposed by a stockholder and impose a requirement that active employees of CH2M HILL constitute a majority of the Board of Directors at all times, which may make it more difficult for a potential acquirer to gain control of CH2M HILL without the prior consent of our Board of Directors.

 

Future returns on our common stock may be significantly lower than historical returns and the value of our common stock may decline.

Historical trends in our stock price are not necessarily indicative of the stock price in the future.  In the past, our stock price has, in some cases, declined from one quarter to the next. We cannot assure stockholders 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.

Item 2.  Properties

Our operations are conducted primarily in leased properties in 36 countries throughout the world. Our corporate headquarters are located in Englewood, Colorado in approximately 155,000 square feet of office space. The lease on our corporate headquarters building expires in 2017, with an option to extend the term twice for either a five or ten year term. Should the lease extension on our headquarters not provide favorable terms, there are sufficient real estate options in the Englewood area to meet our corporate headquarters facilities’ needs.  We believe our current facilities, which include leases for approximately 3.2 million square feet worldwide, are adequate for the operation of our business.

Item 3.  Legal Proceedings

We are party to various legal actions arising in the normal course of business. 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 various agencies of the U.S. government 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, management believes that proceedings and legal actions currently pending would not result in a material adverse effect on our results of operations or financial condition even if the final outcome is adverse to our company.

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Many claims that are currently pending against us are covered by our professional liability insurance. Management estimates that the levels of insurance coverage (after retentions and deductibles) are generally adequate to cover our liabilities, if any, with regard to such claims. Any amounts that are probable of payment are accrued when such amounts are estimable.

In 2010, we were notified that the U.S. Attorneys Office for the Eastern District of Washington was investigating overtime practices in connection with the U.S. Department of Energy Hanford tank farms management contract which we transitioned to another contractor in 2008. In 2011 and 2012, eight former CH2M HILL Hanford Group (CH2M HILL Subsidiary) employees pleaded guilty to felony charges related to time card fraud committed while working on the Hanford Tank Farm Project. As part of its investigation, the U.S. Attorneys Office raised the possibility of violations of the civil False Claims Act and criminal charges for possible violations of federal criminal statutes arising from CH2M HILLs Subsidiary overtime practices on the project. In September 2012, the government intervened in a civil False Claims Act case filed in the District Court for the Eastern District of Washington by one of the employees who plead guilty to time card fraud. In March 2013, we entered into a Non‑Prosecution Agreement (NPA) concluding the criminal investigation so long as we comply with the terms of the NPA. The NPA requires us to comply with ongoing requirements for three years after the effective date. By a separate agreement, we obtained dismissal of the civil False Claims Act case. We paid $18.5 million in total under both agreements. As a result, no criminal charges were brought against CH2M HILL Subsidiary or any CH2M HILL entities, and the civil False Claims Act case was dismissed.

In May 2007, Halcrow, Inc. contracted with Roatan Cruise Terminal, S.A. de C.V., ("Roatan CT"), a Honduran entity owned by Carnival Corporation ("Carnival") to be the design engineer for a marine facility that Roatan CT wanted to build in Roatan, Honduras to become a Carnival Cruise line destination port. Halcrow, Inc.’s responsibility included the design of the navigation or entry channel; dredging needed to accommodate Carnival designated cruise ships, two piers, approach bridges, fenders and mooring dolphins, and a Duty Free Platform.  In October 2010, Carnival filed suit against Halcrow, Inc. in the United States District Court for the Southern District of Florida. The litigation was later consolidated with a state court action filed by the contractor, American Bridge. Carnival is seeking approximately $21.0 million for additional construction costs resulting from alleged design errors related to the structural integrity of the piers and cracking in the pre-cast concrete slabs in the piers.  The Court has not set a trial date in this matter.  This claim is being defended under a $5.0 million eroding limits Halcrow U.S. legacy professional liability insurance policy.  Based on information presently known to management, we intend to vigorously defend the claims brought against us and we believe that the outcome of this dispute will not have a material adverse effect on our financial condition, cash flows or results of operations.

In June 2007, CH2M HILL was retained by DynCorp through a subcontract arrangement to provide logistics support to the Army under the Logistics Civil Augmentation Program IV (“LOGCAP”) umbrella contract.  The subcontract contained a profit sharing provision that called for CH2M HILL to receive a 30% share of all profits earned by DynCorp on the task orders.  CH2M HILL and Dyncorp dispute the profit sharing calculations.  In August 2014, CH2M HILL filed suit against DynCorp in Fairfax County, Virginia alleging breach of contract and requesting damages in the amount of $26.0 million plus interest and costs.  The damages portion of the Complaint has been amended to $43.0 million as further damages have matured. DynCorp filed an Answer and Counterclaim in November 2014. The Counterclaim seeks $98.0 million from CH2M HILL for breach of contract claims that CH2M HILL failed to make capital contributions, failed to contribute to project reserves, and failed to share in project finance costs. The Court has set a September 14, 2015 trial date. Based on information presently known to management, we intend to vigorously defend the claims brought against us and we believe that the outcome of this dispute will not have a material adverse effect on our financial condition, cash flows or results of operations.

In January 2011, CH2M HILL Energy Canada, LTD was awarded the contract to develop a mechanical scope of work and construct a facility for Spectra Energy Transmission’s (“Spectra”) Fort Nelson North Processing Facility located in Northern British Colombia (BC). These services included directly performed civil, structural, mechanical equipment, and piping installation for the project. Spectra claimed it suffered damages associated with project delay and cost overruns. To settle construction related claims, the contract terms were changed from a fixed price to  a  cost plus fixed fee arrangement, and the project completion date was extended, in a Settlement Agreement dated November 2011. The project was completed in February 2013.  Spectra now asserts that it was induced to enter into the Settlement Agreement by false or negligent representations as to the remaining cost to complete the project. Spectra claims the

27


 

project was completed almost a year after its original scheduled completion date and at a cost significantly in excess of the budget, and that CH2M HILL is liable for damages for breach of contract and gross negligence. Spectra commenced arbitration proceedings in Calgary, Alberta in September 2013. Their demand does not state damages with any particularity. The arbitration proceedings are expected to begin in late 2015. Based on information presently known to management, we intend to vigorously defend the claims brought against us and we believe that the outcome of this dispute will not have a material adverse effect on our financial condition, cash flows or results of operations.

CH2M-WG Idaho, LLC (“CWI”), owned 50.5% by CH2M HILL, is a remediation contractor for the U.S. Department of Energy (“DOE”) at the Idaho National Laboratory site. The original remediation contract was to run from May 2005 through September 2012, and was extended through September 2015. CWI currently has a disagreement with DOE concerning what CWI’s final fee should be for the base contract period from May 2005 through September 2012. In December 2013, the DOE issued a final determination that was approximately $30.0 million less than CWI expected to receive in the fee determination.  CWI filed a Certified Claim with the Contracting Officer for a total fee owed of $40.1 million in March 2014.  The Certified Claim was rejected through a Contracting Officer’s Final Decision in May 2014, and CWI filed its appeal to the Civilian Board of Contract Appeals on May 29, 2014. Trial is scheduled for October 19, 2015.  Based on information presently known to management, we intend to vigorously defend the claims brought against us and we believe that the outcome of this dispute will not have a material adverse effect on our financial condition, cash flows or results of operations.

Item 4.  Mine Safety Disclosures

None.

