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EX-31.1 - EX-31.1 - CH2M HILL COMPANIES LTDchm-20160325ex311d0d6c6.htm
EX-31.2 - EX-31.2 - CH2M HILL COMPANIES LTDchm-20160325ex312e2658e.htm
EX-32.1 - EX-32.1 - CH2M HILL COMPANIES LTDchm-20160325ex321687cf8.htm
EX-32.2 - EX-32.2 - CH2M HILL COMPANIES LTDchm-20160325ex322f71895.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 25, 2016

 

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

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

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)

 


 

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

 

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

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(Do not check if a

 

 

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 number of shares outstanding of the registrant’s common stock as of April 27, 2016 was 25,991,060.

 

 

 

 


 

 

 

CH2M HILL COMPANIES, LTD.

TABLE OF CONTENTS

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

 

 

Consolidated Balance Sheets as of March 25, 2016 and December 25, 2015 (unaudited)

 

Consolidated Statements of Income for the Three Months Ended March 25, 2016 and March 27, 2015 (unaudited)

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 25, 2016 and March 27, 2015 (unaudited)

 

Consolidated Statements of Cash Flows for the Three Months Ended March 25, 2016 and March 27, 2015 (unaudited)

 

Notes to Consolidated Financial Statements (unaudited)

Item 2. 

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

22 

Item 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29 

Item 4. 

CONTROLS AND PROCEDURES

29 

 

PART II. OTHER INFORMATION

 

Item 1. 

LEGAL PROCEEDINGS

30 

Item 1A. 

RISK FACTORS

30 

Item 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

31 

Item 6. 

EXHIBITS

32 

SIGNATURES 

 

33 

 

2


 

 

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(Unaudited)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

    

March 25,

    

December 25,

 

 

2016

 

2015

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

199,660

 

$

197,021

Receivables, net—

 

 

 

 

 

 

Client accounts

 

 

671,271

 

 

739,532

Unbilled revenue

 

 

618,761

 

 

601,713

Other

 

 

15,018

 

 

17,316

Income tax receivable

 

 

399

 

 

19,800

Prepaid expenses and other current assets

 

 

93,074

 

 

95,809

Total current assets

 

 

1,598,183

 

 

1,671,191

Investments in unconsolidated affiliates

 

 

78,935

 

 

84,296

Property, plant and equipment, net

 

 

228,115

 

 

203,666

Goodwill

 

 

494,116

 

 

510,985

Intangible assets, net

 

 

54,136

 

 

59,011

Deferred income taxes

 

 

268,482

 

 

255,385

Employee benefit plan assets and other

 

 

77,174

 

 

76,765

Total assets

 

$

2,799,141

 

$

2,861,299

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

1,883

 

$

2,069

Accounts payable and accrued subcontractor costs

 

 

461,004

 

 

504,098

Billings in excess of revenue

 

 

266,101

 

 

302,647

Accrued payroll and employee related liabilities

 

 

331,174

 

 

328,585

Other accrued liabilities

 

 

276,626

 

 

338,926

Total current liabilities

 

 

1,336,788

 

 

1,476,325

Long-term employee related liabilities

 

 

572,213

 

 

599,033

Long-term debt

 

 

383,340

 

 

299,593

Other long-term liabilities

 

 

110,988

 

 

109,017

Total liabilities

 

 

2,403,329

 

 

2,483,968

Commitments and contingencies (Note 14)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value, 50,000,000 shares authorized of which 10,000,000 are designated as Series A; 3,214,400 issued and outstanding at March 25, 2016 and as of December 25, 2015

 

 

32

 

 

32

Common stock, $0.01 par value, 100,000,000 shares authorized; 25,871,376 and 26,282,913 issued and outstanding at March 25, 2016 and December 25, 2015, respectively

 

 

259

 

 

263

Additional paid-in capital

 

 

98,447

 

 

125,381

Retained earnings

 

 

585,793

 

 

561,213

Accumulated other comprehensive loss

 

 

(271,418)

 

 

(274,704)

Total CH2M common stockholders’ equity

 

 

413,113

 

 

412,185

Noncontrolling interests

 

 

(17,301)

 

 

(34,854)

Total stockholders' equity

 

 

395,812

 

 

377,331

Total liabilities and stockholders’ equity

 

$

2,799,141

 

$

2,861,299

 

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

 

3


 

 

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

 

Consolidated Statements of Income

 

(Unaudited)

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 25,

 

March 27,

 

    

2016

    

2015

Gross revenue

 

$

1,343,408

 

$

1,263,986

Equity in earnings of joint ventures and affiliated companies

 

 

9,053

 

 

11,350

Operating expenses:

 

 

 

 

 

 

Direct cost of services

 

 

(1,080,320)

 

 

(1,002,449)

Selling, general and administrative

 

 

(231,275)

 

 

(232,022)

Operating income

 

 

40,866

 

 

40,865

Other income (expense):

 

 

 

 

 

 

Interest income

 

 

60

 

 

41

Interest expense

 

 

(3,267)

 

 

(3,896)

Income before provision for income taxes

 

 

37,659

 

 

37,010

Provision for income taxes

 

 

(13,935)

 

 

(9,505)

Net income

 

 

23,724

 

 

27,505

Less: loss (income) attributable to noncontrolling interests

 

 

855

 

 

(4,007)

Net income attributable to CH2M

 

$

24,579

 

$

23,498

Net income attributable to CH2M per common share:

 

 

 

 

 

 

Basic

 

$

0.74

 

$

0.86

Diluted

 

$

0.74

 

$

0.86

Weighted average number of common shares:

 

 

 

 

 

 

Basic

 

 

26,305,098

 

 

27,363,496

Diluted

 

 

26,506,923

 

 

27,385,943

 

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

4


 

CH2M HILL COMPANIES, LTD.

 

Consolidated Statements of Comprehensive Income

 

(Unaudited)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 25,

 

March 27,

 

    

2016

    

2015

Net income

 

$

23,724

 

$

27,505

Other comprehensive income (loss):

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,166

 

 

(15,180)

Benefit plan adjustments, net of tax

 

 

2,120

 

 

2,640

Other comprehensive income (loss)

 

 

3,286

 

 

(12,540)

Comprehensive income

 

 

27,010

 

 

14,965

Less: comprehensive (loss) income attributable to noncontrolling interests

 

 

(855)

 

 

4,007

Comprehensive income attributable to CH2M

 

$

27,865

 

$

10,958

 

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

5


 

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

(Unaudited)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 25,

 

March 27,

 

    

2016

    

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

23,724

 

$

27,505

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

16,288

 

 

19,164

Stock-based employee compensation

 

 

9,124

 

 

8,982

Loss (gain) on disposal of property, plant and equipment

 

 

296

 

 

(813)

Allowance for uncollectible accounts

 

 

215

 

 

74

Deferred income taxes

 

 

(13,483)

 

 

(9,390)

Undistributed earnings from unconsolidated affiliates

 

 

(9,053)

 

 

(11,350)

Distributions of income from unconsolidated affiliates

 

 

18,170

 

 

9,305

Contributions to defined benefit pension plans

 

 

(8,376)

 

 

(8,484)

Change in assets and liabilities:

 

 

 

 

 

 

Receivables and unbilled revenue

 

 

48,403

 

 

38,295

Prepaid expenses and other

 

 

1,550

 

 

5,993

Accounts payable and accrued subcontractor costs

 

 

(45,025)

 

 

(43,856)

Billings in excess of revenue

 

 

(34,897)

 

 

(20,436)

Accrued payroll and employee related liabilities

 

 

3,154

 

 

42,265

Other accrued liabilities

 

 

(60,350)

 

 

(32,392)

Income tax receivable

 

 

19,757

 

 

21,558

Long-term employee related liabilities and other

 

 

11,202

 

 

(5,436)

Net cash (used in) provided by operating activities

 

 

(19,301)

 

 

40,984

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(36,997)

 

 

(6,302)

Investments in unconsolidated affiliates

 

 

(8,235)

 

 

(7,388)

Distributions of capital from unconsolidated affiliates

 

 

2,621

 

 

4,848

Proceeds from sale of operating assets

 

 

533

 

 

11,839

Net cash (used in) provided by investing activities

 

 

(42,078)

 

 

2,997

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings on long-term debt

 

 

573,662

 

 

591,210

Payments on long-term debt

 

 

(490,110)

 

 

(616,149)

Repurchases and retirements of common stock

 

 

(38,130)

 

 

(13,111)

Excess tax benefits from stock-based compensation

 

 

2,068

 

 

3,075

Net contributions from noncontrolling interests

 

 

18,408

 

 

6,805

Net cash provided by (used in) financing activities

 

 

65,898

 

 

(28,170)

Effect of exchange rate changes on cash

 

 

(1,880)

 

 

(12,949)

Increase in cash and cash equivalents

 

 

2,639

 

 

2,862

Cash and cash equivalents, beginning of period

 

 

197,021

 

 

131,477

Cash and cash equivalents, end of period

 

$

199,660

 

$

134,339

Supplemental disclosures:

 

 

 

 

 

 

Cash paid for interest

 

$

3,075

 

$

3,894

Cash paid for income taxes

 

$

3,730

 

$

3,893

 

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

6


 

 

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

March 25, 2016

 

(Unaudited)

 

(1) Summary of Business and Significant Accounting Policies

 

Summary of Business

 

CH2M Hill Companies, Ltd. and subsidiaries (“We”, “Our”, “CH2M” or the “Company”) is a large employee-controlled professional engineering services firm, founded in 1946, providing engineering, construction, consulting, design, designbuild, procurement, engineeringprocurementconstruction (“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.

