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EX-32.2 - EX-32.2 - CH2M HILL COMPANIES LTDchm-20170929ex322487256.htm
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EX-31.2 - EX-31.2 - CH2M HILL COMPANIES LTDchm-20170929ex312760626.htm
EX-31.1 - EX-31.1 - CH2M HILL COMPANIES LTDchm-20170929ex31137c968.htm

Are

 

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 September 29, 2017

 

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)

 

Emerging Growth Company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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 November 3, 2017 was 24,605,648.

 

 

 

 


 

 

 

CH2M HILL COMPANIES, LTD.

TABLE OF CONTENTS

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

 

 

Consolidated Balance Sheets as of September 29, 2017 and December 30, 2016 (unaudited)

3

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 29, 2017 and September 30, 2016 (unaudited)

4

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 29, 2017 and September 30, 2016 (unaudited)

5

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 29, 2017 and September 30, 2016 (unaudited)

6

 

Notes to Consolidated Financial Statements (unaudited)

7

Item 2. 

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

26

Item 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

36

Item 4. 

CONTROLS AND PROCEDURES

36

 

PART II. OTHER INFORMATION

 

Item 1. 

LEGAL PROCEEDINGS

38

Item 1A. 

RISK FACTORS

39

Item 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

40

Item 6. 

EXHIBITS

41

SIGNATURES 

 

42

 

2


 

 

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(Unaudited)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

  

September 29,

  

December 30,

 

 

2017

 

2016

ASSETS

 

  

 

  

  

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

145,292

 

$

121,365

Receivables, net—

 

 

 

 

 

 

Client accounts

 

 

624,164

 

 

602,363

Unbilled revenue

 

 

532,212

 

 

529,779

Other

 

 

11,062

 

 

11,469

Income tax receivable

 

 

22,303

 

 

18,375

Prepaid expenses and other current assets

 

 

83,032

 

 

92,097

Current assets of discontinued operations

 

 

276

 

 

14,449

Total current assets

 

 

1,418,341

 

 

1,389,897

Investments in unconsolidated affiliates

 

 

82,107

 

 

66,329

Property, plant and equipment, net

 

 

229,582

 

 

246,596

Goodwill

 

 

512,528

 

 

477,752

Intangible assets, net

 

 

26,813

 

 

38,024

Deferred income taxes

 

 

332,512

 

 

363,251

Employee benefit plan assets and other

 

 

95,969

 

 

86,777

Long-term assets of discontinued operations

 

 

 —

 

 

1,836

Total assets

 

$

2,697,852

 

$

2,670,462

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

2,249

 

$

2,242

Accounts payable and accrued subcontractor costs

 

 

368,857

 

 

394,934

Billings in excess of revenue

 

 

194,147

 

 

227,501

Accrued payroll and employee related liabilities

 

 

274,312

 

 

272,458

Other accrued liabilities

 

 

183,003

 

 

210,121

Current liabilities of discontinued operations

 

 

922

 

 

208,105

Total current liabilities

 

 

1,023,490

 

 

1,315,361

Long-term employee related liabilities

 

 

286,407

 

 

308,118

Long-term debt

 

 

539,748

 

 

495,632

Other long-term liabilities

 

 

92,212

 

 

105,813

Long-term liabilities of discontinued operations

 

 

77,920

 

 

 —

Total liabilities

 

 

2,019,777

 

 

2,224,924

Commitments and contingencies (Note 15)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value, 50,000,000 shares authorized of which 10,000,000 are designated as Series A; 4,821,600 issued and outstanding at September 29, 2017 and as of December 30, 2016

 

 

48

 

 

48

Common stock, $0.01 par value, 100,000,000 shares authorized; 24,606,719 and 25,148,399 issued and outstanding at September 29, 2017 and December 30, 2016, respectively

 

 

246

 

 

251

Additional paid-in capital

 

 

137,167

 

 

169,573

Retained earnings

 

 

691,027

 

 

586,252

Accumulated other comprehensive loss

 

 

(148,782)

 

 

(209,408)

Total CH2M common stockholders’ equity

 

 

679,706

 

 

546,716

Noncontrolling interests of continuing operations

 

 

(1,631)

 

 

(8,643)

Noncontrolling interests of discontinued operations

 

 

 —

 

 

(92,535)

Total stockholders' equity

  

  

678,075

  

  

445,538

Total liabilities and stockholders’ equity

  

$

2,697,852

  

$

2,670,462

 

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

 

3


 

 

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

 

Consolidated Statements of Operations

 

(Unaudited)

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 29,

 

September 30,

 

September 29,

 

September 30,

 

  

2017

  

2016

  

2017

  

2016

Gross revenue

  

$

1,240,646

  

$

1,302,609

  

$

3,765,938

  

$

3,880,584

Equity in earnings of joint ventures and affiliated companies

  

  

8,233

  

  

26,877

  

  

30,972

  

  

44,647

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Direct cost of services

 

 

(970,899)

 

 

(1,106,926)

 

 

(3,021,853)

 

 

(3,210,501)

Selling, general and administrative

 

 

(194,371)

 

 

(224,184)

 

 

(589,369)

 

 

(689,383)

Operating income (loss)

 

 

83,609

 

 

(1,624)

 

 

185,688

 

 

25,347

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

117

 

 

136

 

 

325

 

 

306

Interest expense

 

 

(11,426)

 

 

(3,873)

 

 

(27,836)

 

 

(10,019)

Income (loss) from continuing operations before provision for income taxes

 

 

72,300

 

 

(5,361)

 

 

158,177

 

 

15,634

(Provision) benefit for income taxes from continuing operations

 

 

(18,550)

 

 

58,911

 

 

(39,501)

 

 

56,103

Net income from continuing operations

 

 

53,750

 

 

53,550

 

 

118,676

 

 

71,737

Net loss from discontinued operations

 

 

(1,478)

 

 

(87,199)

 

 

(1,619)

 

 

(235,852)

Net income (loss)

 

 

52,272

 

 

(33,649)

 

 

117,057

 

 

(164,115)

Less: income attributable to noncontrolling interests from continuing operations

 

 

(3,750)

 

 

(3,461)

 

 

(12,343)

 

 

(8,280)

Less: loss attributable to noncontrolling interests from discontinued operations

 

 

 —

 

 

53,043

 

 

60

 

 

150,865

Net income (loss) attributable to CH2M

 

$

48,522

 

$

15,933

 

$

104,774

 

$

(21,530)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to CH2M per common share1:

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income from continuing operations per common share

 

$

1.48

 

$

1.25

 

$

3.04

 

$

3.61

Basic net loss from discontinued operations per common share

 

 

(0.04)

 

 

(0.85)

 

 

(0.05)

 

 

(4.83)

Basic net income (loss) per common share

 

$

1.44

 

$

0.40

 

$

2.99

 

$

(1.22)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income from continuing operations per common share

 

$

1.35

 

$

1.25

 

$

2.93

 

$

3.61

Diluted net loss from discontinued operations per common share

 

 

(0.04)

 

 

(0.85)

 

 

(0.04)

 

 

(4.83)

Diluted net income (loss) per common share

 

$

1.31

 

$

0.40

 

$

2.89

 

$

(1.22)

 

  

  

 

  

  

 

  

  

 

  

  

 

Basic weighted average number of common shares

 

 

24,595,751

 

 

25,356,689

 

 

24,738,459

 

 

25,816,819

Diluted weighted average number of common shares

 

 

26,948,751

 

 

25,389,138

 

 

25,630,459

 

 

25,816,819

 

1 Represents net income (loss) attributable to CH2M less (i) income allocated to preferred stockholders of $7,455 and $15,347 for the three and nine months ended September 29, 2017, respectively, and $1,984 for the three months ended September 30, 2016, and (ii) accrued dividends attributable to preferred stockholders of $5,753 and $15,395 for the three and nine months ended September 29, 2017, and $3,891 and $10,067 for the three and nine months ended September 30, 2016.