PART II

Item 5Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

CH2M HILL Companies, Ltd. has a long history as an employee-controlled professional engineering services firm. As a result, our common stock was, in the past, only available to be owned by certain active and former employees, directors, eligible consultants and benefit plans and, under limited circumstances at our discretion other third-parties.  We refer to those eligible owners of our common stock as our “eligible employee stockholders.” At a special meeting held on February 19, 2015, our stockholders approved certain measures, including amendments to CH2M HILL’s restated certificate of incorporation, intended to facilitate investments in CH2M HILL's common or preferred stock, including preferred stock convertible into common stock, by third-party investors, who we refer to as “outside investors,” and to permit such outside investors to transfer CH2M HILL common stock other than through the internal market, subject to any contractual limitations CH2M HILL and the outside investor agree upon. In addition, certain other rights and restrictions in our restated certificate of incorporation are applicable to eligible employee stockholders, but are not applicable to outside investors who may hold common or preferred stock in CH2M HILL from time to time.

There is no market on which our stock may be purchased by the general public. In order to provide liquidity for our stockholders, in 2000 CH2M HILL established an internal market (“Internal Market”) operated through an independent broker, currently Neidiger, Tucker and Bruner, Inc. (“NTB”)

The Internal Market enables eligible employee stockholders 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 of Directors. Generally, there are four Trade Dates each year that occur on a quarterly basis. All sales of our common stock on the Internal Market are made at the price determined by our Board of Directors, generally on a quarterly basis in conjunction with the determination and announcement of quarterly Trade Dates. After our Board of Directors determines the stock price for use on the next Trade Date, all eligible employee stockholders will be advised as to the new stock price and the next Trade Date.

28


 

Purchases of common stock on the Internal Market are restricted to the following authorized buyers:

·

Our employees, directors and certain eligible consultants

·

Trustees of the benefit plans

·

Administrator of the Payroll Deduction Stock Purchase Plan (PDSPP)

In addition, at the discretion of our Board of Directors, we may permit other third parties to purchase common stock from existing stockholders under limited circumstances in private transactions outside of the Internal Market. Authorized sellers who may sell shares through the Internal Market include the authorized buyers and former employees who acquired shares of our common stock while employed, as well as any third parties who may be permitted to purchase our common stock as described above.

Our Internal Market is managed through an independent broker, currently NTB.  On each Trade Date, NTB acts upon instructions, or “orders,” from the buyers and sellers to trade shares of our common stock at the stock price set by our Board of Directors and in accordance with the Internal Market rules. All sellers on the Internal Market, other than CH2M HILL and the trustees of the 401(k) Plan, pay NTB a commission fee equal to three tenths of one percent (.3%) of the proceeds from such sales. No commission is paid by buyers on the Internal Market. 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.

The Internal Market functions differently than most public securities markets, where actual market trading activity determines the trading price of the securities. On the Internal Market, the price of shares of our common stock is determined by our Board of Directors based on their judgment of fair value. Our eligible employee stockholders then make independent decisions to submit buy orders and sell orders for each trade date, which generally does not result in a “balanced market” because the number of buy orders and sell orders are unequal. The Internal Market rules permit CH2M HILL to elect to purchase shares if the Internal Market is “under-subscribed” for a particular Trade Date, meaning that there are more sell orders than buy orders. Similarly, CH2M HILL may elect to sell shares or impose limitations on the number of shares that an authorized buyer may purchase if the Internal Market is “over-subscribed” for a particular Trade Date, meaning that there are more buy orders than sell orders. Since the inception of the Internal Market in 2000, the Internal Market has been under-subscribed on all Trade Dates but one.

CH2M HILL may, but is 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 eligible employee stockholders exceeds the number of shares sought to be purchased by authorized buyers. The decision whether or not CH2M HILL will purchase shares in the Internal Market, if the Internal Market is under-subscribed, is solely within the discretion of our management and Board of Directors and we generally will not notify eligible employee stockholders as to whether or not we will participate prior to the Trade Date. Eligible employee stockholders should understand that there can be no assurance that they will be able to sell their stock without substantial delay or that their stock will be able to be sold at all on the Internal Market. In making the determination as to whether to participate in an under-subscribed market on any trade date, our management and Board of Directors will consider a variety of relevant factors in light of prevailing circumstances at that time, including our financial condition and results of operations, our available cash and capital resources, including the availability of indebtedness pursuant to the terms of our existing unsecured revolving line of credit and other sources of liquidity, expected current and future needs for cash to fund our operations, anticipated contingencies, contractual terms agreed to with any outside investor and other factors. Depending on prevailing circumstances, we may consider other factors from time to time in connection with the decision whether or not to participate in an under-subscribed market on any particular Trade Date.

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 and we decide not to participate in the internal market or to participate only to a limited extent, sell orders submitted by eligible employee stockholders will be subject to proration or allocation, meaning that sell orders will be accepted as follows:

·

  Proration: If enough buy orders are received to purchase all the shares offered by each eligible employee stockholder who wants to sell fewer than 500 shares, which we refer to as the “proration threshold,” and at

29


 

least 500 shares from each other seller, then all sell orders will be 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.  In other words, every eligible employee stockholder selling 500 or fewer shares would sell all of such shares, while eligible employee stockholders seeking to sell more than 500 shares would sell 500 shares plus a portion of the remainder of the shares they are offering. The proration threshold is subject to change at the discretion of our Board of Directors and any change to the proration threshold will be announced in advance of the Trade Date on which the change will take effect.

·

Allocation: If not enough buy orders are received to give effect to the proration described above, then the purchase orders will be allocated equally to each seller. For example, if there are only enough buy orders to purchase up to 100 shares from every seller, then every seller will sell the same number (100) of shares (except eligible employee stockholders who want to sell fewer than 100 shares, who would sell the exact number of shares they specify in their sell orders) even though some sellers may be seeking to sell only 100 (or fewer) shares, while others are seeking to sell considerably more shares

In any such case, all shares of common stock offered by any eligible employee stockholder for sale but not sold on that trade date would remain the property of the eligible employee stockholder and held in the their name or applicable account and the eligible employee stockholder will have to submit a new sell order in order to sell such shares on a subsequent trade date.

As a result of various factors, including adverse operating results during recent periods, reduced liquidity and other operating challenges, CH2M HILL management and Board of Directors determined to participate only to a limited extent in the Internal Market on the September and December 2014 Trade Dates. For the September 2014 Trade Date, CH2M HILL allocated $10.7 million towards purchasing shares on such Trade Date (in addition to $9.3 million of legally required repurchases of shares held in benefit plan accounts), which was less than the amount necessary to purchase all of the shares offered on the Internal Market, and eligible employee stockholders were subject to a 489-share cap on the number of shares they could sell. For the December 2014 Trade Date, CH2M HILL allocated $6.3 million towards purchasing shares (in addition to legally required repurchases of $18.7 million), and eligible employee stockholders were subject to a 235-share cap on the number of shares they could sell.

We may sell shares or impose limitations on the number of shares that an individual eligible employee stockholder may purchase 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 eligible employee stockholders as to whether or not we will participate prior to the Trade Date. Eligible employee stockholders 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 in making the determination as to whether to participate in an over-subscribed market. Since the inception of the Internal Market in 2000, however, the Internal Market has been under-subscribed on all Trade Dates but one.