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and according to instructions to Form 10-Q and the provisions of Article 10 of Regulation S-X that are applicable to interim financial statements. Accordingly, these statements do not include all of the information required by GAAP or the Securities and Exchange Commission (“SEC”) rules and regulations for annual audited financial statements. The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions have been prepared on the basis of the most current and best available information. Actual results could differ from those estimates.

 

In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 25, 2015.

 

 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.

 

7


 

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 fee or an award fee. We generally recognize revenue based on the labor and non-labor costs we incur, plus the portion of the fixed fee or award fee we have earned to date.

 

Included in the total contract value for cost-plus fee arrangements is the portion of the fee for which receipt is determined to be probable.  Award fees are influenced by the achievement of contract milestones, cost savings and other factors.

 

Fixed-Price Contracts.  Under fixed-price contracts, our clients pay us an agreed amount negotiated in advance for a specified scope of work. For engineering and construction contracts, we recognize revenue on fixed-price contracts using the percentage-of-completion method where 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 contract depend on the accuracy of our estimates and will increase to the extent that our actual costs are below the original estimated amounts. Conversely, if our costs exceed these estimates, our profit margins will decrease, and we may realize a loss on a project.

 

Time-and-Materials Contracts.  Under our time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we expend on a project. In addition, clients reimburse us for our actual out of pocket costs of materials and other direct expenditures that we incur in connection with our performance under the contract. Our profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs that we directly charge or allocate to contracts compared with the negotiated billing rate and markup on other direct costs. Some of our time-and-materials contracts are subject to maximum contract values, and accordingly, revenue under these contracts is recognized under the percentage-of-completion method where costs incurred to date are compared to total projected costs at contract completion. Revenue on contracts that is not subject to maximum contract values is recognized based on the actual number of hours we spend on the projects plus any actual out of pocket costs of materials and other direct expenditures that we incur on the projects.

 

Operations and Maintenance Contracts.  A portion of our contracts are operations and maintenance type contracts.  Revenue is recognized on operations and maintenance contracts on a straight-line basis over the life of the contract once we have an arrangement, service has begun, the price is fixed or determinable and collectability is reasonably assured.

 

For all contract types noted above, change orders are included in total estimated contract revenue when it is probable that the change order will result in an addition to contract value and when the change order can be estimated. Management evaluates when a change order is probable based upon its experience in negotiating change orders, the customer’s written approval of such changes or separate documentation of change order costs that are identifiable.

 

Losses on construction and engineering contracts in process are recognized in their entirety when the loss becomes evident and the amount of loss can be reasonably estimated.

 

Accounts Receivable

 

We reduce accounts receivable by estimating an allowance for amounts that may become uncollectible in the future. Management determines the estimated allowance for uncollectible amounts based on their judgments in evaluating the aging of the receivables and the financial condition of our clients, which may be dependent on the type of client and the client’s current financial condition.

 

8


 

Unbilled Revenue and Billings in Excess of Revenue

 

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

 

Billings in excess of revenue represent the excess of billings to date, per the contract terms, over revenue recognized on contracts in process.  A significant portion of our billings in excess balance relates to excess billings on design-build projects.  These projects often require us to order significant project materials and equipment in advance, and we request payment in advance from our clients to cover these costs.  As the projects near completion and our suppliers complete the construction of these components and we complete the installation, the billings in excess balance declines.

 

Fair Value Measurements

 

Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities are valued based upon observable and non-observable inputs. Valuations using Level 1 inputs are based on unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. Level 2 inputs utilize significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly; and valuations using Level 3 inputs are based on significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment.  There were no significant transfers between levels during the quarters ended March 25, 2016 and March 27, 2015.

 

Goodwill

 

Goodwill represents the excess of costs over fair value of the assets of businesses we have acquired.  Goodwill acquired in a purchase business combination is not amortized, but instead, is tested for impairment at least annually in accordance with the provisions of the FASB ASC Topic 350, Intangibles-Goodwill and Other (“ASC 350”), as amended.  Our annual goodwill impairment test is conducted as of the first day of the fourth quarter of each year, however, upon the occurrence of certain triggering events, we are also required to test for impairment at dates other than the annual impairment testing date.  In performing the impairment test, we evaluate our goodwill at the reporting unit level.  Under the guidance of ASC 350, we have the option to assess either quantitative or qualitative factors to determine whether it is more likely than not that the fair values of our reporting units are less than their carrying amounts.  If after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair values of our reporting units are less than their carrying amounts, then the next step of the impairment test is unnecessary.  If we conclude otherwise, then we are required to test goodwill for impairment under the two-step process.  The two-step process involves comparing the estimated fair value of each reporting unit to the unit’s carrying value, including goodwill.  If the carrying value of a reporting unit does not exceed its fair value, the goodwill of the reporting unit is not considered impaired; therefore, the second step of the impairment test is unnecessary.  If the carrying amount of a reporting unit exceeds its estimated fair value, we would then perform a second step to measure the amount of goodwill impairment loss to be recorded.

 

We determine the fair value of our reporting units using a combination of the income approach, the market approach, and the cost approach.  The income approach calculates the present value of future cash flows based on assumptions and estimates derived from a review of our expected revenue growth rates, profit margins, business plans, cost of capital and tax rates for the reporting units.  Our market based valuation method estimates the fair value of our reporting units by the application of a multiple to our estimate of a cash flow metric for each business unit.  The cost approach estimates the fair value of a reporting unit as the net replacement cost using current market quotes.

 

9


 

Intangible Assets

 

We may acquire other intangible assets in business combinations. Intangible assets are stated at fair value as of the date they are acquired in a business combination. We amortize intangible assets with finite lives on a straight-line basis over their expected useful lives, currently up to ten years.  We test our intangible assets for impairment in the period in which a triggering event or change in circumstance indicates that the carrying amount of the intangible asset may not be recoverable.  If the carrying amount of the intangible asset exceeds the fair value, an impairment loss will be recognized in the amount of the excess.  We determine the fair value of the intangible assets using a discounted cash flow approach.

 

Derivative Instruments

 

We primarily enter into derivative financial instruments to mitigate exposures to changing foreign currency exchange rates on our earnings and cash flows. We are primarily subject to this risk on long-term projects whereby the currency being paid by our client differs from the currency in which we incurred our costs, as well as intercompany trade balances among entities with differing currencies. We do not enter into derivative transactions for speculative or trading purposes. All derivatives are carried at fair value on the consolidated balance sheets in other receivables or other accrued liabilities as applicable. The periodic change in the fair value of the derivative instruments related to our business group operations is recognized in earnings within direct costs. The periodic change in the fair value of the derivative instruments related to our general corporate foreign currency exposure is recognized within selling, general and administrative expense.

 

Retirement and Tax-Deferred Savings Plan

 

The Retirement and Tax Deferred Savings Plan is a retirement plan that includes a cash or deferred arrangement that is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code and provides benefits to eligible employees upon retirement. In September 2012, our Board of Directors approved the CH2M HILL Companies, Ltd. Amended and Restated 401(k) Plan which became effective January 1, 2013 (“401(k) Plan”). Effective January 1, 2016, the 401(k) Plan allows for matching contributions up to 58.33% of the first 6% of elective deferrals up to 6% of the employee’s quarterly base compensation, although specific subsidiaries may have different limits on employer matching. The matching contributions may be made in both cash and/or stock.  Expenses related to matching contributions made in common stock for the 401(k) Plan for the three months ended March 25, 2016 and March 27, 2015 were $5.5 million and $6.9 million, respectively.

 

Recently Adopted Accounting Standards

 

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payments Accounting. This ASU identifies areas for simplification involving accounting for share-based payment awards, including the income tax consequences, classification of awards as either equity or liabilities, as well as certain classifications on the statement of cash flows.  This ASU will be effective for fiscal years beginning after December 15, 2016, including interim periods within those annual periods, and early adoption is permitted. CH2M is currently evaluating the impact of this ASU and the transition alternatives on its financial position and results of operations.

 

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new leases standard that was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. CH2M is currently evaluating the impact of this ASU and the transition alternatives on its financial position and results of operations.

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments issued with this ASU require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. An entity’s equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within

10


 

the scope of this update. This ASU will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods, with early adoption permitted. We believe this standard’s impact on CH2M will be limited to equity securities currently accounted for under the cost method of accounting, which as of March 25, 2016 are valued at $3.5 million within investments in unconsolidated affiliates on the consolidated balance sheet. We do not expect the adoption of this standard to have a material impact on our consolidated statements of operations.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The ASU simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets are classified as noncurrent in a classified statement of financial position. This simplification does not affect the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount. This ASU is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We have elected to early adopt this ASU as of December 26, 2015 in order to benefit from the simplification of the deferred income tax balance sheet presentation.  We have applied the change in accounting principle retrospectively resulting in a total long-term deferred tax asset of $255.4 million as of December 25, 2015, which had previously been reported as a current deferred tax asset of $8.7 million and a long-term deferred tax asset of $246.7 million.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The ASU requires that management evaluate for each annual and interim reporting period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued.  If there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, additional disclosures are required, even if the substantial doubt is alleviated as a result of consideration of management’s plans.  This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted.  We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  The ASU also requires additional quantitative and qualitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU.  CH2M is currently evaluating the impact of this ASU and the transition alternatives on its financial position and results of operations. 