 

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

4


 

 

CH2M HILL COMPANIES, LTD.

 

Consolidated Statements of Comprehensive Income (Loss)

 

(Unaudited)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 29,

 

September 30,

 

September 29,

 

September 30,

 

  

2017

   

2016

  

2017

  

2016

Net income (loss)

 

$

52,272

 

$

(33,649)

 

$

117,057

 

$

(164,115)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

20,335

 

 

(17,197)

 

 

54,275

 

 

(5,432)

Benefit plan adjustments, net of tax

 

 

2,119

 

 

(9,104)

 

 

6,353

 

 

(5,034)

Other comprehensive income (loss)

 

 

22,454

 

 

(26,301)

 

 

60,628

 

 

(10,466)

Comprehensive income (loss)

 

 

74,726

 

 

(59,950)

 

 

177,685

 

 

(174,581)

Less: income attributable to noncontrolling interests from continuing operations

 

 

4,014

 

 

3,461

 

 

13,149

 

 

8,280

Less: loss attributable to noncontrolling interests from discontinued operations

 

 

 —

 

 

(53,043)

 

 

(60)

 

 

(150,865)

Comprehensive income (loss) attributable to CH2M

 

$

70,712

 

$

(10,368)

 

$

164,596

 

$

(31,996)

 

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)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 29,

 

September 30,

 

    

2017

    

2016

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

117,057

 

$

(164,115)

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

 

 

 

 

 

 

Net loss from discontinued operations

 

 

1,619

 

 

235,852

Depreciation and amortization

 

 

45,356

 

 

45,770

Stock-based employee compensation

 

 

11,191

 

 

28,952

Loss on disposal of property, plant and equipment

 

 

679

 

 

62

Amortization of debt issuance costs

 

 

655

 

 

 —

Allowance for uncollectible accounts

 

 

2,772

 

 

3,706

Deferred income taxes

 

 

36,247

 

 

(145,523)

Undistributed earnings and gains from unconsolidated affiliates

 

 

(30,972)

 

 

(44,647)

Distributions of income from unconsolidated affiliates

 

 

33,691

 

 

41,214

Contributions to defined benefit pension plans

 

 

(21,692)

 

 

(30,482)

Gain on pension curtailment

 

 

 —

 

 

(4,568)

Excess tax benefits from stock-based compensation

 

 

2,267

 

 

3,093

Change in assets and liabilities of continuing operations:

 

 

 

 

 

 

Receivables and unbilled revenue

 

 

(95,089)

 

 

100,021

Prepaid expenses and other

 

 

(15,208)

 

 

(3,892)

Accounts payable and accrued subcontractor costs

 

 

50,992

 

 

(57,140)

Billings in excess of revenue

 

 

(35,082)

 

 

14,827

Accrued payroll and employee related liabilities

 

 

25,369

 

 

(54,572)

Other accrued liabilities

 

 

(27,910)

 

 

(616)

Income tax receivable

 

 

(9,600)

 

 

18,202

Long-term employee related liabilities and other

 

 

(11,330)

 

 

37,106

Net cash provided by operating activities from continuing operations

 

 

81,012

 

 

23,250

Net cash used in operating activities from discontinued operations

 

 

(15,459)

 

 

(153,197)

Net cash provided by (used in) operating activities

 

 

65,553

 

 

(129,947)

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(16,199)

 

 

(87,511)

Acquisition related payments

 

 

(213)

 

 

(17,901)

Investments in unconsolidated affiliates

 

 

(20,647)

 

 

(16,596)

Distributions of capital from unconsolidated affiliates

 

 

875

 

 

10,456

Proceeds from sale of operating assets

 

 

2,665

 

 

2,703

Net cash used in investing activities from continuing operations

 

 

(33,519)

 

 

(108,849)

Net cash used in investing activities from discontinued operations

 

 

(8,109)

 

 

(169)

Net cash used in investing activities

 

 

(41,628)

 

 

(109,018)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings on long-term debt

 

 

1,506,127

 

 

1,808,743

Payments on long-term debt

 

 

(1,462,678)

 

 

(1,690,254)

Repurchases and retirements of common stock

 

 

(43,602)

 

 

(103,912)

Proceeds from the issuance of preferred stock, net of issuance costs

 

 

 —

 

 

99,800

Settlement of tax-withholding obligation on stock-based compensation 

 

 

(3,030)

 

 

(3,720)

Net distributions to noncontrolling interests for continuing operations

 

 

(3,786)

 

 

(5,452)

Net cash (used in) provided by financing activities from continuing operations

 

 

(6,969)

 

 

105,205

Net cash provided by financing activities from discontinued operations

 

 

4,635

 

 

80,007

Net cash (used in) provided by financing activities

 

 

(2,334)

 

 

185,212

Effect of deconsolidation of joint venture partnerships on cash

 

 

(23,376)

 

 

 —

Effect of exchange rate changes on cash

 

 

16,048

 

 

(16,994)

Increase (decrease) in cash and cash equivalents

 

$

14,263

 

$

(70,747)

 

 

 

 

 

 

 

Cash and cash equivalents from continuing operations, beginning of period

 

$

121,365

 

$

148,979

Cash and cash equivalents from discontinued operations, beginning of period

 

 

9,664

 

 

48,042

Cash and cash equivalents, beginning of period

 

$

131,029

 

$

197,021

 

 

 

 

 

 

 

Cash and cash equivalents from continuing operations, end of period

 

$

145,292

 

$

114,615

Cash and cash equivalents from discontinued operations, end of period

 

 

 —

 

 

11,659

Cash and cash equivalents, end of period

 

$

145,292

 

$

126,274

Supplemental disclosures:

 

 

 

 

 

 

Cash paid for interest

 

$

19,760

 

$

9,781

Cash paid for income taxes

 

$

6,930

 

$

7,390

 

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

6


 

 

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

September 29, 2017

 

(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, design‑build, procurement, engineering‑procurement‑construction (“EPC”), operations and maintenance, program management and technical services to United States (“U.S.”) federal, state, municipal and local government agencies, national governments, as well as private industry and utilities, around the world.  A substantial portion of our professional fees are derived from projects that are funded directly or indirectly by government entities.