If the aggregate purchase orders exceed the number of shares of our common stock available for sale in the Internal Market on any Trade Date and a determination is made that CH2M HILL will not issue additional shares to satisfy the excess purchase orders, the following prospective purchasers will have priority to purchase shares, in the order listed:

·

Administrator of the PDSPP

·

Trustees of the 401(k) Plan; and

·

Internal Market participants on a pro‑rata basis (including purchases through pre‑tax and after‑tax deferred compensation plans)

 

Previously, eligible employee stockholders who sold their common stock upon retirement were given the option to sell their common stock they own on the Internal Market and pay a commission on the sale or to sell to CH2M HILL

30


 

without paying a commission. In the latter case, the eligible employee stockholder would have sold their common stock to CH2M HILL at the price in effect on the date of their termination in exchange for a four-year promissory note at a market interest rate. No eligible employee stockholder utilized the four year promissory note option since the inception of the Internal Market in 2000 and, effective November 12, 2014, the four year promissory note option was eliminated. All eligible employee stockholders who desire to sell their stock upon retirement must do so in accordance with CH2M HILL’s internal market rules. In addition, our Articles of Incorporation and Bylaws, as well as the terms of the 401(k) Plan, permit us to allow retired and other former employees to continue to hold the common stock they own after leaving.  The Board of Directors has determined that former employees are permitted to continue to hold common stock after separation, although the Board of Directors has the discretion to change or modify this policy at any time.

Price of our Common Stock

The price of CH2M HILL common stock is established by the Board of Directors each quarter based on a company fair valuation methodology described in the CH2M HILL Prospectus, dated March 23, 2010 (the “Prospectus”), as filed with the SEC, as amended by the information contained in the subsequent annual, quarterly and current reports filed by CH2M HILL with the SEC pursuant to the Securities Exchange Act of 1934.  The valuation methodology used by the board of directors includes the following valuation formula:

Share Price = [(7.8 × M × P) + (SE)] / CS

As further discussed below, the stock valuation formula is one of several factors considered by the Board of Directors as part of the total mix of information available to determine the fair value of our common stock.

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 stockholders’ equity) is a reasonable valuation process based on factors that are generally used in the valuation of equity securities. The Stock Valuation Formula is one of several factors considered by the Board of Directors as part of the total mix of information available to determine the fair value of our common stock. As part of the total mix of information that our Board of Directors considers in determining the fair value of our common stock, our Board of Directors reviews company appraisal information prepared by independent third party valuation experts and other available information. The valuation methodology used to determine the stock price is subject to change at the discretion of our Board of Directors, as described below.

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. A market factor greater than one increases the price per share, while a market factor less than one would decrease the price per share. In determining the market factor, our Board of Directors takes 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, including our financial condition and results of operations

·

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.

31


 

In its discretion, our Board of Directors may change the market factor used in the valuation process from time-to-time. 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. In addition, during 2014, CH2M HILL made several strategic operational decisions with respect to restructuring activities that resulted in certain adjustments to stock price formula parameters that our Board of Directors believed were necessary to calculate a fair valuation of the Company. The board did not adjust the “M” factor. The Board may consider adjusting the “M” factor in future periods to enable the stock price formula to better reflect the fair value of CH2M HILL, including expectations for the future performance of CH2M HILL as well as any other factors as described above.

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 independent valuation experts. In setting the common 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 CH2M HILL in the appraisal provided by the independent valuation experts. If 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 Internal Market 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 common stock has always been within the enterprise appraisal range provided quarterly by the independent valuation experts.

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 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. Our Board of Directors believes that in order to determine the fair value of our common stock, it is important for the Board of Directors to have the ability to review unusual or one-time events that affect net income. For example, in 2014, CH2M HILL made a decision to wind down its Power business and exclude the Power business losses from reported earnings.  During the same period, CH2M HILL began to implement certain restructuring activities, including the rationalization of certain lines of business, which resulted in recording non-cash charges for restructuring activities and recognizing a cash restructuring charge related primarily to severance costs. Additionally, during 2014, CH2M HILL’s reported earnings were reduced as a result of the recognition of certain non-cash depreciation and amortization charges relating to acquisitions.  The reasons for, and effects of, these charges and reductions of our reported earnings are discussed in further detail in this Annual Report under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Board of Directors concluded that these charges are among the types of cash and non-cash charges that would generally not be taken into account by the market in valuing an equity security. Therefore, the Board of Directors decided to exclude these charges from the “P” (profit after tax) parameter for stock valuation purposes during the relevant periods and expects to treat similar charges and costs in future periods in the same manner. 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 Stockholders’ Equity (“SE”).  “SE” is total Stockholders’ 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 Stockholders’ Equity parameter nonrecurring or unusual transactions that the market would not generally take into account in valuing an equity security. The exclusions from Stockholders’ 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 Stockholders’ 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)” and non-controlling interests are excluded from “SE” and include items such as unrealized gains/losses on securities and foreign currency translation adjustments.

32


 

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. For example, we include in CS as calculated an estimate of the weighted-average number of shares that we reasonably anticipate will be issued during the next four quarters under our stock-based compensation programs and employee benefit plans in this calculation. We include an estimate of the weighted-average number of shares that we reasonably anticipate will be issued during the next four quarters because 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. Similarly, if we make a substantial issuance of shares during the four fiscal quarters immediately preceding the Trade Date, using the weighted average of those shares may create an inappropriate variance in share value during the four fiscal quarters following the issuance. For example, if we use shares as all or part of the consideration for the acquisition of a business, the time-weighted average number of shares issued in the acquisition transaction would not match the impact of the transaction reflected in total Stockholders’ Equity (or SE) as described above. Therefore, in the discretion of the Board of Directors, a substantial issuance of shares during the four-quarter period used to calculate CS for each Trade Date may be treated as having been issued at the beginning of such four-quarter period. As a result, our Board of Directors may determine, in its discretion, to adjust the weighted-average number of shares to reflect in an appropriate manner the impact of past or anticipated future issuances.

The following table shows a comparison of the “CS” value actually used by our Board of Directors to calculate common stock prices on the dates indicated versus the year-to-date weighted-average number of shares of common stock as reflected in the diluted earnings per share calculation in our financial statements for the past three years.

 

 

 

 

 

 

 

    

 

    

YTD Weighted‑

 

 

 

 

Average Number

 

 

 

 

of Shares as reflected in

Effective Date

 

CS

 

Diluted EPS calculation

 

 

(in thousands)

 

(in thousands)

February 9, 2012

 

32,962 

 

31,428 

May 11, 2012

 

32,944 

 

31,801 

August 10, 2012

 

32,941 

 

31,851 

November 9, 2012

 

32,779 

 

31,718 

February 15, 2013

 

32,466 

 

31,484 

May 17, 2013

 

31,981 

 

30,222 

August 9, 2013

 

31,455 

 

30,192 

November 14, 2013

 

30,923 

 

29,985 

February 14, 2014

 

30,502 

 

29,890 

May 16, 2014

 

30,242 

 

28,809 

August 15, 2014

 

29,892 

 

28,976 

November 24, 2014

 

29,470 

 

28,429 

February 20, 2015

 

28,980 

 

28,257 

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 common stock price derived by this methodology to approximate our historical, pre-Internal Market common 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 stockholders to understand future changes, if any, to the market factor.

33


 

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 generally announce the new stock price and the Trade Date approximately four weeks prior to each Trade Date. The broker will deliver the information to all employees 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 make the most current prospectus for our common stock and our audited annual financial statements available to all stockholders, as well as other employees, and to participants in the Internal Market through the employee benefit plans. Such information will be made available at the same time as our annual reports and proxy information.