 

 

(2) Changes in Project-Related Estimates

 

During 2015, we experienced cost growth on a fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States.  The cost growth was primarily caused by design delays for a water main relocation, the discovery of extremely hard and abrasive rock during construction, differing site conditions, unidentified and mislocated utilities, client requested changes, labor supply challenges in the construction market, lower than expected labor productivity, and severe adverse weather delays.  These unforeseen and unexpected changes resulted in the recording of a charge to operations of $11.0 million for increased estimated project losses during the three months ended March 27, 2015.  There were no changes to the loss provision during the three months ended March 25, 2016.  As of March 25, 2016, the project is approximately 65% complete with a remaining loss provision of $45.7 million.  On December 17, 2015, our client claimed we were in default of our obligations under the design-build contract and issued a notice of default that triggered a cure period under the contract.  On February 9, 2016, within the cure period, CH2M and the client agreed on a contract amendment under which the client accepted our recovery schedule and withdrew the notice of default.  In addition, the client agreed within the settlement to defer the assessment of any potential liquidated damages under the terms of the contract until at least May 1, 2016.  CH2M is seeking resolution of outstanding claims through direct negotiations with the client as well as an outside dispute resolution board (“DRB”) process allowed under the

11


 

contract.  The DRB rendered its initial findings in April 2016, and we are currently in discussions with the client to determine how these conclusions can be used to resolve the outstanding claims.  In the course of these negotiations, the client has indicated that it intends to assess liquidated damages in the second quarter of 2016.  The negotiations on change orders and claims and the postponing of any assessment of liquidated damages as part of an overall settlement are ongoing.  CH2M and the client have not reached an agreement on how to resolve these outstanding issues.  Accordingly, it is not possible to estimate the recoveries or costs that may be achieved or incurred through these resolution processes. We may 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 resulting in liquidated damages under our contract. These potential changes in estimates could be materially adverse to the Company’s results of operations, cash flow or liquidity.

 

All reserves for project related losses are included in other accrued liabilities, which totaled $119.0 million and $152.6 million as of March 25, 2016 and December 25, 2015, respectively.  Of the amounts included in the March 25, 2016 and December 25, 2015 balances, $33.2 million and $44.4 million, respectively, relate to accrued project losses attributable to, and payable by, a noncontrolling joint venture partner.

 

(3) Segment Information

 

In the first quarter of 2016, we implemented certain organizational changes, including the reorganization of our internal reporting structure to better facilitate our strategy for growth, client-centric service, and operational efficiency. In connection with this refinement, we have discontinued our former Industrial and Urban Environments (“IUE”) business group as a standalone unit, and we have combined its industrial and advanced technology business with our Oil, Gas and Chemicals business group to form the Energy and Industrial business group.  Additionally, our urban environments and sports business which was formally within IUE has been combined with our Water business group.  Our Power EPC business continues to be monitored as a separate operating segment as we exit the fixed-price Power EPC business.  As a result of this reorganization, we have identified our four business groups, which include Energy and Industrial, Environment and Nuclear, Transportation, and Water, as well as our Power EPC business as reportable operating segments.

 

Certain financial information relating to the three months ended March 25, 2016 and March 27, 2015 for each segment is provided below.  Costs for corporate general and administrative expenses, restructuring costs and amortization expense related to intangible assets have been allocated based upon the estimated allocation to each segment based on the benefits provided by corporate functions.  This allocation is primarily based upon metrics that reflect the proportionate volume of project-related activity and employee labor costs within each segment.  Prior year amounts have been revised to conform to the current year presentation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 25, 2016

 

Three Months Ended March 27, 2015

 

 

Gross

 

Equity in

 

Operating

 

Gross

 

Equity in

 

Operating

($ in thousands) 

    

Revenue

    

Earnings

    

Income (Loss)

    

Revenue

    

Earnings

 

Income (Loss)

Energy and Industrial

 

$

240,641

 

$

496

 

$

461

 

$

299,053

 

$

415

 

$

8,711

Environment and Nuclear

 

 

503,365

 

 

6,029

 

 

18,197

 

 

358,960

 

 

6,704

 

 

17,281

Transportation

 

 

245,763

 

 

1,685

 

 

3,115

 

 

235,400

 

 

2,497

 

 

(6,117)

Water

 

 

297,241

 

 

843

 

 

19,773

 

 

334,942

 

 

1,734

 

 

20,096

Power EPC

 

 

56,398

 

 

 —

 

 

(680)

 

 

35,631

 

 

 —

 

 

894

Total

 

$

1,343,408

 

$

9,053

 

$

40,866

 

$

1,263,986

 

$

11,350

 

$

40,865

 

 

 

 

 

 

12


 

(4) Stockholders’ Equity

 

The changes in stockholders’ equity for the three months ended March 25, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

Common

 

Preferred

 

 

 

(in thousands)

    

Shares

 

Shares

    

Amount

Stockholders’ equity, December 25, 2015

 

26,283

 

3,214

 

$

377,331

Shares purchased and retired

 

(575)

 

 —

 

 

(36,061)

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

 

163

 

 —

 

 

9,124

Net income attributable to CH2M

 

 —

 

 —

 

 

24,579

Other comprehensive income, net of tax

 

 —

 

 —

 

 

3,286

Loss attributable to noncontrolling interests

 

 —

 

 —

 

 

(855)

Investment in affiliates, net

 

 —

 

 —

 

 

18,408

Stockholders’ equity, March 25, 2016

 

25,871

 

3,214

 

$

395,812

 

Preferred Stock

 

As of March 25, 2016, the Company had 50,000,000 shares of preferred stock, $0.01 par value, authorized.  On June 22, 2015, the Company designated 10,000,000 shares as Series A Preferred Stock with an original issue price of $62.22 under the Certificate of Designation.  On June 24, 2015, the Company sold and issued an aggregate of 3,214,400 shares of Series A Preferred Stock for an aggregate purchase price of $200.0 million in a private placement to a subsidiary owned by investment funds affiliated with Apollo Global Management, LLC (together with its subsidiaries, “Apollo”). Total proceeds from the preferred stock offering were $191.7 million, net of issuance costs of $8.3 million. The sale occurred in connection with the Initial Closing (“Initial Closing”) pursuant to the Subscription Agreement entered into by the Company and Apollo on May 27, 2015 (“Subscription Agreement”).  On April 11, 2016, after the three months ended March 25, 2016, Apollo purchased an additional 1,607,200 shares of Series A Preferred Stock for an aggregate purchase price of approximately $100.0 million in a second closing subject to the conditions within the Subscription Agreement.  Refer to Note 15 – Subsequent Events for additional details related to the second closing.

 

Dividends. Dividends on the Series A Preferred Stock are cumulative and accrue quarterly in arrears at the annual rate of 5.0% on the sum of the original issue price of $62.22 per share plus all accumulated and unpaid accruing dividends, regardless of whether or not declared by the Board.  After June 24, 2020 (the “Fifth Anniversary”), the rate at which dividends accrue may increase from 5.0% to 10.0% or 15.0% if there was a failure of the stockholders to approve certain other actions to facilitate an initial public offering as well as a failure to approve a sale of the Company.

 

Dividends accruing on shares of Series A Preferred Stock prior to the Fifth Anniversary are not paid in cash or in kind but are added to the liquidation preference of the Series A Preferred Stock.  After the Fifth Anniversary, dividends shall continue to accrue on shares of Series A Preferred Stock and will be payable in cash at the election of the Board.  However, if after the Fifth Anniversary if there was a failure of the stockholders to approve certain other actions to facilitate an initial public offering as well as a failure to approve a sale of the Company, dividends accrued on shares of Series A Preferred Stock will be payable in cash or in kind at the election of the holders of a majority of the outstanding shares of Series A Preferred Stock.  Additionally, if the Company declares certain dividends on the common stock, the Company is required to declare and pay a dividend on the outstanding shares of Series A Preferred Stock on a pro rata basis with the common stock, determined on an as-converted basis.

 

Liquidation PreferenceIn the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or any other transaction deemed a liquidation event pursuant to the Certificate of Designation for the Series A Preferred Stock (including a sale of the Company), each holder of outstanding shares of Series A Preferred Stock will be entitled to be paid out of the assets of the Company available for distribution to stockholders before any payment may be made to the holders of Common Stock.  Each holder would receive an amount equal to the number of outstanding Series A Preferred Stock shares held multiplied by $62.22 plus either accrued and unpaid dividends on such shares or, if the liquidation event occurs before the Firth Anniversary, an amount equal to all dividends that would have been accrued during the period from the date of issuance through the

13


 

Fifth Anniversary, and any other dividends declared on such shares.  However, if the amount that the holders of Series A Preferred Stock would have received if all outstanding shares of Series A Preferred Stock had been converted into Common Stock immediately prior to the liquidation event exceeded the amount discussed previously, the holders of Series A Preferred Stock will receive the greater amount.

 

Conversion. Each share of Series A Preferred Stock may be converted at any time at the option of the holder into a number of shares of Common Stock as is determined by dividing the original issue price of $62.22 per share by the conversion price which is initially $62.22. In the event that after the Fifth Anniversary the Board of Directors recommends to the Company’s stockholders a sale of the company, but the Company’s stockholders do not approve the recommended sale, then the conversion price would be reduced to $52.65.  Additionally, if there was a failure of the stockholders to approve certain other actions to facilitate an initial public offering of the company’s Common Stock as well as a failure to approve a sale of the Company recommended by the Board of Directors, then the conversion price would be $47.86.  The conversion price is also subject to adjustments on a broad-based, weighted-average basis upon the issuance of shares of common stock or certain equivalent securities at a price per share less than conversion price of $62.22 or as then adjusted to date.