 

Proposed Acquisition by Jacobs Engineering

 

On August 1, 2017, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Jacobs Engineering Group Inc. (“Jacobs”) and Basketball Merger Sub Inc. (“Merger Sub”).  The Merger Agreement provides for the merger of Merger Sub with and into CH2M, with CH2M continuing as the surviving company and a direct, wholly-owned subsidiary of Jacobs.

Under the terms of the Merger Agreement, each outstanding share of our common stock will be cancelled and converted into the right to receive, at the election of the holder thereof, (i) a combination of $52.85 in cash and 0.6677 shares of Jacobs common stock, (ii) $88.08 in cash or (iii) 1.6693 shares of Jacobs common stock.  Each outstanding share of our preferred stock will be deemed converted into shares of our common stock in accordance with the Certificate of Designation for such preferred stock, and such shares will also be automatically converted into the right to receive, at the election of the holder thereof, the same merger consideration.  Stockholder elections with respect to the form of merger consideration to be received in connection with the Merger Agreement will be subject to proration, such that the overall consideration to be paid by Jacobs in connection with the Merger will be 60% in the form of cash and 40% in the form of shares of Jacobs common stock.

The merger is subject to approval by our stockholders, performance by the parties of all their obligations under the Merger Agreement, regulatory approvals and the satisfaction of other customary closing conditions.  On September 25, 2017, the parties satisfied the requirements under the Canadian Competition Act.  On October 18, 2017, Jacobs and CH2M received early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, from the Federal Trade Commission.  On October 25, 2017, Jacobs and CH2M received clearance from the European Commission pursuant to Council Regulation (EC) No. 139/2004 of 20 January 2004 on the Control of Concentrations Between Undertakings, as amended.  On November 9, 2017, CH2M filed a definitive proxy statement with the Securities and Exchange Commission (“SEC”) announcing that a special meeting of CH2M stockholders will be held on December 13, 2017 at 10:00 a.m. Mountain time, at CH2M’s World Headquarters, 9191 South Jamaica Street, Englewood, Colorado, 80112, USA, to seek adoption of the merger agreement, among other things.  Also on November 9, 2017, the SEC declared effective the amended registration statement filed on Form S-4 by Jacobs.  On or about November 10, 2017, CH2M commenced mailing the Notice of Special Meeting and the definitive proxy statement to stockholders of CH2M as of the close of business on November 8, 2017, the record date for the special meeting.  We anticipate that the transaction will be consummated prior to the end of calendar 2017.  However, we cannot predict with certainty whether and when all of the required closing conditions will be satisfied or if the merger will close.

 

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 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

7


 

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 30, 2016.

 

 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, subcontractor costs, liability claims, contract disputes, and achievement of contract performance standards.  We record the cumulative effect of changes in contract revenue and cost at completion in the period in which the changed estimates are determined to be reliably estimable.

 

Below is a description of the four basic types of contracts from which we may earn revenue:

 

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.  The significance of these estimates varies with the complexity of the underlying project, with our large, fixed-price EPC projects being most significant.

 

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.  Additional contract revenue related to claims is included in total estimated contract revenue when the amount can be reliably estimated, which is typically evidenced by a contract or other evidence providing a legal basis for the claim.

8


 

 

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.

 

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 work performed and revenue recognized on contracts in process using the percentage-of-completion method.

 

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 any period presented.

 

Restructuring and Related Charges 

 

An exit activity includes but is not limited to a restructuring, such as a sale or termination of a line of business, the closure of business activities in a particular location, the relocation of business activities from one location to another, changes in management structure, and a fundamental reorganization that affects the nature and focus of operations.  The Company recognizes a current and long-term liability, within other accrued liabilities and other long term liabilities, respectively, and the related expense, within selling, general and administrative expense, for restructuring costs when the liability is incurred and can be measured.  Restructuring accruals are based upon management estimates at the time they are recorded and can change depending upon changes in facts and circumstances subsequent to the date the original liability was recorded.  Nonretirement postemployment benefits offered as special termination benefits to employees, such as a voluntary early retirement program, are recognized as a liability and a loss when the employee accepts the offer and the amount can be reasonably estimated.

 

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.  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.  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 by 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.  If the carrying amount of a reporting unit exceeds its estimated fair value, we would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

9


 

 

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.

 

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.  The 401(k) Plan allows for matching contributions up to 58.33% of the first 6% of elective deferrals up to 3.5% 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 cash and common stock for the 401(k) Plan for the three and nine months ended September 29, 2017 was $7.5 million and $22.0 million, respectively, as compared to $8.3 million and $21.3 million of expenses related to matching contributions made in common stock for the three and nine months ended September 30, 2016, respectively.

 

Recently Issued and Adopted Accounting Standards

 

In May 2017, the FASB issued Accounting Standards Update ("ASU") 2017-09, Compensation- Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.  This ASU is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods, and early adoption is permitted.  The amendments in this update should be applied prospectively to an award modified on or after the adoption date.  Once effective, we will apply this guidance to future changes to terms or conditions of our stock-based payment awards to determine if it triggers modification accounting, but we do not believe this ASU will materially change how we currently evaluate similar occurrences.

 

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  The amendments in this ASU require that an employer disaggregate the service cost component from the other components of net benefit cost and report the service cost component in the same statement of income line item as other compensation costs for the relevant employees.  Additionally, only the service cost component of net benefit cost would be eligible for capitalization.  The ASU requires that the other components of net benefit cost be presented outside of income or loss from operations on the statement of income, separate from the service cost component.  The amendments in this update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic benefit cost and net periodic postretirement benefit in assets.  This

10


 

guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, and early adoption is permitted.  Currently, the net periodic pension expense or income related to our defined pension benefit plans in the U.S. and internationally is presented within selling, general and administrative expense.  Therefore, we anticipate the adoption of this ASU to impact the presentation of our statement of operations, including the subtotal of income or loss from operations.  Refer to Note 13 – Defined Benefit Plans and Other Postretirement Benefits for detail of our net periodic pension expense or income by component.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment.    This ASU was issued with the objective of simplifying the subsequent measurement of goodwill for public business entities and not-for-profit entities by eliminating the second step of the goodwill impairment test.  As a result, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  During the three months ended March 31, 2017, we early adopted this standard which will be effective for our annual goodwill impairment test to be conducted as of the first day of the fourth quarter of 2017.  We do not believe this ASU will have a material impact on our financial statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control.  This standard amends the guidance issued with ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis in order to make it less likely that a single decision maker would individually meet the characteristics to be the primary beneficiary of a Variable Interest Entity ("VIE").  When a decision maker or service provider considers indirect interests held through related parties under common control, they perform two steps.  The second step was amended with this ASU to say that the decision maker should consider interests held by these related parties on a proportionate basis when determining the primary beneficiary of the VIE rather than in their entirety as was called for in the previous guidance.  The adoption of this standard in the current reporting period did not have a material impact on our consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.  This ASU was issued with the objective to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory.  The new standard will require companies to recognize the income tax consequences of an intra-entity transfer of non-inventory assets when the transfer occurs.  This ASU will be effective for fiscal years beginning after December 15, 2017, and early adoption is permitted.  We are currently evaluating the impact of the adoption of this ASU on our financial position and results of operations.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  This ASU provides guidance for eight specific changes with respect to how certain cash receipts and cash payments are classified within the statement of cash flows in order to reduce existing diversity in practice.  This ASU will be effective for fiscal years beginning after December 15, 2017, and early adoption is permitted, and it should be applied using a retroactive transition method to each period presented.  We are currently evaluating the impacts the adoption of this standard will have on our consolidated statements of cash flows, focusing on the impact our cash flows related to distributions received from equity method investees and contingent consideration payments made subsequent to business combinations.  We anticipate that approximately $0.2 million and $17.9 million of acquisition related payments within our investing cash flows for the nine months ended September 29, 2017 and September 30, 2016, respectively, will be reclassified to financing cash flows as a result of adopting this ASU.