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, along with the various factors and values used by our Board of Directors to determine such stock prices on each date, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

 

    

 

 

    

Percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Price

 

 

 

 

 

 

 

 

 

 

 

 

Price Per

 

Increase

Effective Date

 

M

 

P

 

SE

 

CS

 

Share

 

(Decrease)

 

 

 

 

(in thousands)

 

(in thousands)

 

(in thousands)

 

(in thousands)

 

 

 

February 9, 2012

 

1.2 

 

$

124,121 

 

$

717,414 

 

32,962 

 

$

57.01 

 

2.3 

%  

May 11, 2012

 

1.2 

 

$

110,441 

 

$

725,247 

 

32,944 

 

$

53.39 

 

(6.3)

%  

August 10, 2012

 

1.2 

 

$

101,423 

 

$

743,484 

 

32,941 

 

$

51.39 

 

(3.7)

%  

November 9, 2012

 

1.2 

 

$

111,722 

 

$

746,205 

 

32,779 

 

$

54.67 

 

6.4 

%  

February 15, 2013

 

1.2 

 

$

121,490 

 

$

734,331 

 

32,466 

 

$

57.64 

 

5.4 

%  

May 17, 2013

 

1.2 

 

$

122,922 

 

$

717,030 

 

31,981 

 

$

58.40 

 

1.3 

%  

August 9, 2013

 

1.2 

 

$

123,684 

 

$

717,131 

 

31,455 

 

$

59.60 

 

2.1 

%  

November 14, 2013

 

1.2 

 

$

125,432 

 

$

735,515 

 

30,923 

 

$

61.75 

 

3.6 

%  

February 14, 2014

 

1.2 

 

$

144,682 

 

$

763,383 

 

30,502 

 

$

69.43 

 

12.4 

%  

May 16, 2014

 

1.2 

 

$

131,486 

 

$

729,888 

 

30,242 

 

$

64.83 

 

(6.6)

%  

August 15, 2014

 

1.2 

 

$

117,630 

 

$

698,369 

 

29,892 

 

$

60.20 

 

(7.1)

%  

November 24, 2014

 

1.2 

 

$

84,307 

 

$

564,545 

 

29,470 

 

$

45.93 

 

(23.7)

%  

February 20, 2015

 

1.2 

 

$

96,361 

 

$

485,115 

 

28,980 

 

$

47.86 

 

4.2 

%  

 

Holders of Our Common Stock

As of February 13, 2015, there were 7,544 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, 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.

Dividend Policy

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.

34


 

Issuer Purchases of Equity Securities

The following table covers the purchases of our securities by CH2M HILL during the quarter ended December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number of

    

Maximum Number

 

 

 

 

 

 

 

 

Shares Purchased

 

of Shares that May

 

 

 

Total

 

Average

 

as Part of Publicly

 

Yet Be Purchased

 

 

 

Number of

 

Price Paid

 

Announced Plans

 

Under the Plans or

 

Period

 

Shares

 

per Share

 

or Programs

 

Programs

 

October(a)

 

 —

 

$

 —

 

 

 

November

 

 

 

 

 

 

December(a)(b)

 

544,308 

 

$

45.93 

 

 

 

Total

 

544,308 

 

$

45.93 

 

 

 

 


(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, 2014, 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, 2014 and 2013, and for each of the years in the three‑year period ended December 31, 2014, and the report thereon of KPMG LLP, are included in Item 15. Exhibits and Financial Statement Schedules of this Annual Report on Form 10‑K. The following information should be read in conjunction with Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes thereto.

35


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

($ in millions, except per share data)

 

2014

 

2013

 

2012

 

2011

 

2010

 

Selected Statement of Operations Data:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Revenue

 

$

5,413.5 

(d)

$

5,877.8 

 

$

6,160.6 

(b)

$

5,555.2 

 

$

5,422.8 

 

Operating (loss) income

 

 

(341.6)

(e)

 

192.4 

 

 

158.8 

 

 

185.2 

 

 

174.8 

 

Net (loss) income attributable to CH2M HILL

 

 

(181.5)

(e)

 

118.3 

 

 

93.0 

 

 

113.3 

 

 

93.7 

 

Net (loss) income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(6.42)

 

$

4.00 

 

$

2.99 

 

$

3.68 

 

$

2.98 

 

Diluted

 

$

(6.42)

 

$

3.96 

 

$

2.95 

 

$

3.60 

 

$

2.91 

 

Selected Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,941.3 

 

$

3,056.4 

 

$

3,114.6 

 

$

2,754.0 

(a)

$

1,967.1 

 

Long-term debt, including current maturities ( c)

 

 

513.0 

 

 

391.1 

 

 

252.3 

 

 

92.8 

 

 

37.6 

 

Total CH2M HILL stockholders’ equity

 

 

212.8 

(f)

 

624.4 

 

 

603.7 

 

 

656.6 

 

 

544.9 

 

 


(a)

The majority of the increase in total assets relates to the acquisition of Halcrow in November 2011.

(b)

The majority of the increase in 2012 revenue relates to the acquisition of Halcrow in November 2011.

(c)

Substantially all of our long‑term debt relates to our revolving credit facility. Borrowings on this facility are primarily used for working capital needs, acquisitions, required pension contributions and funds required to repurchase shares on our internal market.

(d)

The decrease in revenue in 2014 relates primarily to the discontinuation of the Power EPC business and the shift away from other riskier design build projects in several other markets.

(e)

The majority of the decrease in operating (loss) income and net income attributable to CH2M HILL relates to estimated project losses, impairment charges, and costs incurred for restructuring activities in 2014.

(f)

The decrease in stockholders’ equity is related to the consolidated net loss incurred in 2014,  changes in assumptions that increased pension liabilities and shares repurchases.

 

Item 7.  Managements Discussion and Analysis of Financial Condition and Results of Operations

Business Summary

Founded in 1946, we are a large employee-controlled professional engineering services firm providing engineering, construction, consulting, design, design-build, procurement, operations and maintenance, EPC, program management and technical services around the world. Including craft and hourly employees as well as certain populated joint ventures, we have approximately 25,000 employees worldwide.

We provide services to a diverse customer base including the U.S. federal and foreign governments and governmental authorities, various United States federal government agencies, provincial, state and local municipal governments, major oil and gas companies, refiners and pipeline operators, utilities, metal and mining, automotive, food and beverage and consumer products manufacturers, microelectronics, pharmaceuticals and biotechnology companies. We believe we provide our clients with innovative project delivery using cost-effective approaches and advanced technologies.

 

Our revenue is 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.

 

Summary of Operations

Effective January 1, 2014 through December 31, 2014, we implemented certain significant organizational changes, including the manner in which our operations are managed. Our operations are now organized and managed using a structure consisting of markets, geographical areas and service lines.  Our business results are reported internally using this matrix structure.  In connection with this change, we reevaluated the manner in which our Chief Operating

36


 

Decision Maker (“CODM”) reviews operating results and makes key business decisions.  As a result of our evaluation, we determined that our CODM is our executive management committee that meets regularly to evaluate operating results and allocate our financial and operational resources.  Our CODM primarily reviews consolidated financial operating results, as well as safety, project delivery and other operational metrics. We reviewed the matrix structure, noting the markets, geographical areas and service lines we offer have similar economic characteristics, including:

 

·

The composition of our workforce is highly consistent across all market, geographical and service lines;

·

Our customers share similar characteristics, including regulatory and confidentiality constraints, quality and safety delivery requirements;

·

We use similar technologies, including project proposal, design and delivery software tools, consistently throughout our organization;

·

Our markets and service lines have similar gross margin rates;

·

The channels we use to deliver our services within our markets are comparable;

·

Our markets, service lines, and geographies assemble teams from the entire organization to seamlessly deliver projects;

·

We share staff across these entities and from within our corporate functions to assure effective project delivery;

·

Regulatory environments in which we operate are comparable across our markets including, state, local and federal governmental regulations;

·

The marketing methods we use across our service lines are consistent;

·

We designed our sales force to benefit our markets and service lines interchangeably;

·

Our project proposal teams are designed to be utilized in all of our markets, service lines and geographical areas; and,

·

Our delivery administration and enterprise delivery excellence services were formed to ensure a consistent, high quality service experience for our clients.