 

Mandatory conversion of the Series A Preferred Stock to Common Stock will occur immediately prior to the closing of any firm-commitment, underwritten public offering of the Company in which the aggregate proceeds to the Company exceed $200.0 million, before deduction of underwriters’ discounts and commissions, provided that the Common Stock is then listed on the New York Stock Exchange, its NYSE Mkt or the Nasdaq Stock Market (or any successor exchange) and provided that the Company sells on a primary basis in such offering at least certain required amounts of shares.  All outstanding Series A Preferred Stock, accrued and unpaid dividends accrued on such shares, or, in the event that the public offering occurs before the Firth Anniversary, dividends that would have accrued during the period from the date of issuance through the Fifth Anniversary, as well as dividends declared and unpaid would be converted at the effective conversion price automatically.  Or, all outstanding shares of Series A Preferred Stock, plus accrued and unpaid dividends, and dividends declared and unpaid will automatically be converted into shares of Common Stock upon written notice delivered to the Company by the holders of at least a majority of the then outstanding shares of Series A Preferred Stock.

 

Voting Rights.  Each holder of outstanding shares of Series A Preferred Stock is entitled to vote with the holders of outstanding shares of Common Stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company. Each outstanding share of Series A Preferred Stock is entitled to a number of votes equal to the number of shares of Common Stock into which it is convertible.

 

In addition, the Company may not take certain actions without first having obtained the affirmative vote or waiver of the holders of a majority of the outstanding shares of Series A Preferred Stock. These actions include, among other items, conducting certain liquidation events, entering into new lines of business, entering into agreements for certain acquisitions, joint ventures or investments involving amounts greater than $100.0 million and entering into agreements for certain firm, fixed-price or lump-sum design-build or EPC contracts.  In addition, among other things the Company is limited in certain additional amounts it may borrow, additional shares of certain securities that it may issue and the amounts of capital stock it can repurchase in excess of pre-approved amounts, in each case, without further approval from the holders of the Series A Preferred Stock.

 

Redemption. The Company may redeem all the shares of Series A Preferred Stock (and not fewer than all shares of Series A Preferred Stock) in one installment commencing at any time on or after June 24, 2018. The aggregate redemption price for the shares of Series A Preferred Stock will be equal to the greater of (i) certain guaranteed minimum prices of up to an aggregate of $600.0 million, and (ii) the fair value of the shares, as determined by a third-party appraisal, plus accrued and unpaid dividends, and any other dividends declared and unpaid on such shares. The Series A Preferred Stock is not redeemable upon the election of the holders of Series A Preferred Stock.

 

(5) Earnings Per Share

 

Basic earnings per share (“EPS”) is calculated using the weighted-average number of common shares outstanding during the period and income available to common stockholders, which is calculated by deducting the dividends accumulated for the period on cumulative preferred stock (whether or not earned) and income allocated to

14


 

preferred stockholders as calculated under the two-class method. The Company considers all of the Series A Preferred Stock to be participating securities as the holders of the preferred stock are entitled contractually to receive a cumulative dividend. Diluted EPS is computed by giving effect to all potential shares of common stock including common stock issuable upon conversion of the convertible preferred stock, the related convertible dividends for the aggregate five year contractual obligation, and stock options. The denominator is calculated by using the weighted-average number of common shares and common stock equivalents outstanding during the period, assuming conversion at the beginning of the period or at the time of issuance if later. If outstanding preferred shares and dividends which would be earned upon conversion were converted as of March 25, 2016, the result would be equivalent to 3,337,370 common shares. Common stock equivalents are only included in the diluted EPS calculation when their effect is dilutive.

 

The following table presents the reconciliations of basic and diluted EPS for the three months ended March 25, 2016 and March 27, 2015:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 25,

 

March 27,

(in thousands, except per share amounts)

    

2016

    

2015

Numerator - basic and diluted:

 

 

 

 

 

 

Net income

 

$

23,724

 

$

27,505

Less: loss (income) attributable to noncontrolling interests

 

 

855

 

 

(4,007)

Net income attributable to CH2M

 

 

24,579

 

 

23,498

Less: income allocated to preferred stockholders - basic

 

 

2,451

 

 

 —

Less: accrued dividends attributable to preferred stockholders

 

 

2,564

 

 

 —

Income available to common stockholders - basic and diluted

 

$

19,564

 

$

23,498

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

Weighted-average common shares outstanding - basic

 

 

26,305

 

 

27,363

Dilutive effect of common stock equivalents

 

 

202

 

 

23

Diluted adjusted weighted-average common shares outstanding, assuming conversion of common stock equivalents

 

 

26,507

 

 

27,386

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.74

 

$

0.86

Diluted net income per common share

 

$

0.74

 

$

0.86

 

For the three months ended March 25, 2016 and March 27, 2015, options to purchase 0.5 million and 1.9 million shares of common stock, respectively, were excluded from the dilutive EPS calculation because including them would have been antidilutive.  For the three months ended March 25, 2016, 3.3 million shares of preferred stock and accumulated preferred stock dividends were excluded from the dilutive EPS calculation because including them would have been antidilutive.

 

(6) Variable Interest Entities and Equity Method Investments

 

We routinely enter into teaming arrangements, in the form of joint ventures, to perform projects for our clients. Such arrangements are customary in the engineering and construction industry and generally are project specific. The arrangements facilitate the completion of projects that are jointly contracted with our partners. These arrangements are formed to leverage the skills of the respective partners and include consulting, construction, design, design-build, program management and operations and maintenance contracts. The assets of a joint venture are restricted for use only for the particular joint venture and are not available for general operations of the Company. Our risk of loss on these arrangements is usually shared with our partners. The liability of each partner is usually joint and several, which means that each partner may become liable for the entire risk of loss on the project. Furthermore, on some of our projects, CH2M has granted guarantees which may encumber both our contracting subsidiary company and CH2M for the entire risk of loss on the project.

 

Our financial statements include the accounts of our joint ventures when the joint ventures are variable interest entities (“VIE”) and we are the primary beneficiary or those joint ventures that are not VIEs yet we have a controlling interest. We perform a qualitative assessment to determine whether our company is the primary

15


 

beneficiary once an entity is identified as a VIE. A qualitative assessment begins with an understanding of the nature of the risks associated with the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and how they were marketed, and the parties involved in the design of the entity. All of the variable interests held by parties involved with the VIE are identified and a determination is made of which activities are most significant to the economic performance of the entity and which variable interest holder has the power to direct those activities. Most of the VIEs with which our Company is involved have relatively few variable interests and are primarily related to our equity investments, subordinated financial support, and subcontracting arrangements. We consolidate those VIEs in which we have both the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and the obligation to absorb losses or the right to receive the benefits from the VIE that could potentially be significant to the VIE. As of March 25, 2016 and December 25, 2015, total assets of VIEs that were consolidated were $222.2 million and $224.6 million, respectively, and liabilities were $251.5 million and $289.3 million, respectively.  These assets and liabilities consist almost entirely of working capital accounts associated with the performance of an Australian fixed-price Power project being executed with a consolidated joint venture and an Environment and Nuclear consolidated joint venture consulting project in Canada.

 

In determining whether we have a controlling interest in a joint venture that is not a VIE and the requirement to consolidate the accounts of the entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partnership/members.

 

We held investments in unconsolidated VIEs and equity method investments of $78.9 million and $84.3 million at March 25, 2016 and December 25, 2015, respectively. Our proportionate share of net income or loss is included as equity in earnings of joint ventures and affiliated companies in the consolidated statements of income. In general, the equity investment in our unconsolidated affiliates is equal to our current equity investment plus our portion of the entities’ undistributed earnings. We provide certain services, including engineering, construction management and computer and telecommunications support, to these unconsolidated entities. These services are billed to the joint ventures in accordance with the provisions of the agreements.

 

As of March 25, 2016 and December 25, 2015, the total assets of VIEs that were not consolidated were $400.5 million and $389.6 million, respectively, and total liabilities were $320.1 million and $304.9 million, respectively.  These assets and liabilities consist almost entirely of working capital accounts associated with the performance of single contracts. The maximum exposure to losses is limited to the funding of any future losses incurred by those entities under their respective contracts with the project company.