 

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.  We continue to assess the impact of adopting ASU 2016-02, but expect to record a significant amount of right-of-use assets and corresponding liabilities. Based upon our operating leases as of September 29, 2017, we expect to have in excess of $500.0 million of undiscounted future minimum lease payments upon adoption of this standard.

 

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 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

11


 

of September 29, 2017 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers and subsequently modified with various amendments and clarifications. 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, as amended, is effective for annual reporting periods beginning after December 15, 2017 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, the subsequently issued amendments, and the transition alternatives on its financial position and results of operations.  Currently, we have identified various revenue streams by contract billing type, client type, and type of contracted services.  We are in the process of reviewing our contracts in the various revenue streams in order to isolate those that will be significantly impacted as well as to identify the relevant revenue streams for disaggregated disclosure.  From our initial assessment, we do not anticipate the new revenue recognition standard to, in substance, change our current process of recognizing revenue on a substantial portion of our portfolio of contracts.  For example, we currently estimate variable consideration in relation to total contract revenue in a manner consistent with the new model, and our initial evaluation of performance obligations coincides with our current contract segmentation policies.  After our assessment is complete, we can begin estimating the potential financial impacts of the new standard as well as identify necessary controls, processes and information system changes.

 

 

(2) Changes in Project-Related Estimates

 

We have a fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States.    The project is approximately 93% complete as of September 29, 2017.  During the second and third quarters of 2016, we experienced cost growth resulting in changes in estimated costs of approximately $60.0 million and $65.6 million, respectively, which resulted in total changes in estimated costs of approximately $125.6 million in the nine months ended September 30, 2016.  During the second quarter of 2016, we estimated further cost growth in the amount of $60.0 million as a result of a review of the covered scope of contracts, survey engineering and design challenges, rework of previously installed work and client-caused delays, including limited daytime access to portions of the site, the sum of which resulted in increased material quantities and work and schedule extensions.  We also had severe weather including record rainfall, and production shortfalls resulting from differing site conditions and engineering rework.  Additionally, during the three months ended September 30, 2016, we estimated additional cost growth of $65.6 million due to continued survey engineering and design challenges, additional rework, greater than expected subcontractor costs, subcontracting work previously planned to be self-performed, delivery schedule extensions (which increased the overall estimated costs for labor and expenses), greater than expected construction material expenditures, and additional weather delays.

 

In the first quarter of 2017, the project team increased the overall estimated costs for labor and materials by a total of $23.5 million.  The cost growth was predominately related to unanticipated field conditions and labor resource restraints, some of which costs were included in claims submitted to the client.  Additionally, during the three months ended September 29, 2017, we estimated additional cost growth of $20.5 million due to lower than expected productivity, additional subcontractor crews to maintain project schedule, and incurred legal costs to reach a settlement agreement with the client.  Certain of these additional costs also relate to sound wall fabrication errors incurred by a subcontractor, sound wall design issues, pavement optimization issues, as well as specifications provided by the client that were determined to be incorrect.

 

Effective September 22, 2017, we reached a mutual settlement agreement with the client regarding outstanding change orders and claims that we previously sought resolution to through a combination of submissions to the Disputes Board under the terms of the contract and direct negotiations with the client.  The parties agreed to settle all CH2M’s outstanding claims for an amount no greater than $38.5 million.  Of the settlement amount, $21.5 million is contingent on CH2M meeting certain delivery milestones.  The remaining $17.0 million is for settlement change orders, $15.0 million of which the client has unconditionally agreed to pay, with the $2.0 million balance contingent upon the client securing federal highway funding.  We have currently met the delivery milestone associated with opening the northbound and southbound roadway to traffic.  As a result, the project recognized $31.7 million of the agreed upon settlement balance in the three months ended September 29, 2017, including estimated agreed upon settlement change orders and the milestone delivery payments associated with the opening of the northbound and southbound roadway.

 

While management believes that it has recorded an appropriate provision to complete the project, we may incur additional costs and losses if our cost estimation processes identify new costs not previously included in our total estimated loss.  While the

12


 

majority of the construction efforts on the roadways are complete, possible cost increases may be incurred to complete efforts to install and repair sound walls along the roadway as well as unanticipated future warranty costs that may arise.  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 for projects related to our continuing operations are included in other accrued liabilities and totaled $32.4 million and $71.2 million as of September 29, 2017 and December 30, 2016, respectively.  Refer to Note 14 – Discontinued Operations for additional details regarding projects reported within discontinued operations.

 

(3) Segment Information

 

In the first quarter of 2017, we implemented a new organizational structure to more fully align global operations with the Company’s client-centric strategy, resulting in three sectors: National Governments, Private, and State & Local Governments.  Each of these sectors has been identified as a reportable operating segment.

 

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

 

Certain financial information relating to the three and nine months ended September 29, 2017 and September 30, 2016 for each segment is provided below.  Prior year amounts have been revised to conform to the current year presentation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 29, 2017

 

Three Months Ended September 30, 2016

 

 

Gross

 

Equity in

 

Operating

 

Gross

 

Equity in

 

Operating

($ in thousands) 

Revenue

Earnings

Income

Revenue

Earnings

 

Income (Loss)

National Governments

 

$

402,734

 

$

4,599

 

$

24,720

 

$

482,968

 

$

5,944

 

$

8,952

Private

 

 

294,967

 

 

547

 

 

8,345

 

 

330,797

 

 

2,700

 

 

17,244

State & Local Governments

 

 

542,945

 

 

3,087

 

 

50,544

 

 

488,844

 

 

18,233

 

 

(27,820)

Total

$

1,240,646

$

8,233

$

83,609

$

1,302,609

$

26,877

$

(1,624)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 29, 2017

 

Nine Months Ended September 30, 2016

 

 

Gross

 

Equity in

 

Operating

 

Gross

 

Equity in

 

Operating

($ in thousands) 