 

Based on our evaluation, we have determined that our operations may be aggregated into one reportable segment. Prior year information has been revised to conform to current year presentation. 

 

Effective January 1, 2015, we reorganized our internal reporting structure by making changes we believe will better facilitate our continued growth, client-centric service, and operational efficiency. Under our new structure, we will continue to have a delivery focus around markets, geographies and services, however we have reorganized the business lines within the markets into five business groups: Water; Transportation; Environment and Nuclear; Industrial and Urban Environments; and Oil, Gas and Chemicals.  Management is currently evaluating the impact this reorganization will have on our external reporting segments.  Any changes will be reflected in the Company’s first quarter results of operations.

 

Restructuring

 

In September 2014, we commenced certain restructuring activities in order to achieve important business objectives, including reducing overhead costs, enhancing client service, improving efficiency, reducing risk, creating more opportunity for profitable growth, and providing more long-term value for Company stockholders.  These restructuring plans included such items as the evaluation of certain lines of business, voluntary and involuntary employee terminations, the closure of certain facilities and reduction of corporate overhead costs.  During the year ended December 31, 2014, we incurred $70.4 million of costs for these restructuring activities.   Once all restructuring activities are completed, we expect to incur aggregated costs up to $120 million resulting in annualized cost savings of greater than $120 million.

 

Acquisitions

We continuously monitor acquisition and investment opportunities that will expand our portfolio of services, provide local resources internationally to serve our customers, add value to the projects undertaken for clients, or enhance our capital strength.  On April 4, 2014, we acquired certain agreed upon assets and liabilities of TERA Environmental Consultants (“TERA”) for consideration of $119.6 million.  TERA is an employee-owned environmental consulting firm headquartered in Canada specializing in providing environmental assessment, planning, siting,

37


 

permitting, licensing, and related services for the pipeline, electrical transmission, and oil and gas industries. The purchase price was paid to TERA in the following forms:

 

 

 

 

 

 

($ in thousands)

    

Purchase Price Paid

Cash

 

$

86,634 

Earn-out promissory note, at estimated fair value

 

 

11,807 

CH2M HILL common stock, valued at date of acquisition

 

 

10,831 

Holdback amount for settlement of future potential liabilities

 

 

10,290 

Total consideration

 

$

119,562 

 

 

For the year ended December 31, 2014, approximately $84.6 million of revenue and $10.6 million of operating income generated from TERA’s operations have been reported in the consolidated financial statements since the date of acquisition and are reported in the Environment and Nuclear market.

Results of Operations for the Year Ended December 31, 2014 Compared to 2013

 

The following table summarizes our gross revenue by market for the year ended December 31, 2014 as compared to the year ended December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended

 

 

 

 

December 31,

 

Change

($ in thousands)

 

2014

 

2013

 

 

 

 

Energy

 

$

1,055,726 

 

 

1,493,222 

 

 

(437,496)

 

(29)

%

Environment and Nuclear

 

 

1,377,126 

 

 

1,318,777 

 

 

58,349 

 

%

Facilities and Urban Environments

 

 

789,528 

 

 

919,509 

 

 

(129,981)

 

(14)

%

Transportation

 

 

947,395 

 

 

939,088 

 

 

8,307 

 

%

Water

 

 

1,243,694 

 

 

1,207,223 

 

 

36,471 

 

%

Total

   

$

5,413,469 

   

 

5,877,819 

   

 

(464,350)

   

(8)

%

 

For the year ended December 31, 2014 as compared to the same period ended in 2013, gross revenue decreased by $464.4 million, or 8%The decline of gross revenue for the year ended December 31, 2014 as compared to the same period ended in 2013 was primarily driven by decreases within our Energy and Facilities and Urban Environments businesses. During 2014, we made a decision to shift our focus away from pursuing and contracting fixed price EPC projects within the Power sector of our business.  In addition, as part of our restructuring efforts we announced in the third quarter of 2014, we made a decision to exit the Power business with the exception of projects under contract at that time which we remain committed to complete.  As a result, various large scale power projects reached completion in 2013 and 2014 and were not replaced at a comparable rate.  Specifically, revenue within the Energy market decreased by approximately $319.2 million due to the substantial completion of four domestic design-build power plant projects.  Additionally, within our Energy business, approximately $120.0 million of the decline in gross revenue is attributable to the 2013 completion of several Canadian EPC projects, primarily gas processing and pipeline projects. Within our Facilities and Urban Environments business, lower demand for new projects in the electronics and manufacturing industries in our domestic regions and a decline in Middle Eastern planning support services for U.S. armed forces has resulted in material decline on our overall revenue.  In addition, we made a decision to no longer pursue fixed price, design-build contracts in the Government Facilities sector, further adding to the revenue decline.  These declines in revenue were only partially offset by a $46.7 million increase related to field construction commencing in 2014 on the Power project in Australia. Within Environment and Nuclear, the inclusion of TERA operations due to the 2014 acquisition contributed $84.6 million in revenue for the year ended December 31, 2014 as compared to the same period in 2013.  Gross revenue within Water and Transportation remained fairly consistent for the year ended December 31, 2014 as compared to the year ended December 31, 2013.

 

38


 

For the year ended December 31, 2014, we had an operating loss of $341.6 million, which was a decrease of $533.9 million from the $192.4 million operating income for the year ended December 31, 2013.   Operating income was negatively impacted by the following significant project losses:

 

·

We are involved in a fixed price project in Australia through a consolidated 50/50 joint venture partnership with an Australian construction contractor to engineer, procure, construct and start-up a combined cycle power plant that will supply power to a large liquefied natural gas facility in Australia.  As of December 31, 2014, the total contract value of the joint venture project is $470 million and is approximately 35% complete overall, with engineering and procurement nearing completion and construction activities ramping upDue to a variety of issues related to the joint venture scope of work, we identified changes in estimated contract costs that resulted in charges to operations of $170.0 million and $110.0 million in the third and fourth quarters of 2014, respectively. This total of $280.0 million represents the total expected loss of the joint venture project at completion.  After considering the losses attributable to the noncontrolling interest in the joint venture held by our joint venture partner, the net impact on our pre-tax results of operations for third and fourth quarters of 2014 was $85.0 million and $55.0 million, respectively.   Management believes the project has suffered from substantial client interference related to numerous design changes, delays in providing timely access to site delivery facilities and access to certain construction materials.  These items have resulted in a significant increase in the cost to complete the project as well as a delay in the start of construction activities and possibly the ultimate delivery of the power facility.  While management believes the current estimated cost to complete the project represents the best estimate at this time, there is a significant amount of work that still needs to be performed on the project before achieving substantial completion and thus there can be no assurance that additional cost growth will not occur.  Management is currently in substantive negotiations with the client and is vigorously pursuing recovery of costs and schedule impacts with the assistance of external legal and commercial claims specialists.  A settlement, if reached, could significantly reduce the joint venture’s total anticipated loss at completion.  Management believes it will gain a better understanding during the first half of 2015 whether a negotiated settlement is possible, and, if so, how the terms of such settlement would impact the joint venture’s estimated costs at completion.  However, if these recovery steps are not successful, we might not be reimbursed by the client for previously incurred or potential future cost overruns and the joint venture might be assessed potential liquidated damages in excess of amounts already included in the current estimated loss at completion.