 

 

 

(7) Goodwill and Intangible Assets

 

The following table presents the changes in goodwill by segment during the three months ended March 25, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

    

Environment and Nuclear

    

Energy and Industrial

    

Transportation

    

Water

    

Power

    

Consolidated Total

Balance as of December 25, 2015

 

$

64,764

 

$

93,242

 

$

281,520

 

$

71,459

 

$

 —

 

$

510,985

Foreign currency translation

 

 

326

 

 

 —

 

 

(13,725)

 

 

(3,470)

 

 

 —

 

 

(16,869)

Balance as of March 25, 2016

 

$

65,090

 

$

93,242

 

$

267,795

 

$

67,989

 

$

 —

 

$

494,116

 

The following table presents the changes in intangible assets by segment during the three months ended March 25, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

    

Environment and Nuclear

    

Energy and Industrial

    

Transportation

    

Water

    

Power

    

Consolidated Total

Balance as of December 25, 2015

 

$

30,096

 

$

 —

 

$

22,731

 

$

6,184

 

$

 —

 

$

59,011

Amortization

 

 

(1,183)

 

 

 —

 

 

(2,778)

 

 

(782)

 

 

 —

 

 

(4,743)

Foreign currency translation

 

 

1,155

 

 

 —

 

 

(977)

 

 

(310)

 

 

 —

 

 

(132)

Balance as of March 25, 2016

 

$

30,068

 

$

 —

 

$

18,976

 

$

5,092

 

$

 —

 

$

54,136

 

 

16


 

Intangible assets with finite lives consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Accumulated

    

Net finite-lived

($ in thousands)

 

Cost

 

Amortization

 

intangible assets

March 25, 2016

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

184,575

 

$

(130,447)

 

$

54,128

Tradename

 

 

4,325

 

 

(4,317)

 

 

8

Total finite-lived intangible assets

 

$

188,900

 

$

(134,764)

 

$

54,136

December 25, 2015

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

187,580

 

$

(128,655)

 

$

58,925

Tradename

 

 

4,499

 

 

(4,413)

 

 

86

Total finite-lived intangible assets

 

$

192,079

 

$

(133,068)

 

$

59,011

 

All intangible assets are being amortized over their expected lives of between two years and ten years. The amortization expense reflected in the consolidated statements of income for the three months ended March 25, 2016 and March 27, 2015 totaled $4.7 million and $7.2 million, respectively. All intangible assets are expected to be fully amortized in 2024.

 

At March 25, 2016, the future estimated amortization expense related to these intangible assets is:

 

 

 

 

 

 

    

Amortization

($ in thousands)

 

Expense

2016 (nine months remaining)

 

$

13,912

2017

 

 

17,275

2018

 

 

4,273

2019

 

 

3,540

2020

 

 

3,540

2021

 

 

3,540

Thereafter

 

 

8,056

 

 

$

54,136

 

 

(8) Property, Plant and Equipment

 

Property, plant and equipment consists of the following:

 

 

 

 

 

 

 

 

 

    

March 25,

    

December 25,

($ in thousands)

 

2016

 

2015

Land

 

$

5,021

 

$

5,021

Building and land improvements

 

 

86,042

 

 

67,631

Furniture and fixtures

 

 

26,168

 

 

25,332

Computer and office equipment

 

 

160,419

 

 

158,399

Field equipment

 

 

141,418

 

 

138,721

Leasehold improvements

 

 

71,981

 

 

65,734

 

 

 

491,049

 

 

460,838

Less: Accumulated depreciation

 

 

(262,934)

 

 

(257,172)

Net property, plant and equipment

 

$

228,115

 

$

203,666

 

Depreciation expense reflected in the consolidated statements of income was $11.5 million and $11.9 million for the three months ended March 25, 2016 and March 27, 2015, respectively.

 

(9) Fair Value of Financial Instruments

 

Cash and cash equivalents, client accounts receivable, unbilled revenue, accounts payable and accrued subcontractor costs and billings in excess of revenue are carried at cost, which approximates fair value due to their short maturities. Fair value of longterm debt, including the current portion, is estimated based on Level 2 inputs, except the amount outstanding on the revolving credit facility for which the carrying value approximates fair value.

17


 

Fair value is determined by discounting future cash flows using interest rates available for issues with similar terms and average maturities. The estimated fair values of our financial instruments where carrying values do not approximate fair value are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 25, 2016

 

December 25, 2015

 

    

Carrying

    

Fair

    

Carrying

    

Fair

($ in thousands)

 

Amount

 

Value

 

Amount

 

Value

Equipment financing

 

$

7,965

 

$

7,530

 

$

8,594

 

$

8,056

 

We primarily enter into derivative financial instruments to mitigate exposures to changing foreign currency exchange rates. These currency derivative instruments are carried on the balance sheet at fair value and are typically based upon Level 2 inputs including third-party quotes. At March 25, 2016, we had forward foreign exchange contracts on major world currencies with varying durations, none of which extend beyond one year. As of March 25, 2016,  we had $0.7 million of derivative liabilities. We had an insignificant amount of derivative assets as of December 25, 2015. The changes in derivative fair values resulted in a realized and unrealized losses of $0.8 million and $0.6 million, respectively, for the three months ended March 25, 2016.  For the three months ended March 27, 2015, the changes in derivative fair values resulted in unrealized losses of $1.3 million and an insignificant amount of realized losses.

 

(10) Line of Credit and Long-Term Debt

 

On March 30, 2015, we entered into the Second Amendment to our Amended and Restated Credit Agreement (“Amended Credit Agreement”).  The Amended Credit Agreement provides for an unsecured revolving Credit Facility of $1.1 billion (“Credit Facility”) which matures on March 28, 2019.  Under the terms of the Amended 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 Amended Credit Agreement 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.

 

Certain terms and conditions of our Amended Credit Agreement as of March 25, 2016 are as follows:

 

·

The maximum consolidated leverage ratio is 3.00x for 2016 and beyond.

·

For 2016 and beyond, there is no limit on repurchases of common stock offered for sale on the internal market, and there is a $100.0 million limit for other repurchases of common stock, redemption of preferred stock and common dividends, subject to pro forma leverage of 2.75x.

·

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

 

The Amended Credit Agreement contains customary representations and warranties and conditions to borrowing including customary affirmative and negative covenants, which include covenants that limit or restrict our ability to incur indebtedness and other obligations, grant liens to secure their obligations, make investments, merge or consolidate, and dispose of assets outside the ordinary course of business, in each case subject to customary exceptions for credit facilities of this size and type.  As of March 25, 2016, we were in compliance with the covenants required by the Credit Agreement.

 

18


 

Our nonrecourse and other long-term debt consist of the following:

 

 

 

 

 

 

 

 

 

    

March 25,

    

December 25,

($ in thousands)

 

2016

 

2015

Revolving Credit Facility, average rate of interest of 1.8%

 

$

377,000

 

$

292,783

Equipment financing, due in monthly installments to September 2021, secured by equipment. These notes bear interest ranging from 0.22% to 3.29%

 

 

7,965

 

 

8,594

Other notes payable

 

 

258

 

 

285

Total debt

 

 

385,223

 

 

301,662

Less: current portion of debt

 

 

1,883

 

 

2,069

Total long-term portion of debt

 

$

383,340

 

$

299,593

 

At March 25, 2016 and December 25, 2015, company-wide issued and outstanding letters of credit and bank guarantee facilities were $133.8 million and $145.5 million, respectively.  The remaining unused borrowing capacity under the Credit Facility was $364.1 million as of March 25, 2016.

 

 

(11) Income Taxes

 

After adjusting for the impact of loss attributable to noncontrolling interests, the effective tax rate on income attributable to CH2M for the three months ended March 25, 2016 was 36.2% compared to 28.8% for the same period in the prior year. The 2015 effective tax rate for the three month period was lower than the effective tax rate in the same period of 2016 primarily due to the favorable impact in 2015 of a 2007 Internal Revenue Service settlement. Our effective tax rate continues to be negatively impacted by the effect of state income taxes, non-deductible foreign net operating losses, and the disallowed portions of meals and entertainment expenses.

 

Estimated undistributed earnings of our foreign subsidiaries amounted to approximately $344.8 million and $341.8 million at March 25, 2016 and December 25, 2015, respectively. These earnings are considered to be permanently reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been made. Determining the tax liability that would arise if these earnings were repatriated is not practical.

 

As of March 25, 2016 and December 25, 2015, we had $40.4 million and $38.5 million, respectively, recorded as a liability for uncertain tax positions.  We recognize interest and penalties related to unrecognized tax benefits in income tax expense.  Included in the amounts discussed above are approximately $3.1 million and $3.0 million of accrued interest and penalties related to uncertain tax positions, as of March 25, 2016 and December 25, 2015, respectively.

 

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, United Kingdom and Canada. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities in major tax jurisdictions for years before 2007.

 

(12) Restructuring and Related Charges

 

In September 2014, we commenced certain restructuring activities in order to achieve important business objectives, including reducing overhead costs, improving efficiency, and reducing risk (“2014 Restructuring Plan”). These restructuring activities, which continued into 2015, included such items as a voluntary retirement program, workforce reductions, facilities consolidations and closures, and evaluation of certain lines of business.  During the three months ended March 27, 2015, we incurred $8.0 million of costs for these restructuring activities, which have been included in selling, general and administration expense on the consolidated statements of income.  The restructuring activities under the 2014 Restructuring Plan were substantially complete as of December 25, 2015, and as such no restructuring costs were incurred during the three months ended March 25, 2016.  As of March 25, 2016 and December 25, 2015, the provision for restructuring costs was $26.0 million and $32.4 million, respectively, and were primarily related to accruals for facilities costs that will be paid over the remaining term of the leases which we have exited and therefore will extend through 2028.

19


 

 

 

(13) Defined Benefit Plans and Other Postretirement Benefits

 

We sponsor several defined benefit pension plans primarily in the United States and the United Kingdom.  In the U.S., we have three noncontributory defined benefit pension plans. Plan benefits in two of the plans are frozen while one plan remains active. Benefits are generally based on years of service and compensation during the span of employment.  In the U.K., we assumed several defined benefit plans as part of our acquisition of Halcrow on November 10, 2011, of which the largest is the Halcrow Pension Scheme. These defined benefit plans have been closed to new entrants for many years. The information related to these plans is presented in the NonU.S. Pension Plans columns of the tables below.

 

The components of the net periodic pension expense for the three months ended March 25, 2016 and March 27, 2015 are detailed below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 25, 2016

 

March 27, 2015

 

 

U.S.

 

Non-U.S.