Revenue

Earnings

Income

Revenue

Earnings

Income (Loss)

National Governments

 

$

1,359,897

 

$

20,245

 

$

50,290

 

$

1,411,877

 

$

17,183

 

$

16,726

Private

 

 

887,170

 

 

871

 

 

27,766

 

 

1,009,336

 

 

3,293

 

 

44,624

State & Local Governments

 

 

1,518,871

 

 

9,856

 

 

107,632

 

 

1,459,371

 

 

24,171

 

 

(36,003)

Total

$

3,765,938

$

30,972

$

185,688

$

3,880,584

$

44,647

$

25,347

 

 

(4) Stockholders’ Equity

 

The changes in stockholders’ equity for the nine months ended September 29, 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

 

Common

 

Preferred

 

 

 

(in thousands)

  

Shares

 

Shares

  

Amount

Stockholders’ equity, December 30, 2016

 

25,148

 

4,822

 

$

445,538

Shares purchased and retired

 

(869)

 

 —

 

 

(43,602)

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

 

328

 

 —

 

 

11,191

Net income attributable to CH2M

 

 —

 

 —

 

 

104,774

Other comprehensive income, net of tax

 

 —

 

 —

 

 

60,628

Other comprehensive income attributable to noncontrolling interest, net of tax

 

 

 

 

 

 

(806)

Deconsolidation of subsidiaries' noncontrolling interest

 

 —

 

 —

 

 

87,292

Income attributable to noncontrolling interests from continuing operations

 

 —

 

 —

 

 

12,343

Loss attributable to noncontrolling interests from discontinued operations

 

 

 

 

 

 

(60)

Investment in affiliates, net

 

 —

 

 —

 

 

777

Stockholders’ equity, September 29, 2017

 

24,607

 

4,822

 

$

678,075

 

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Preferred Stock

 

As of September 29, 2017, 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 pursuant to the Subscription Agreement entered into by the Company and Apollo on May 27, 2015 (“Subscription Agreement”).  On April 11, 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.  Total proceeds from the preferred stock offering were $99.8 million, net of issuance costs of $0.2 million.

 

In connection with the issuance of the Second Lien Notes and the Fourth Amendment to our Amended and Restated Credit Agreement on April 28, 2017, as discussed in Note 10 – Long-Term Debt,  we obtained consent from our Series A Preferred Stockholder with respect to the incurrence of the notes and filed a Certificate of Amendment to the Certificate of Designation of Series A Preferred Stock which increases the annual rate at which dividends accrue on the Series A Preferred Stock from 5% to 7% beginning April 1, 2017.  Dividends on the Series A Preferred Stock are cumulative and accrue quarterly in arrears 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.  The other terms and conditions of the Series A Preferred Stock set forth in the Certificate of Designation, as summarized in our Annual Report on Form 10-K for the year ended December 30, 2016, remain unchanged.

 

Under our agreement with Apollo, the maximum consolidated leverage ratio is 4.00x for 2017 and beyond, consistent with the Fourth Amendment to our Amended and Restated Credit Agreement.  As of September 29, 2017, we were in compliance with this covenant.  Management continually assesses its potential future compliance with the consolidated leverage ratio covenant based on estimates of future earnings and cash flows.  If there is an expected possibility of non-compliance, we will discuss possibilities with Apollo to modify the covenant consistent with discussions with the Company’s lenders or utilize other means of capitalizing the Company to anticipate or remedy any non-compliance.

 

(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 preferred stockholders as calculated under the two-class method.  In the event the Company has a net loss, the net loss is not allocated to preferred stockholders as the holders do not have a contractual obligation to share in the Company’s losses.  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 under the two-class method 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.  Additionally, when calculating diluted EPS, the Company analyzes the potential dilutive effect of the outstanding preferred stock under the if-converted method, in which it is assumed that the outstanding preferred stock convert to common stock at the beginning of the period.  In the event that the if-converted method is more dilutive than the two-class method, the if-converted diluted EPS will be reflected in our financial statements.  Common stock equivalents are only included in the diluted EPS calculation when their effect is dilutive.

 

14


 

The table below presents the reconciliations of basic and diluted EPS for the three and nine months ended September 29, 2017 and September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 29,

 

September 30,

 

September 29,

 

September 30,

(in thousands, except per share amounts)

 

2017

 

2016

 

2017

  

2016

Numerator - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

53,750

 

$

53,550

 

$

118,676

 

$

71,737

Net loss from discontinued operations

 

 

(1,478)

 

 

(87,199)

 

 

(1,619)

 

 

(235,852)

Net income (loss)

 

 

52,272

 

 

(33,649)

 

 

117,057

 

 

(164,115)

Less: income attributable to noncontrolling interests from continuing operations

 

 

(3,750)

 

 

(3,461)

 

 

(12,343)

 

 

(8,280)

Less: loss attributable to noncontrolling interests from discontinued operations

 

 

 —

 

 

53,043

 

 

60

 

 

150,865

Net income (loss) attributable to CH2M

 

 

48,522

 

 

15,933

 

 

104,774

 

 

(21,530)

Less: accrued dividends attributable to preferred stockholders

 

 

5,753

 

 

3,891

 

 

15,395

 

 

10,067

Less: income allocated to preferred stockholders - basic

 

 

7,455

 

 

1,984

 

 

15,347

 

 

 —

Income (loss) available to common stockholders - basic and diluted

 

$

35,314

 

$

10,058

 

$

74,032

 

$

(31,597)

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - basic

 

 

24,596

 

 

25,357

 

 

24,738

 

 

25,817

Dilutive effect of common stock equivalents

 

 

2,353

 

 

32

 

 

892

 

 

 —

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

 

 

26,949

 

 

25,389

 

 

25,630

 

 

25,817

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income from continuing operations per common share

 

$

1.48

 

$

1.25

 

$

3.04

 

$

3.61

Basic net loss from discontinued operations per common share

 

 

(0.04)

 

 

(0.85)

 

 

(0.05)

 

 

(4.83)

Basic net income (loss) per common share

 

$

1.44

 

$

0.40

 

$

2.99

 

$

(1.22)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income from continuing operations per common share

 

$

1.35

 

$

1.25

 

$

2.93

 

$

3.61

Diluted net loss from discontinued operations per common share

 

 

(0.04)

 

 

(0.85)

 

 

(0.04)

 

 

(4.83)

Diluted net income (loss) per common share

 

$

1.31

 

$

0.40

 

$

2.89

 

$

(1.22)

 

For the three and nine months ended September 29, 2017, approximately 5.2 million shares of preferred stock and accumulated preferred stock dividends were excluded from the dilutive EPS calculation because including them would have been antidilutive.  Due to the existence of a net loss available to common shareholders for the nine months ended September 30, 2016, basic and diluted EPS were the same as the effect of potentially dilutive common stock equivalents, including options to purchase 2.6 million shares of common stock and 5.1 million shares of preferred stock and accumulated preferred stock dividends, 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 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

15


 