 

·

During the second half of 2014, we experienced significant cost growth on a Transportation fixed price contract to design and construct roadway improvements on an expressway in the southwestern U.S.  The cost growth was primarily caused by design and engineering changes deemed necessary after completion of a detailed design review was completed. The changes in design drove increases in materials quantities and caused schedule delays.  As a result of these changes in estimate, a charge to operations was recorded totaling $38.7 million for the year ended December 31, 2014, which represents the reversal of previously recognized profits as well as the total loss at completion which is estimated to be $36.2 million.  Management is assessing the recovery of cost and schedule delays from the client as a result of significant interference; however, at this time it is not possible to estimate these recoveries.  It is possible that we could incur additional costs and losses if our cost estimation processes identify new costs not previously included in our total estimated loss or if our plans to meet our revised schedule are not achieved.  These potential changes in estimates could be materially adverse to the Company’s results of operations and could include additional costs to complete the project as well as penalties assessed by the client if the project is not delivered by agreed upon dates.

 

39


 

·

During the first quarter of 2014, we experienced significant cost growth on a fixed-price contract to design and construct a new power generation facility in the northeastern United States.  The effect of these changes in estimates resulted in a charge to operations totaling $52.5 million in the first quarter of 2014 which includes both the reversal of previously recognized profits as well as the recording of the estimated total loss on the project at completion. In the third and fourth quarters of 2014, additional changes in estimates were identified as the project approached completion resulting in the recognition of an additional loss of $11.9 million.  These increases in costs resulted from multiple sources including a substantial decline in union labor productivity, poor subcontractor performance and the impacts of schedule delays caused by the above items and severe weather in the northeastern United States during the winter months of 2014. The project achieved substantial completion during the fourth quarter of 2014. Certain of our subcontractors have submitted claims against us requesting additional funding and, although we believe the majority of these claims to be without merit, we are in the process of resolving these disputes and there can be no assurances that the resolution will not result in additional losses.  Management is seeking recovery of a portion of the total project loss from various sources including change orders from the client. In addition, we are requesting relief from a portion of the liquidated damages assessed by the client through the date of substantial completion due to client interference and other remedies under the terms of the contract. There can be no assurance we will be successful in obtaining such recoveries.

 

·

During the first and second quarter of 2014, we experienced cost growth on a Facilities and Urban Environments project in our Europe region primarily due to productivity issues.  These changes in estimates negatively impacted our results of operations by $17.8 million for the year ended December 31, 2014.  Management has implemented various processes to assist in improving productivity rates and does not believe further losses will be incurred on this projects.  However, future results could differ from the current performance.

 

In addition to the above project specific items, the lower demand for new projects in the electronics and manufacturing industries discussed above in our domestic region and a decline in Middle Eastern planning support services for U.S. armed forces has also negatively impacted our operating profits during the year ended December 31, 2014.  While revenue volumes were down in our Energy business as discussed above, strong performance on a project management contract in Middle East as well as overhead cost control efforts within the group resulted in the Energy operating profits in the year ended December 31, 2014 declining only slightly from the 2013 amounts. 

 

These declines in operating income were partially offset by improvements within the Water and Environment and Nuclear markets.  Our Water market benefited from a design-build project in the southwestern United States awarded during the second quarter of 2014 as well as an increase in the volume of operations management projects.  Within the Environment and Nuclear market, the TERA acquisition in the second quarter of 2014 accounted for an increase in operating income of $10.6 million in the year ended December 31, 2014.

 

Additionally, as discussed above, in the third and fourth quarter, we began to implement certain restructuring activities, including voluntary retirement program, workforce reductions, facilities consolidations, overhead cost reductions and evaluation of certain lines of business.  For the year ended December 31, 2014, we incurred $70.4 million for these restructuring activities which has been included in general and administrative expenses on the consolidated statements of operations.  Management also determined that the restructuring was a triggering event for purposes of requiring us to test goodwill for impairment and initiated an interim impairment test. Based upon our impairment testing,  we recorded a goodwill impairment loss of $64.2 million, of which $36.4 million related to our Power reporting unit within the Energy market and $27.8 million related to our Industrial and Advanced Technology and Urban Programs reporting units within our Facilities and Urban Environments market.  Additionally, we identified an impairment in our tradename intangibles of $9.1 million, related to our Power reporting unit within the Energy market.

 

40


 

Results of Operations for the Year Ended December 31, 2013 Compared to 2012

The following table summarizes our gross revenue by market for the year ended December 31, 2013 as compared to the year ended December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended

 

 

 

 

December 31,

 

Change

($ in thousands)

 

2013

 

2012

 

 

 

 

Energy

 

$

1,493,222 

 

 

1,782,721 

 

 

(289,499)

 

(16)

%

Environment and Nuclear

 

 

1,318,777 

 

 

1,424,504 

 

 

(105,727)

 

(7)

%

Facilities and Urban Environments

 

 

919,509 

 

 

878,719 

 

 

40,790 

 

%

Transportation

 

 

939,088 

 

 

962,608 

 

 

(23,520)

 

(2)

%

Water

 

 

1,207,223 

 

 

1,112,001 

 

 

95,222 

 

%

Total

   

$

5,877,819 

   

 

6,160,553 

   

 

(282,734)

   

(5)

%

 

For the year ended December 31, 2013 as compared to the same period ended in 2012, gross revenue decreased by $282.7 million, or 5%The decline of gross revenue for the year ended December 31, 2013 as compared to the same period ended in 2012 was primarily driven by decreases within the Energy market and Environment and Nuclear market. The Energy market experienced a decrease of approximately $175.8 million in gross revenue during the year ended December 31, 2013 due to reduced revenue on three EPC power projects that began in late 2011 and reached their highest levels of field construction in early 2013. Additionally, lower demand for new power plants in the U.S., partially due to increased energy efficiency efforts, as well as decreases in new construction projects, primarily gas processing and pipeline projects in Canada, attributed to lower revenue from Energy in 2013 compared to 2012. Additionally, the Environment and Nuclear market had significantly lower gross revenue in 2013 as compared to 2012 primarily due to decreased volumes caused by reduced funding levels for large DOE projects and overall U.S. Federal government budget reductions related to the Budget Control Act.  However, strong commercial customer growth in all environmental service lines within the Environment and Nuclear market partially offset the decrease in federal spending. Within Facilities and Urban Environments, the increase in gross revenue primarily related to infrastructure revenue from Hurricane Sandy emergency response consulting services.  Gross revenue improvements within Water from the year ended December 31, 2013 as compared to the year ended December 31, 2012 were primarily due to additional domestic consulting wins as well as successful negotiations for additional work with existing design-build clients. Gross revenue within Transportation remained fairly consistent for the year ended December 31, 2013 as compared to the year ended December 31, 2012.