 

U.S.

 

Non-U.S.

($ in thousands)

 

Pension Plans

 

Pension Plans

 

Pension Plans

 

Pension Plans

Service cost

 

$

671

 

$

1,377

 

$

863

 

$

879

Interest cost

 

 

2,954

 

 

10,477

 

 

2,810

 

 

10,894

Expected return on plan assets

 

 

(2,921)

 

 

(8,814)

 

 

(3,312)

 

 

(7,839)

Amortization of prior service credits

 

 

(188)

 

 

 —

 

 

(191)

 

 

 —

Recognized net actuarial loss

 

 

1,629

 

 

693

 

 

1,865

 

 

981

Net expense included in current income

 

$

2,145

 

$

3,733

 

$

2,035

 

$

4,915

 

We sponsor a medical benefit plan for retired employees of certain subsidiaries. The plan is contributory, and retiree premiums are based on years of service at retirement. The benefits contain limitations and a cap on future cost increases. We fund postretirement medical benefits on a payasyougo basis. Additionally, we have a frozen nonqualified pension plan that provides additional retirement benefits to certain senior executives who remained employed and retired from CH2M on or after age 65.

 

The components of the non-qualified pension benefit expense and postretirement benefit expense for the three months ended March 25, 2016 and March 27, 2015 are detailed below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 25, 2016

 

March 27, 2015

 

 

Non-Qualified

 

Postretirement

 

Non-Qualified

 

Postretirement

($ in thousands)

 

Pension Plan

 

Benefit Plans

 

Pension Plan

 

Benefit Plans

Service cost

 

$

 —

 

$

206

 

$

 —

 

$

242

Interest cost

 

 

13

 

 

497

 

 

15

 

 

524

Amortization of prior service (credits) costs

 

 

 —

 

 

(96)

 

 

 —

 

 

(7)

Recognized net actuarial loss (gain)

 

 

 —

 

 

(3)

 

 

 —

 

 

(2)

Net expense included in current income

 

$

13

 

$

604

 

$

15

 

$

757

 

 

 

 

 

(14) Commitments and Contingencies

 

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.

20


 

 

Many claims that are currently pending against us are covered by our professional liability insurance after we have exhausted our self-insurance requirement. 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.  As of March 25, 2016 and December 25, 2015, accruals for potential estimated claim liabilities were $9.1 million and $11.0 million, respectively.

 

In 2010, we were notified that the U.S. Attorney’s 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 that we transitioned to another contractor in 2008. In 2011 and 2012, eight former CH2M Hanford Group (“CH2M 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. Attorney’s 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 Subsidiary’s 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 of March 6, 2013.  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 Subsidiary or any CH2M entities, and the civil False Claims Act case was dismissed.  On March 4, 2016, we received a letter from the U.S. Attorney’s Office for the Eastern District of Washington, extending certain requirements of the NPA through at least March 6, 2019: (i) our obligation to cooperate with the U.S. Attorney’s Office with regard to investigations of individuals who may have been involved in time card fraud; and (ii) the tolling of any applicable limitation of actions periods.

 

 

 

(15) Subsequent Events

 

On April 11, 2016, Apollo pursuant to the Subscription Agreement entered into by the Company and Apollo on May 27, 2015, we sold and issued in a second closing an aggregate of 1,607,200 shares of Series A Preferred Stock to Apollo at a price of $62.22 per share for an aggregate purchase price of approximately $100.0 million in a private placement. The Company offered and sold the preferred shares in reliance on the exemption from registration provided by Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended, on the basis that Apollo was an accredited investor and that we did not use general solicitation or advertising to market the preferred shares and otherwise satisfied the requirements of the exemption.  The rights, privileges and preferences of the Series A Preferred Stock are summarized within Note 4 – Stockholders’ Equity.

21


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis is intended to assist in providing an understanding of our financial condition, changes in financial condition and results of operations as a whole and for each of our operating segments and should be read in conjunction with our consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 25, 2015.

 

In the following text, the terms, “CH2M,” “the Company,” “we,” “our,” and “us” may refer to CH2M HILL Companies, Ltd.

 

Certain statements throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and thus reflect our current expectations and beliefs with respect to certain current and future events and financial performance. Such forward-looking statements are and will be subject to many risks and uncertainties relating to our operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward looking statements. Words such as “believes,” “anticipates,” “expects,” “will,” “plans” and similar expressions are intended to identify forward-looking statements.

 

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

 

Our actual results could differ materially from these forward-looking statements due to numerous factors including, without limitation, the following: the continuance of, and funding for certain governmental regulation and enforcement programs which create demand for our services; our ability to attract and perform large, longer-term projects; our ability to insure against or otherwise cover the liability risks inherent in our business including environmental liabilities and professional engineering liabilities; our ability to manage the risks inherent in the government contracting business and the delivery of lump sum projects; our ability to manage the costs associated with our fixed-price contracts; our ability to manage the risks inherent in international operations, including operations in war and conflict zones; our ability to identify and successfully integrate acquisitions; our ability to attract and retain professional personnel; changes in global business, economic, political and social conditions; intense competition in the global engineering, procurement and construction industry; civil unrest, security issues and other unforeseeable events in countries in which we do business; our failure to receive anticipated new contract awards; the affects, if any, of U.S. government budget constraints; difficulties or delays incurred in the execution of contracts; risks inherent to the operations of our internal market; our ability to maintain the liquidity necessary for our operations; possible changes to our capital structure; obligations associated with the issuance of our Series A Preferred Stock; and other risks and uncertainties set forth under Item 1A. Risk Factors in the Annual Report on Form 10-K for the year ended December 25, 2015, and other risks and uncertainties set forth from time to time in the reports the Company files with the SEC. Consequently, forward-looking statements should not be regarded as representation or warranties by the Company that such matters will be realized.

 

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. We have approximately 22,000 employees worldwide inclusive of craft and hourly employees as well as employees in our consolidated joint ventures.

 

We provide services to a diverse customer base including the U.S. federal and foreign governments and governmental authorities; provincial, state and local municipal governments and agencies; universities; and private sector industries. We believe we provide our clients with innovative project delivery using cost-effective approaches

22


 

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.

 

Private Equity Investor

 

On June 22, 2015, the Company designated 10,000,000 shares as Series A Preferred Stock with an original issue price of $62.22 under the Certificate of Designation. On June 24, 2015, the Company sold and issued an aggregate of 3,214,400 shares of Series A Preferred Stock for an aggregate purchase price of $200.0 million in a private placement to a subsidiary owned by investment funds affiliated with Apollo Global Management, LLC (together with its subsidiaries, “Apollo”). Total proceeds from the preferred stock offering were $191.7 million, net of issuance costs of $8.3 million. The sale occurred in connection with the Initial Closing (“Initial Closing”) pursuant to the Subscription Agreement entered into by the Company and Apollo on May 27, 2015 (“Subscription Agreement”).

 

On April 11, 2016, pursuant to the Subscription Agreement, we sold and issued in a second closing an aggregate of 1,607,200 shares of Series A Preferred Stock to Apollo at a price of $62.22 per share for an aggregate purchase price of approximately $100.0 million in a private placement. The Company offered and sold the preferred shares in reliance on the exemption from registration provided by Rule 506 of Regulation D promulgated under the Securities Act on the basis that Apollo was an accredited investor and that we did not use general solicitation or advertising to market the preferred shares and otherwise satisfied the requirements of the exemption.

 

For a summary of the terms and conditions of the Series A Preferred Stock, see Note 4 – Stockholders’ Equity of the consolidated financial statements.

 

Restructuring

 

In September 2014, we commenced certain restructuring activities in order to achieve important business objectives, including reducing overhead costs, improving efficiency, and reducing risk (“2014 Restructuring Plan”). These restructuring activities, which continued into 2015, included such items as a voluntary retirement program, workforce reductions, facilities consolidations and closures, and evaluation of certain lines of business.  The restructuring charges incurred in 2015 were included within general and administrative costs on our consolidated statements of income.  As of December 25, 2015, the activities under 2014 Restructuring Plan were substantially complete.  The Company’s overall overhead cost structure benefited from the restructuring activities as described in the Summary of Operations section below through the reduction of costs within the corporate overhead functions which are allocated to the business groups to arrive at segment operating profit as well as overhead costs within the business groups themselves. 

 

Summary of Operations

 

In the first quarter of 2016, we implemented certain organizational changes, including the reorganization of our internal reporting structure to better facilitate our strategy for growth, client-centric service, and operational efficiency. In connection with this refinement, we have discontinued our former Industrial and Urban Environments (“IUE”) business group as a standalone unit, and we have combined its industrial and advanced technology business with our Oil, Gas and Chemicals business group to form the Energy and Industrial business group.  Additionally, our urban environments and sports business which was formally within IUE has been combined with our Water business group.  Our Power EPC business continues to be monitored as a separate operating segment as we exit the fixed-price Power EPC business.  As a result of this reorganization, we have identified our four business groups, which include Energy and Industrial, Environment and Nuclear, Transportation, and Water, as well as our Power EPC business as reportable operating segments.

 

Costs for corporate general and administrative expenses, restructuring costs and amortization expense related to intangible assets have been allocated based upon the estimated allocation to each segment based on the

23


 

benefits provided by corporate functions.  This allocation is primarily based upon metrics that reflect the proportionate volume of project-related activity and employee labor costs within each segment.  Prior year amounts have been revised to conform to the current year presentation.