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.  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.  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 VIE’s 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 September 29, 2017 and December 30, 2016, total assets of VIEs that were consolidated were $125.9 million and $220.3 million, respectively, and liabilities were $92.8 million and $385.9 million, respectively.  As of December 30, 2016, $19.0 million of the consolidated assets and $203.9 million of consolidated liabilities were related to an Australian fixed-price Power EPC joint venture which was deconsolidated upon termination of the underlying contract on January 24, 2017.  Refer to Note 14 - Discontinued Operations for additional details.  On July 3, 2017, following the closing of SNC-Lavalin Group Inc.’s acquisition of WS Atkins plc., both of whom were partners with CH2M in a joint venture through which we are executing a large Canadian nuclear project, we determined that we no longer controlled the majority of the activities that most significantly impact the joint venture’s economic performance, and, therefore, we were no longer the primary beneficiary of the joint venture.  Accordingly, we deconsolidated the joint venture from our consolidated financial statements as of July 3, 2017 and prospectively account for the joint venture as an equity method investment within investments in unconsolidated affiliates.  As our carrying value approximated the fair value of our investment in the joint venture on July 3, 2017, there was no gain or loss upon deconsolidation of the joint venture.  As of December 30, 2016, $115.9 million of the consolidated assets and $115.1 million of the consolidated liabilities were related to this joint venture.

We held investments in unconsolidated VIEs and equity method investments related to continuing operations of $82.1 million and $66.3 million at September 29, 2017 and December 30, 2016, respectively.  As of September 29, 2017, as a result of deconsolidating the Australian joint venture during the first quarter of 2017 as discussed above, we held a negative investment in unconsolidated VIE related to discontinued operations of $77.9 million.  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 operations.  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 September 29, 2017 and December 30, 2016, the total assets of VIEs related to continuing operations that were not consolidated were $535.5 million and $479.2 million, respectively, and total liabilities were $432.3 million and $304.9 million, respectively.  As of September 29, 2017, total assets and liabilities of the unconsolidated VIE related to the Australian fixed-price Power EPC joint venture included in discontinued operations were $2.0 million and $172.6 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 nine months ended September 29, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

  

National Governments

   

Private

  

State & Local Governments

  

Consolidated Total

Balance as of December 30, 2016

 

$

12,753

 

$

146,913

 

$

318,086

 

$

477,752

Foreign currency translation

 

 

1,223

 

 

4,955

 

 

28,598

 

 

34,776

Balance as of September 29, 2017

 

$

13,976

 

$

151,868

 

$

346,684

 

$

512,528

 

16


 

The following table presents the changes in intangible assets by segment during the nine months ended September 29, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

  

National Governments

  

Private

  

State & Local Governments

  

Consolidated Total

Balance as of December 30, 2016

 

$

433

 

$

23,988

 

$

13,603

 

$

38,024

Amortization

 

 

(404)

 

 

(3,002)

 

 

(10,324)

 

 

(13,730)

Foreign currency translation

 

 

21

 

 

1,895

 

 

603

 

 

2,519

Balance as of September 29, 2017

 

$

50

 

$

22,881

 

$

3,882

 

$

26,813

 

Intangible assets with finite lives consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

Accumulated

  

Net finite-lived

($ in thousands)

 

Cost

 

Amortization

 

intangible assets

September 29, 2017

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

182,650

 

$

(155,837)

 

$

26,813

Total finite-lived intangible assets

 

$

182,650

 

$

(155,837)

 

$

26,813

December 30, 2016

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

172,880

 

$

(134,856)

 

$

38,024

Total finite-lived intangible assets

 

$

172,880

 

$

(134,856)

 

$

38,024

 

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 operations totaled $4.8 million and $4.4 million for the three months ended September 29, 2017 and September 30, 2016, respectively, and $13.7 million and $13.9 million for the nine months ended September 29, 2017 and September 30, 2016, respectively.  All intangible assets are expected to be fully amortized in 2024.

 

As of September 29, 2017, the future estimated amortization expense related to these intangible assets was:

 

 

 

 

 

 

  

Amortization

($ in thousands)

 

Expense

2017 (three months remaining)

 

$

2,481

2018

 

 

4,493

2019

 

 

3,760

2020

 

 

3,760

2021

 

 

3,760

2022

 

 

3,760

Thereafter

 

 

4,799

 

 

$

26,813

 

(8) Property, Plant and Equipment

 

Property, plant and equipment consists of the following:

 

 

 

 

 

 

 

 

 

  

September 29,

  

December 30,

($ in thousands)

 

2017

 

2016

Land

 

$

4,867

 

$

5,021

Building and land improvements

 

 

105,681

 

 

107,140

Furniture and fixtures

 

 

25,294

 

 

26,009

Computer and office equipment

 

 

165,433

 

 

157,542

Field equipment

 

 

124,853

 

 

130,681

Leasehold improvements

 

 

78,749

 

 

75,492

 

 

 

504,877

 

 

501,885

Less: Accumulated depreciation

 

 

(275,295)

 

 

(255,289)

Net property, plant and equipment

 

$

229,582

 

$

246,596

 

Depreciation expense from continuing operations reflected in the consolidated statements of operations was $10.5 million and $10.4 million for the three months ended September 29, 2017 and September 30, 2016, respectively, and $31.6 million and $21.5 million for the nine months ended September 29, 2017 and September 30, 2016, respectively.

 

17


 

(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 and the Second Lien Notes, for which, in consideration of the likelihood of the occurrence of a change in control with the pending merger with Jacobs, the carrying value approximates fair value.  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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 29, 2017

 

December 30, 2016

 

  

Carrying

  

Fair

  

Carrying

  

Fair

($ in thousands)

 

Amount

 

Value

 

Amount

 

Value

Equipment financing

 

 

6,574

 

 

6,248

 

 

8,152

 

 

7,662

Note payable by consolidated joint venture

 

$

2,489

 

$

2,325

 

$

2,483

 

$

2,284

 

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.  As of September 29, 2017, we had forward foreign exchange contracts on major world currencies with varying durations, none of which extend beyond one year.  As of September 29, 2017 and December 30, 2016,  we had $2.0 million and $1.2 million of derivative liabilities, respectively.

 

The unrealized and realized gains and losses due to changes in derivative fair values included in selling, general and administrative expense are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 29,

 

September 30,

 

September 29,

 

September 30,

(in thousands)

  

2017

   

2016

  

2017

  

2016

Unrealized (loss) gain from changes in derivative fair values

 

$

(2)

 

$

46

 

$

(867)

 

$

223

Realized gain (loss) from changes in derivative fair values

 

$

44

 

$

(2,262)

 

$

(808)

 

$

(5,038)

 

 

(10)  Long-Term Debt

 

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

 

 

 

 

 

 

 

 

 

  

September 29,

  

December 30,

($ in thousands)

 

2017

 

2016

Revolving Credit Facility, average rate of interest of 4.36%

 

$

337,312

 

$

487,009

Second Lien Notes, net of $4.5 million of debt issuance costs. These notes bear interest of 10% due May 1 and November 1 annually

 

 

195,456

 

 

 —

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

 

 

6,574

 

 

8,152

Note payable by consolidated joint venture, due July 2019. This note bears interest at 6-month LIBOR plus 2.5%

 

 

2,489

 

 

2,483

Other notes payable

 

 

166

 

 

230

Total debt 

 

 

541,997

 

 

497,874

Less: current portion of debt

 

 

2,249

 

 

2,242

Total long-term portion of debt

 

$

539,748

 

$

495,632

 

As of September 29, 2017 and December 30, 2016, company-wide issued and outstanding letters of credit and bank guarantee facilities were $132.1 million and $134.2 million, respectively.