 

Operating income increased for the year ended December 31, 2013 compared to the same period in 2012 by $33.5 million, or 21%.  This increase was primarily attributable to growth in volume and margin for global consulting services, much of which relates to clients and markets acquired with Halcrow, and operational efficiencies in our Transportation market. Also contributing to the increased operating income within Transportation in 2013 was a $15.5 million gain on termination of Halcrow lease obligations.  The Energy market also had increased operating income for the year ended December 31, 2013 as compared to the same period ended December 31, 2012 in part due to higher margins on two power projects in the U.S. as well as an Australian project.  Additionally, the oil, gas, and chemical business within Energy had increases in operating income in 2013 as compared to 2012 due to higher margins on field services in Alaska, a  favorable resolution of a claim on a construction project in Alaska, and better performance on a gas project in the Middle East.  However, the increases in Energy operating income were offset by a $40.9 million charge on a fixed-price project to design and construct significant improvements to an existing power generation facility in northern California. That project reached substantial completion at the end of 2013.  Operating income was slightly lower in 2013 as compared to 2012 within the Environment and Nuclear market due to lower volumes on EPA projects and DOE projects and increased business development costs on U.S. Federal sector proposals and a Military of Defence (MOD) proposal.   Within Water, operating income decreased in the year ended December 31, 2013 as compared to December 31, 2012 due to lower margins on domestic consulting projects and design build projects.

41


 

Income Taxes

The income tax (benefit) provisions for the years ended December 31, 2014, 2013, and 2012 are as follows:

 

 

 

 

 

 

 

 

 

    

Income Tax

    

Effective

 

($ in millions)

 

Provision

 

Tax Rate

 

2014

 

$

(37.2)

 

17.0 

%  

2013

 

$

50.7 

 

30.0 

%  

2012

 

$

52.1 

 

35.9 

%  

 The effective tax rate for the loss for the year ended December 31, 2014 was a benefit of 24.5% compared to a provision of 30.0%, respectively for the same periods in the prior year.  The effective tax rate in 2014 was lower than the expected statutory rates due to the negative impacts of the nondeductible portion of our goodwill impairment charges, determination that no domestic production activities deduction was available, nondeductible permanent items, and the recording of a valuation allowance against certain foreign tax credits.  During the fourth quarter of 2013 the company restructured the legal ownership of certain foreign operations which enabled the company to utilize tax attributes and reduced the effected tax rate for that quarter and the year; these did not repeat in 2014. Our effective tax rate continues to be negatively impacted by the effect of state income taxes, non‑deductible foreign net operating losses, the disallowed portion of executive compensation, and disallowed portions of meals and entertainment expenses.

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, 2014 and 2013, we reported a valuation allowance of $269.2 million and $227.0 million, respectively, related primarily to the reserve of certain foreign net loss carryforwards.

Loss attributable to noncontrolling interests

 

For the year ended December 31, 2014, we had a loss attributable to noncontrolling interests of $137.1 million as compared to income attributable to noncontrolling interests of $12.8 million for the year ended December 31, 2013. The significant loss in the 2014 period is due to a consolidated joint venture partnership with an Australian construction contractor involved in a power project in Australia recording an estimated project loss of $280.0 million.  See discussion above in Results of Operations for the Year Ended December 31, 2014 and 2013 for a description of the Australian joint venture.  As a result of the joint venture structure, half of the total project loss, or $140.0 million, was recorded as a loss attributable to a noncontrolling interest during the year ended December 31, 2014. 

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 working capital, acquisitions, capital expenditures and purchases of stock presented on our internal market. We maintain a domestic cash management system which provides for cash sufficient to satisfy financial obligations as they are submitted for payment and any excess cash in domestic bank accounts is applied against any outstanding swingline debt held under our credit facility described below. We maintain entities to do business in countries around the world and as a result hold cash in international bank accounts to fund the working capital requirements of those operations.  At December 31, 2014 and December 31, 2013, cash totaling $99.2 million and $247.8 million, respectively, was held in wholly-owned subsidiary foreign bank accounts.

In addition, as is common within our industry, we partner with other EPC firms on specific projects to leverage the skills of the respective partners and decrease our risk of loss. Often projects of this nature require significant cash contributions and the joint ventures created may retain cash earned while the project is being completed.  Cash and cash equivalents on our consolidated balance sheets include cash held within these consolidated joint venture entities which is used for operating activities of those joint ventures. As of December 31, 2014 and December 31, 2013, cash and cash equivalents held in our consolidated joint ventures and reflected on the consolidated balance sheets totaled $45.4 million and $112.2 million, respectively. 

42


 

As of December 31, 2014, our total consolidated cash and cash equivalents balance was $131.5 million, as compared to $294.3 million as of December 31, 2013. This decrease of $162.8 million was primarily a result of using cash previously held in foreign bank accounts in the purchase of the assets of TERA as discussed above.

During the twelve months ended December 31, 2014, cash provided by operations was $52.8 million compared to $93.2 million for the same period last year. Cash flows from operations primarily result from earnings on our operations and changes in our working capital.  Earnings from our operations and our working capital requirements can vary significantly from period to period based primarily on the mix of our projects underway and their stage of completion.  The decrease of $40.4 million in cash provided by operations during the current period was primarily attributable to a decrease in earnings of $449.8 million, offset by increases in reserves and other working capital liabilities of $418.8 million, which included the non-cash reserves recorded on estimated project losses of $222.4 million.  Additionally, in the 2014 period, we benefited from a decrease in working capital components of $260.7 million, including a $73.3 million increase in accounts payable and accrued subcontractor costs and a decrease of $13.6 million in receivables and unbilled revenue.  In the twelve month period ended December 31, 2013, our cash flow from operations was negatively affected by an increase in working capital components of $158.1 million offset by an increase in earnings of $32.9 million from the same period in the prior year.  The prior period working capital changes included a $100.9 million decrease in accounts payable and accrued subcontractor cost increases in receivables and unbilled revenue of $42.2 million.    

We continuously monitor collection efforts and assess the allowance for doubtful accounts. Based on our assessment at December 31, 2014, we have deemed the allowance for doubtful accounts to be adequate; however, economic conditions may adversely impact some of our clients ability to pay our bills or the timeliness of their payments.

Cash used in investing activities was $161.9 million for the twelve months ended December 31, 2014 compared to $57.9 million for the same period in 2013. The majority of cash used in our investing activities in the year ended December 31, 2014 related to the $86.6 million cash payment for the TERA acquisition.  Another factor contributing to the increase in cash used in investing activities relates to the significant decrease in cash distributions of earnings from our unconsolidated joint ventures.  We periodically make working capital advances to certain of our unconsolidated joint ventures and, such advances are repaid to us from the joint ventures in the normal course of the joint venture activities.  In addition, capital calls requiring cash contributions to the joint venture are required if the joint venture is operating in a loss position.  During the year ended December 31, 2014, we received cash disbursements from our unconsolidated joint ventures of $14.3 million, including a distribution of $10.2 million from a major domestic nuclear joint venture project, compared to $70.7 million in the nine month period ended December 31, 2013, which included a distribution of $49.1 million from a major domestic nuclear joint venture and $20.2 million from an international transportation joint venture.  These increases in cash used in investing activities for the year ended December 31, 2014 as compared to the same period in 2013 were offset by a $24.6 million reduction in investments in unconsolidated affiliates as well as an $18.3 million reduction in capital expenditures.  Capital expenditures in the year ended 2014 and the year ended December 31, 2013 were primarily related to upgrades we made to our enterprise resource planning system, equipment purchases to support our Energy market projects on the North Slope of Alaska and improvements to our office facilities.