 

Results of Operations for the three months ended March 25, 2016 and March 27, 2015

 

The following table summarizes our results of operation by segment for the three months ended March 25, 2016 as compared to the three months ended March 27, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 25, 2016

 

March 27, 2015

 

Change

 

 

Gross

 

Operating

 

Gross

 

Operating

 

Gross

 

Operating

($ in thousands) 

    

Revenue

    

Income (Loss)

    

Revenue

    

Income (Loss)

    

Revenue

    

Income (Loss)

Energy and Industrial

 

$

240,641

 

$

461

 

$

299,053

 

$

8,711

 

$

(58,412)

 

$

(8,250)

Environment and Nuclear

 

 

503,365

 

 

18,197

 

 

358,960

 

 

17,281

 

 

144,405

 

 

916

Transportation

 

 

245,763

 

 

3,115

 

 

235,400

 

 

(6,117)

 

 

10,363

 

 

9,232

Water

 

 

297,241

 

 

19,773

 

 

334,942

 

 

20,096

 

 

(37,701)

 

 

(323)

Power EPC

 

 

56,398

 

 

(680)

 

 

35,631

 

 

894

 

 

20,767

 

 

(1,574)

Total

 

$

1,343,408

 

$

40,866

 

$

1,263,986

 

$

40,865

 

$

79,422

 

$

1

 

Energy and Industrial

 

Energy and Industrial had a $58.4 million, or 20%, decrease in revenue for the three months ended March 25, 2016 as compared to the three months ended March 27, 2015.  The decline in gross revenue was predominantly caused by reductions in volume and client concessions on program management, professional services, and operations and maintenance contracts primarily within the U.S. and the Middle East as a result of sustained commodity pricing pressures within the oil and gas industry.

Operating income within Energy and Industrial experienced a net decrease of $8.3 million for the three months ended March 25, 2016 as compared to the three months ended March 27, 2015.  The decrease in operating income was primarily related to the reduction in project volume and client concessions due to the pressures in the oil and gas industry as discussed above.   These declines in project earnings were partially offset by improvements in selling, general and administrative costs related to efficiencies gained from the 2014 Restructuring Plan and continuing efforts to reduce overhead as well as reduced business development costs with the depressed oil and gas industry.

Environment and Nuclear

 

Environment and Nuclear revenue increased $144.4 million, or 40%, for the three month period ended March 25, 2016 as compared to the three month period ended March 27, 2015.  Approximately $143.7 million of the increase in revenue was attributable to a large nuclear consulting project in a consolidated Canadian joint venture which began operations in late 2015.

 

For the three months ended March 25, 2016 as compared to the three months ended March 27, 2015, Environment and Nuclear operating income had a net increase of $0.9 million, or 5%.  There was an increase of approximately $1.6 million attributable to increased project activity related to a domestic nuclear-remediation consulting project as well as an increase of $0.8 million related to the consolidated Canadian joint venture discussed above.  Additionally, amortization expense related to the 2014 acquisition of TERA Environmental Consultants decreased by $1.1 million as the backlog intangible asset became fully amortized during the three months ended March 27, 2015.  These increases in earnings were partially offset by a $2.6 million decline in equity in earnings related to the winding down of a large nuclear joint venture project.

 

Transportation

 

Transportation revenue increased by $10.4 million, or 4%, in the three months ended March 25, 2016 as compared to the three months ended March 27, 2015.  The increase was primarily due to revenue growth related to

24


 

increased activities in 2016 on a fixed-price contract to design and construct roadway improvements on an expressway in the southwestern United States.

 

Transportation operating income increased by a net $9.2 million for the three months ended March 25, 2016 as compared to the three months ended March 27, 2015.  The net increase was predominantly driven by an $11.0 million charge in the three months ended March 27, 2015 for the fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States.   The cost growth recognized in 2015 was primarily caused by design delays for a water main relocation, the discovery of extremely hard and abrasive rock during construction, differing site conditions, unidentified and mislocated utilities, client requested changes, labor supply challenges in the construction market, lower than expected labor productivity, and severe adverse weather delays.  There were no changes to the loss provision during the three months ended March 25, 2016.  On December 17, 2015, our client claimed we were in default of our obligations under the design-build contract and issued a notice of default that triggered a cure period under the contract.  On February 9, 2016, within the cure period, CH2M and the client agreed on a contract amendment under which the client accepted our recovery schedule and withdrew the notice of default.  In addition, the client agreed within the settlement to defer the assessment of any potential liquidated damages under the terms of the contract until at least May 1, 2016.  CH2M is seeking resolution of outstanding claims through direct negotiations with the client as well as an outside dispute resolution board (“DRB”) process allowed under the contract.  The DRB rendered its initial findings in April 2016, and we are currently in discussions with the client to determine how these conclusions can be used to resolve the outstanding claims.  In the course of these negotiations, the client has indicated that it intends to assess liquidated damages in the second quarter of 2016.  The negotiations on change orders and claims and the postponing of any assessment of liquidated damages as part of an overall settlement are ongoing.  CH2M and the client have not reached an agreement on how to resolve these outstanding issues.  Accordingly, it is not possible to estimate the recoveries or costs that may be achieved or incurred through these resolution processes. We may 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 resulting in liquidated damages under our contract. These potential changes in estimates could be materially adverse to the Company’s results of operations, cash flow or liquidity.  The increase in Transportation’s earnings was partially offset by increased business development costs related to significant program management pursuits in the United States and Europe.

 

Water

 

Water revenue decreased $37.7 million, or 11%, for the three months ended March 25, 2016 as compared to three months ended March 27, 2015.  Approximately $26.0 million of the decline in revenue was attributable to decreased activity on two design-build-operate contracts for water treatment facilities in the western United States as the projects approach completion and the completion of a program management project in the Middle East.  Water experienced an additional $7.0 million decrease in revenue due to economic challenges in Puerto Rico and reduced activity on projects related to the oil and gas industry.

 

Water’s operating income experienced a net decrease of $0.3 million, or 2%, in the three months ended March 25, 2016 as compared to the three months ended March 27, 2015. There was a $2.1 million decrease in earnings related to the Water projects which experienced reductions in revenue as discussed above.  The decline in operating income was partially offset by efficiencies gained from the 2014 Restructuring Plan.

 

Power EPC

 

Power EPC revenues increased $20.8 million for the three months ended March 25, 2016 as compared to the three months ended March 27, 2015, which was primarily related to a $19.4 million increase in revenue recorded on an  Australian fixed-price Power EPC project being executed by a consolidated 50/50 joint venture.   The increase in revenue on the Australian project resulted from increasing the incremental construction progress achieved during the three months ended March 25, 2016 as compared to three months ended March 27, 2015.  In the fourth quarter of 2015, management was able to reach an agreement with the client of this project to settle certain claims to recover costs and extend the amount of time allowed to complete interim delivery milestones for the project.  Certain of those milestones are expected to be completed in the remainder of 2016 with construction and commission continuing into 2017.  While management believes the current costs estimate-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

25


 

achieving substantial completion.  Thus there can be no assurance that additional cost growth will not occur.

 

For the three months ended March 25, 2016 as compared to the three months ended March 27, 2015, Power’s operating income decreased by $1.6 million.  As the Australian fixed-price EPC project has an estimated loss at completion which was recorded in its entirety in 2014, the decrease in earnings in 2016 as compared to the same period in 2015 is due to operating costs of the Power EPC business as well as a decline in earnings related to foreign currency translation.

 

Income Taxes

 

After adjusting for the impact of loss attributable to noncontrolling interests, the effective tax rate on income attributable to CH2M for the three months ended March 25, 2016 was 36.2% compared to 28.8% for the same period in the prior year. The 2015 effective tax rate for the three month period was lower than the effective tax rate in the same period of 2016 primarily due to the favorable impact in 2015 of the 2007 IRS settlement. Our effective tax rate continues to be negatively impacted by the effect of state income taxes, non-deductible foreign net operating losses, and the disallowed portions of meals and entertainment expenses.

 

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 in 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 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 March 25, 2016 and December 25, 2015, cash and cash equivalents, including the amount related to consolidated joint ventures as discussed below, totaling $167.1 million and $152.0 million, respectively, was held in foreign bank accounts.

 

In addition, as is common within our industry, we partner with other engineering and construction 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 March 25, 2016 and December 25, 2015, cash and cash equivalents held in our consolidated joint ventures and reflected on the consolidated balance sheets totaled $69.0 million and $95.4 million, respectively.

 

During the three months ended March 25, 2016, cash used in operations was $19.3 million, which was a decrease of $60.3 million as compared to cash provided by operations of $41.0 million in the three months ended March 27, 2015. The decrease in cash flows from operations primarily resulted from a decline in cash provided by changes in working capital of $62.2 million.

 

Changes in 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.  For the three months ended March 25, 2016, other accrued liabilities decreased by $60.4 million primarily due to a $33.6 million reduction in project loss reserves from December 25, 2015 to March 25, 2016 as actual losses were funded with increased percentage of completion on loss projects.  Additionally, other accrued liabilities decreased by approximately $12.9 million primarily due to payments related to the 2014 Restructuring Plan as well as a holdback provision payment related to a 2007 acquisition.  For the three months ended March 25, 2016, cash used for working capital increased by $45.0 million for payments made on accounts payable and accrued subcontractor costs primarily related to milestone payments on our fixed-price contract to design and construct roadway improvements on an expressway in the southwestern United States.  There was also a decline of $34.9 million in billings in excess of revenue due primarily due to timing of issuing  invoices and construction progress achieved in 2016.  As we complete our work on our joint venture power project in Australia and our fixed-price contract to design and construct roadway improvements on an expressway in the southwestern United States, we may experience decreases in our working capital and cash flow in future periods.  These changes in our working capital were offset primarily

26


 

by a $48.4 million decrease in our receivables and unbilled revenue, which were primarily related to payments received within our Energy and Industrial business group for oil and gas projects.