 

Revolving Credit Facility

 

On April 28, 2017, we entered into a Fourth Amendment to our Amended and Restated Credit Agreement (“Credit Agreement”).  The Fourth Amendment allowed for the issuance and sale of the Second Lien Notes, as discussed below, and lowered our maximum revolving credit facility to $875.0 million from $925.0 million.  The credit facility matures on March 28, 2019 and includes a subfacility for the issuance of standby letters of credit up to $450.0 million, a subfacility of up to $300.0 million for

18


 

multicurrency borrowings, and a subfacility of up to $50.0 million for swingline loans.  Other technical and operating changes to the Credit Agreement specifically achieved the following:

 

·

Increased the maximum consolidated leverage ratio to 4.00x from 3.00x;

·

Modified the definition of adjusted EBITDA as used in the financial covenant calculation;

·

Required CH2M to maintain, on a consolidated basis, a maximum consolidated first lien leverage ratio no greater than 3.00x;

·

Required CH2M to maintain a minimum consolidated fixed charge coverage ratio no less than 1.50x;

·

Restricted CH2M’s ability to repurchase of its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock, and required compliance with the terms of the Second Lien Indenture, which also limits certain Restricted Payments and participation in the employee stock ownership program as described below.

 

The Credit Agreement contains customary representations, 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 or acquisitions, merge or consolidate, and dispose of assets, in each case subject to customary exceptions for credit facilities of this size and type.  Additionally, the obligations of CH2M and its subsidiaries that are either borrowers or guarantors under the Credit Facility are secured by first-priority security interests in substantially all of the domestic assets of CH2M and such subsidiaries.

 

As of September 29, 2017, we were in compliance with the covenants required by the Credit Agreement.  Management continually assesses its potential future compliance with the Credit Agreement covenants based upon estimates of future earnings and cash flows.  If there is an expected possibility of non-compliance, we will discuss possibilities with the Company’s lenders or utilize other means of capitalizing the Company to waive or remedy any non-compliance.

 

Second Lien Indenture

 

On April 28, 2017, we entered into a Second Lien Indenture through which we issued Senior Second Lien Notes with an aggregate principal amount of $200.0 million at an annual interest rate of 10% (the “Second Lien Notes”).  The Second Lien Notes mature on April 28, 2020, and interest is payable on May 1 and November 1 of each year, commencing on November 1, 2017.  The net proceeds of the Second Lien Notes were used to repay a portion of the outstanding revolving credit loans under our credit facility.  The Second Lien Notes are unsubordinated, senior obligations of CH2M and are secured by second-priority liens on substantially all of CH2M’s and certain CH2M subsidiaries’ domestic assets.

 

The Second Lien Indenture contains financial covenants that require CH2M to maintain a consolidated leverage ratio no greater than 4.50x and restricts CH2M’s ability to repurchase of its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock (“Restricted Payments”).  Specifically, while the Second Lien Notes are outstanding, the amount CH2M may spend to repurchase its common stock in connection with its employee stock ownership program, other than legally required repurchases of common stock held in benefit plans, which are not restricted, will be limited to an aggregate of $75.0 million during the term of the Second Lien Notes plus a cumulative amount equal to 50% of CH2M’s consolidated net income, or minus 100% of any net loss, from April 1, 2017 to the date on which any such repurchase is to be made.  The amount available to make Restricted Payments shall also be reduced to the extent that CH2M makes legally required repurchases of common stock held in benefit plans in excess of $50.0 million in any period of four consecutive quarters and that CH2M makes certain payments on subordinated indebtedness in accordance with the terms of the Second Lien Indenture.

 

The Second Lien Indenture contains affirmative and negative covenants and other terms that are customary for obligations similar to the Second Lien Notes, which include covenants that limit or restrict our ability to incur additional indebtedness, grant liens to secure their obligations, make certain kinds of investments or acquisitions, dispose of assets outside the ordinary course of business, create contractual restrictions on the ability to pay dividends or make certain other payments,  merge or consolidate, sell all or substantially all of our assets, and enter into certain transactions with affiliates unless the transaction is comparable to an arm’s length transaction with a non-affiliate.

 

19


 

CH2M may, at its option, redeem the Second Lien Notes in whole at any time or from time to time in part, upon notice at a premium on the principal amount plus any accrued and unpaid interest to the date of redemption as shown below:

 

 

 

 

 

 

 

 

 

Redemption Period

 

Redemption Price

From April 28, 2017 (issue date) through April 28, 2018

 

110.0

%

From April 29, 2018 through April 28, 2019

 

103.0

%

From April 29, 2019 through October 28, 2019

 

101.5

%

From October 29, 2019 through April 28, 2020 (maturity date)

 

100.0

%

 

Upon the occurrence of a change of control, any holder of Second Lien Notes will have the right to require CH2M to repurchase all or any portion of the holder’s Second Lien Notes at a purchase price in cash equal to 101% of the outstanding principal and accrued and unpaid interest, if any, through the date of repurchase.

 

The Second Lien Indenture also contains customary events of default.  If an event of default occurs, the holders of the Second Lien Notes may declare any outstanding principal, accrued and unpaid interest, and premium to be immediately due and payable.  Additionally, certain events of bankruptcy or insolvency are events of default which shall result in the Second Lien Notes being due and payable immediately upon the occurrence of such events of default.

 

Furthermore, on April 28, 2017, we entered into an Intercreditor Agreement with the agents of the Second Lien Notes and the lenders of the Fourth Amendment to our Credit Agreement that states that the liens on common collateral securing the claims of the Credit Agreement have priority over, and are senior to, the liens on the common collateral securing Second Lien Notes.  The senior claims are defined in the Intercreditor Agreement to include, among other things, the principal amount of all indebtedness incurred under the Fourth Amendment to our Credit Agreement and certain additional senior indebtedness permitted under the Intercreditor Agreement.