Cash used in financing activities was $41.0 million for the twelve months ended December 31, 2014 compared to cash used in financing activities of $38.4 million for the same period in 2013.  The primary factor contributing to the increase in cash used in financing activities was an $18.3 million increase in repurchases and retirements of common stock in the year ended December 31, 2014 as compared to the same period ended 2013.  Our amended credit agreement, which is discussed below, includes certain limitations on the amount the Company can spend on future stock repurchases.  Additionally, there was a $16.9 million decrease in net borrowings on long-term debt, primarily from our credit facility.  Our net borrowings totaled $122.0 million and $138.9 million for the years ended December 31, 2014 and 2013, respectively.  These increases in cash used in financing activities was partially offset by a $27.0 million payment on the termination of Halcrow lease obligations made in September of 2013.

We finance our operations, acquisitions and capital expenditures using a variety of capital vehicles including an unsecured revolving credit facility.  On March 28, 2014, we amended and restated our Credit Agreement (“Second Amended and Restated Credit Agreement”) to provide for an unsecured revolving Credit Facility of $1.1 billion (the

43


 

“Credit Facility”), to extend its maturity to March 28, 2019, to increase the capacity of certain subfacilities and to improve our borrowing rates. Under the terms of the Second Amended and Restated Credit Agreement, we may be able to invite existing and new lenders to increase the amount available to be borrowed under the agreement by up to $350.0 million.  The revised Credit Facility has a subfacility for the issuance of standby letters of credit in a face amount up to $750.0 million and a subfacility up to $300.0 million for multicurrency borrowings.

On September 26, 2014, we entered into a First Amendment to the Second Amended and Restated Credit Agreement (“First Amendment to Credit Agreement”) to provide us with financial and operational flexibility, particularly in connection with the restructuring activities previously described.  In addition to other technical and operating changes to the terms of the Credit Agreement, the First Amendment to Credit Agreement specifically achieved the following:

 

·

Amended the definition of consolidated adjusted EBITDA to allow add back of up to $120 million of cash restructuring charges, including up to $80 million of cash restructuring charges in 2014 and up to $40 million in 2015 (with a rollover of unused 2014 amounts to 2015);

·

Temporarily increased the maximum consolidated leverage ratio from 3.0x to 3.25x through the end of 2015;

·

Limited the amount CH2M HILL may spend to repurchase its common stock in connection with its employee stock ownership program to an aggregate of $45 million for the third and fourth quarters of 2014 and an additional $45 million in 2015 (with a rollover of unused 2014 amounts to 2015), and both the repurchase of shares of common stock in the internal market and legally required repurchases of common stock held in benefit plan accounts are applied towards these limits (although legally required repurchases of common stock held in benefit plan accounts are allowed in excess of such limits);

·

Permitted other repurchases of common stock and preferred stock and payment of common stock dividends up to $100 million per fiscal year, subject to a pro forma 3.00x leverage threshold through 2015 and 2.75x thereafter;

·

Permitted payment of dividends on preferred stock without regard to the foregoing $100 million per fiscal year limitation subject to pro forma financial covenant compliance;

·

Permitted restricted payments, including common or preferred stock repurchases and redemptions, with proceeds from the sale of new equity interests, subject to pro forma financial covenant compliance; and

·

Allowed up to 50% of the proceeds from asset sales to be utilized to repurchase common or preferred stock, subject to pro forma financial covenant compliance.

 

As of December 31, 2014, we were in compliance with the covenants required by the First Amendment to Credit Agreement. There can be no assurance that the capacity under this facility will be adequate to fund future operations or future acquisitions that we may pursue from time to time.

 

At December 31, 2014,  $492.6 million in borrowings were outstanding on the Credit Facility, compared to $376.8 million at December 31, 2013. The average rate of interest charged on that balance was 1.67% as of December 31, 2014. At December 31, 2014, company-wide issued and outstanding letters of credit and bank guarantee facilities were $199.3 million, compared to $201.9 million at December 31, 2013.

 

 Our borrowing capacity under the Credit Facility is limited by a maximum consolidated leverage ratio, which is based on a multiple of an adjusted earnings before interest, taxes, depreciation and amortization calculation, and other outstanding obligations of the Company.  Therefore, our remaining borrowing capacity is not simply a function of the amount of the Credit Facility less outstanding borrowings on the line of credit, outstanding letters of credit and bank guarantees.  As of December 31, 2014, the remaining unused borrowing capacity under the Credit Facility was approximately $200.0 million.   

 

For the quarter ended September 30, 2014, we spent $10.7 million towards clearing the internal market on September 26, 2014.   Additionally, we spent $9.3 million on legally required repurchases of common stock held in benefit plan accounts during the same period.  For the quarter ended December 31, 2014, we spent $18.7 million for legally required repurchases of common stock held in the benefit plan accounts on the December 16, 2014 trade date.  Additionally, we spent $6.3 million towards clearing the internal market, which was the remainder of the $25.0 million

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maximum amount permitted under the covenants required by the First Amendment to the Credit Agreement.

 

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 borrowings under our Credit Facility or other debt. In some instances we may use a combination of one or more of these financing mechanisms.

 

Off‑Balance Sheet Arrangements

We have interests in multiple joint ventures, some of which are unconsolidated variable interest entities, to facilitate the completion of contracts that are jointly performed 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. See further discussion in Note 3Variable Interest Entities and Equity Method Investments of the Notes to the Consolidated Financial Statements in Item 15, of this Annual Report on Form 10‑K.

There were no substantial changes to other off‑balance sheet arrangements or contractual commitments during the twelve months ended December 31, 2014.

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 bid bonds and performance and payment 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 2014. For additional information, see Item 1A. Risk Factors.

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 worlds 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 outstanding as of December 31, 2014 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Commitment Expiration Per Period

($ in millions)

 

Less  than

 

 

 

 

 

 

 

 

 

 

Total Amount

Contractual Obligations

 

1 Year

 

13 Years

 

45 Years

 

Over 5 Years

 

Committed

Letters of credit

 

$

71.8 

 

$

20.4 

 

$

35.1 

 

$

35.1 

 

$

162.4 

Bank guarantees

 

 

32.8 

 

 

2.5 

 

 

0.6 

 

 

1.0 

 

 

36.9 

Long-term debt

 

 

5.0 

 

 

6.4 

 

 

498.8 

 

 

2.8 

 

 

513.0 

Interest payments1

 

 

9.0 

 

 

17.4 

 

 

16.9 

 

 

0.1 

 

 

43.4 

Operating lease obligations

 

 

95.2 

 

 

144.0 

 

 

83.6 

 

 

124.8 

 

 

447.6 

Surety and bid bonds

 

 

783.5 

 

 

527.6 

 

 

22.3 

 

 

0.1 

 

 

1,333.5 

Total

 

$

997.3 

 

$

718.3 

 

$

657.3 

 

$

163.9 

 

$

2,536.8 

1The interest payments on the revolving credit facility are based on the borrowings outstanding as of December 31, 2014 at the expected interest rate over the period outstanding.

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 (U.S. 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 revenue from different types of services performed under various types of contracts, including cost-plus, fixed-price and time-and-materials. We evaluate contractual arrangements to determine how to recognize revenue. We primarily perform engineering and construction related services and recognize 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 contract. In making such estimates, judgments are required to evaluate potential variances in schedule, the cost of materials and labor, productivity, liability claims, contract disputes, and achievement of contract performance standards. We record the cumulative effect of changes in contract revenue and cost at completion in the period in which the changed estimates are determined to be reliably estimable.

 

Below is a description of the three basic types of contracts from which we may earn revenue 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.

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.

 

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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 direct costs incurred to date are compared to total projected direct costs at contract completion. Prior to completion, our recognized profit margins on any fixed price contra