 

Cash used in investing activities was $42.1 million for the three months ended March 25, 2016 as compared to cash provided by investing activities of $3.0 million for the three months ended March 27, 2015.  A significant factor contributing to change in cash used in investing activities was the $30.7 million increase in capital expenditures in three months ended March 25, 2016 as compared to the three months ended March 27, 2015 primarily due to the construction of employee housing units for oilfield workers in the northwestern United States to support our oil and gas operations. Additionally, due to the sale of certain previously owned land during 2015, proceeds from the sale of operating assets decreased by $11.3 million for the three months ended March 25, 2016 as compared to the three months ended March 27, 2015.  Furthermore, we periodically make working capital advances to certain of our unconsolidated joint ventures; such advances are repaid to us from the joint ventures in the normal course of the joint venture activities.  During the three months ended March 25, 2016, we received working capital repayments from our unconsolidated joint ventures of $2.6 million as compared to $4.8 million for the three months ended March 27, 2015.  These working capital repayments are offset by additional investments made in our unconsolidated joint ventures, which were $8.2 million and $7.4 million for the three months ended March 25, 2016 and March 27, 2015, respectively.

 

Cash provided by financing activities was $65.9 million in the three months ended March 25, 2016 as compared to $28.2 million of cash used in financing activities for the three months ended March 27, 2015.  The change in financing cash flows was primarily caused by the net payment on long-term debt of $83.6 million for the three months ended March 25, 2016 as compared to a net payment of $24.9 million for the three months ended March 27, 2015.  This was offset by a $25.0 million increase in cash used from financing activities for repurchases of common stock during the three months ended March 25, 2016 as compared to the three months ended March 27, 2015.

 

On March 30, 2015, we entered into the Second Amendment to our Amended and Restated Credit Agreement (“Amended Credit Agreement”).  The Amended Credit Agreement provides for an unsecured revolving Credit Facility of $1.1 billion (“Credit Facility”) which matures on March 28, 2019.  Under the terms of the Amended 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 Amended Credit Agreement 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.

 

Certain terms and conditions of our Amended Credit Agreement as of March 25, 2016 are as follows:

 

·

The maximum consolidated leverage ratio is 3.00x for 2016 and beyond.

·

For 2016 and beyond, there is no limit on repurchases of common stock offered for sale on the internal market, and there is a $100.0 million limit for other repurchases of common stock, redemption of preferred stock and common dividends, subject to pro forma leverage of 2.75x.

·

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

 

As of March 25, 2016, we were in compliance with the covenants required by the Credit Agreement.  In the context of our current debt structure and projected cash needs, and assuming prorated participation in our internal market to repurchase stock, we believe the combination of our current cash position, our credit capacity under our Amended Credit Agreement, the cash from the issuance of the Series A Preferred Stock, and cash flows anticipated from operations are adequate to support our immediate business operations and plans.

 

At March 25, 2016, we had $377.0 million in outstanding borrowings of the Credit Facility, compared to $292.8 million at December 25, 2015. The average rate of interest charged on that balance was 1.79% as of March 25, 2016. At March 25, 2016 company-wide issued and outstanding letters of credit, and bank guarantee facilities of $133.8 million were outstanding, compared to $145.5 million at December 25, 2015.  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.  As of March 25, 2016, the remaining unused borrowing capacity under the Credit

27


 

Facility was approximately $364.1 million.

 

Internal Market Trades 

 

CH2M’s common stock trades on an internal market four times per year. The next internal market trade date is expected to be on June 2, 2016.  CH2M determines whether to participate in the internal market on a quarterly basis. 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 should participate in the internal market by buying shares. In making that determination, CH2M’s management and Board of Directors consider prevailing circumstances, including our financial condition and results of operations, our available cash and capital resources, including the limits that CH2M may spend on share repurchases and 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.

 

CH2M’s management and Board of Directors could determine to limit the amount of money expended by the Company to repurchase shares, or not to participate in the internal market, either of which would result in proration of sell orders that stockholders may place for trades on the next trade date. In addition, CH2M’s Board of Directors could determine to suspend trading on the internal market in order to provide time to evaluate the ability to adequately provide for proration and to conserve the company’s cash reserves and available liquidity.  For the 2015 trade dates, CH2M limited the amount expended to repurchase shares.  We expect that the amounts CH2M will be able to spend to clear sell orders for the June 2016 and future trade dates will continue to be restricted. CH2M’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.

 

For more information of the risks associated with the internal market, please see the risk factors set forth in the CH2M Annual Report on Form 10-K for the year ended December 25, 2015 under the heading Item 1A. Risk Factors.

 

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 6 – Variable Interest Entities and Equity Method Investments of the consolidated financial statements.

 

There were no substantial changes to other off-balance sheet arrangements or contractual commitments in the three months ended March 25, 2016, when compared to the disclosures provided in our Annual Report on Form 10-K for the year ended December 25, 2015.

 

Aggregate Contractual 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.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our

28


 

consolidated financial statements, which have been prepared in accordance with 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 on matters that are inherently uncertain. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as of the date of the financial statements that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The accounting policies that we believe are most critical to the understanding of our financial condition and results of operations and require complex management judgment are summarized below. Further detail and information regarding our critical accounting policies and estimates are included in our Annual Report on Form 10-K for the year ended December 25, 2015.

 

Recently Adopted Accounting Standards

 

See Note 1 – Summary of Business and Significant Accounting Policies of the Notes to Consolidated Financial Statements.

 

Commitments and Contingencies

 

See Note 14 – Commitments and Contingencies of the Notes to Consolidated Financial Statements.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Foreign currency exchange rates.    We operate in many countries around the world and as a result, are exposed to foreign currency exchange rate risk on transactions in numerous countries. We are primarily subject to this risk on long term projects whereby the currency being paid by our client differs from the currency in which we incurred our costs, as well as intercompany trade balances among our entities with differing currencies. In order to mitigate this risk, we enter into derivative financial instruments. We do not enter into derivative transactions for speculative or trading purposes. All derivatives are carried at fair value in the consolidated balance sheets and changes in the fair value of the derivative instruments are recognized in earnings. These currency derivative instruments are carried on the balance sheet at fair value and are based upon Level 2 inputs including third party quotes. As of March 25, 2016, we had derivative liabilities of $0.7 million of forward foreign exchange contracts on world currencies with varying durations, none of which extend beyond one and five years.

 

Interest rates.    Our interest rate exposure is primarily limited to our Credit Facility.  As of March 25, 2016, the outstanding balance on the Credit Facility was $377.0 million.  We have assessed the market risk exposure on this financial instrument and determined that any significant change to the fair value of this instrument would not have a material impact on our consolidated results of operations, financial position or cash flows.  Based upon the amount outstanding under the Credit Facility, a one percentage point change in the assumed interest rate would change our annual interest expense by approximately $3.8 million.

 

Item 4.  Controls and Procedures

 

We carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that

29


 

information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

There have been no changes in our internal control over financial reporting during the quarter ended March 25, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. OTHER INFORMATION

 

Item 1. 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.

 

Many claims that are currently pending against us are covered by our professional liability insurance after we have exhausted our self-insurance requirement. 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. Attorney’s 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 that we transitioned to another contractor in 2008. In 2011 and 2012, eight former CH2M Hanford Group (“CH2M 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. Attorney’s 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 Subsidiary’s 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 of March 6, 2013.  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 Subsidiary or any CH2M entities, and the civil False Claims Act case was dismissed.  On March 4, 2016, we received a letter from the U.S. Attorney’s Office for the Eastern District of Washington, extending certain requirements of the NPA through at least March 6, 2019: (i) our obligation to cooperate with the U.S. Attorney’s Office with regard to investigations of individuals who may have been involved in time card fraud; and (ii) the tolling of any applicable limitation of actions periods.

 

In the three months ended March 25, 2016, there have been no material developments to other proceedings and legal actions as compared to the legal proceedings disclosed in our Annual Report on Form 10-K for the year ended December 25, 2015.

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 25, 2015.

 

30


 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

The following table covers the purchases of our common shares by our company not previously reported during the three months ended March 25, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number of Shares

    

Maximum Number of Shares

 

 

Total Number of

 

Average Price

 

Purchased as Part of Publicly

 

that May Yet Be Purchased

Period

 

Shares Purchased

 

Paid per Share

 

Announced Plans or Programs

 

Under the Plans or Programs

January

 

 —

 

$

 —

 

 —

 

 —

February

 

 —

 

 

 —

 

 —

 

 —

March (a)

 

572,378

 

 

62.89

 

 —

 

 —

Total

 

572,378

 

$

62.89

 

 —

 

 —


(a)

Shares purchased by CH2M in the Internal Market.

 

 

 

 

31


 

Item 6.  Exhibits

 

Exhibit Index

 

 

 

 

 

 

 

*31.1

 

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

*31.2

 

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

*32.1

 

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

*32.2

 

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

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 


* Filed herewith

 

32


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

CH2M HILL Companies, Ltd.

 

 

 

 

Date: April 29, 2016

/s/ GARY L. MCARTHUR

 

Gary L. McArthur

 

Chief Financial Officer

 

 

 

33