 

(11) Income Taxes

 

After adjusting for the impact of income attributable to noncontrolling interests, the effective tax rate related to continuing operations on the income attributable to CH2M for the three months ended September 29, 2017 was 27.0% compared to 668.0% on the loss for the same period in the prior year, and the effective tax rate related to continuing operations on the income attributable to CH2M for the nine months ended September 29, 2017 was 27.1% compared to (646.2)% on the loss for the same period in the prior year.  The effective tax rate attributable to CH2M for the three months ended September 29, 2017 was lower compared to the same period in the prior year and higher for the nine months ended September 29, 2017 compared to the same period in the prior year primarily due to large losses in the prior period and the favorable impacts associated with the release of valuation allowances related to pension and net operating loss deferred tax assets due to the renegotiation of pension agreements and transfer pricing in the prior year period.  In addition, the lower rate is partially attributable to the current year’s favorable impacts associated with increased foreign earnings and favorable investment results related to key employee life assets.  Recent discussions regarding tax reform may result in changes to long-standing tax principles which could adversely affect our effective tax rate or result in higher cash tax liabilities.  These discussions include a reduced corporate tax rate and repatriation of foreign earnings, cash, and cash equivalents.  Additionally, our effective tax rate continues to be negatively impacted by the effect of disallowed portions of meals and entertainment expenses.

 

As of September 29, 2017 and December 30, 2016, we had $6.0 million and $8.0 million, respectively, recorded as a liability for uncertain tax positions, included in which was approximately $1.6 million and $2.6 million, respectively, of interest and penalties.  We recognize interest and penalties related to unrecognized tax benefits in income tax expense or benefit.

 

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.

 

(12) Restructuring and Related Charges

 

2016 Restructuring Plan.  During the third quarter of 2016, the Company began a process to review the structure and resources within its business segments and formulate a restructuring plan to more fully align global operations with the Company’s client-centric strategy, including a simplified organization structure and streamlined delivery model to achieve higher levels of profitable growth (“2016 Restructuring Plan”).  The restructuring activities primarily included workforce reductions and facilities consolidations.  For the nine months ended September 29, 2017, we incurred $13.1 million of costs for restructuring activities related

20


 

to the 2016 Restructuring Plan, which have been included in selling, general and administrative expense on the consolidated statements of operations.  The restructuring activities under the 2016 Restructuring Plan were substantially complete in the first quarter of 2017, and, as such, no restructuring costs were incurred during the three months ended September 29, 2017.  Overall, as of September 29, 2017, we incurred aggregate costs of $55.3 million in total restructuring charges under the 2016 Restructuring Plan, and we expect aggregate annual cost savings of approximately $100.0 million.

 

2014 Restructuring Plan. In September 2014, the Company 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 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 and nine months ended September 30, 2016.

 

The changes in the provision for the restructuring activities for the nine months ended September 29, 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014 Restructuring Plan

 

2016 Restructuring Plan

 

 

($ in thousands)

   

Employee Severance

  

Facilities Cost

  

Employee Severance

  

Facilities Cost

  

Other

  

Consolidated Total

Balance, December 30, 2016

 

$

1,015

 

$

13,995

 

$

6,041

 

$

15,090

 

$

30

 

$

36,171

Provision

 

 

 —

 

 

 —

 

 

4,353

 

 

8,401

 

 

382

 

 

13,136

Cash payments

 

 

 —

 

 

(2,910)

 

 

(9,625)

 

 

(5,605)

 

 

(412)

 

 

(18,552)

Non-cash settlements

 

 

 —

 

 

 —

 

 

 —

 

 

(453)

 

 

 —

 

 

(453)

Balance, September 29, 2017

 

$

1,015

 

$

11,085

 

$

769

 

$

17,433

 

$

 —

 

$

30,302

 

The remaining provisions for employee severance and termination benefits will be paid before year-end, and accruals for facilities costs will be paid over the remaining term of the exited leases which extend through 2032.

 

(13) Defined Benefit Plans and Other Postretirement Benefits

 

We sponsor several defined benefit pension plans primarily in the U.S. and the United Kingdom (“U.K.”).  In the U.S., we have three noncontributory defined benefit pension plans.  Plan benefits are generally based on years of service and compensation during the span of employment.  Benefits in two of the plans are frozen while one plan remains active, the CH2M HILL OMI Retirement Plan (“OMI Plan”).  During the year ended December 30, 2016, the Company adopted an amendment to freeze future pay and benefit service accruals beginning in 2017 for non-union participants within the OMI Plan.

 

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 Halcrow 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.  During the year ended December 30, 2016, a subsidiary of CH2M, effected a transaction to restructure the benefits provided to members of the Halcrow Pension Scheme which significantly reduced the Company’s projected benefit obligation under the scheme as well as improved our net periodic benefit through the recognition of prior service credits.

 

The components of the net periodic pension expense (income) for the three and nine months ended September 29, 2017 and September 30, 2016 are detailed below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 29, 2017

 

September 30, 2016

 

 

U.S.

 

Non-U.S.

 

U.S.

 

Non-U.S.

($ in thousands)

 

Pension Plans

 

Pension Plans

 

Pension Plans

 

Pension Plans

Service cost

 

$

89

 

$

1,090

 

$

672

 

$

1,349

Interest cost

 

 

2,733

 

 

6,392

 

 

2,955

 

 

9,697

Expected return on plan assets

 

 

(3,017)

 

 

(10,062)

 

 

(2,921)

 

 

(8,137)

Amortization of prior service credits

 

 

(13)

 

 

(2,622)

 

 

(188)

 

 

 —

Recognized net actuarial loss

 

 

1,908

 

 

2,748

 

 

1,627

 

 

631

Gain on curtailment

 

 

 —

 

 

 —

 

 

(4,568)

 

 

 —

Net expense (income) included in current income

 

$

1,700

 

$

(2,454)

 

$

(2,423)

 

$

3,540

 

21


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 29, 2017

 

September 30, 2016

 

 

U.S.

 

Non-U.S.

 

U.S.

 

Non-U.S.

($ in thousands)

 

Pension Plans

 

Pension Plans

 

Pension Plans

 

Pension Plans

Service cost

 

$

266

 

$

3,243

 

$

2,014

 

$

4,104

Interest cost

 

 

8,200

 

 

18,687

 

 

8,863

 

 

30,661

Expected return on plan assets

 

 

(9,050)

 

 

(29,384)

 

 

(8,763)

 

 

(25,773)

Amortization of prior service credits

 

 

(40)

 

 

(7,656)

 

 

(564)

 

 

 —

Recognized net actuarial loss

 

 

5,723

 

 

8,018

 

 

4,885

 

 

2,017

Gain on curtailment

 

 

 —

 

 

 —

 

 

(4,568)

 

 

 —

Net expense (income) included in current income

 

$

5,099

 

$

(7,092)

 

$

1,867

 

$

11,009

 

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 non-qualified 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 and nine months ended September 29, 2017 and September 30, 2016 are detailed below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 29, 2017

 

September 30, 2016

 

 

Non-Qualified

 

Postretirement

 

Non-Qualified

 

Postretirement

($ in thousands)

 

Pension Plan

 

Benefit Plans

 

Pension Plan

 

Benefit Plans

Service cost

 

$

 —

 

$

163

 

$

 —

 

$

207

Interest cost

 

 

10

 

 

405

 

 

14

 

 

497

Amortization of prior service credits

 

 

 —

 

 

(96)

 

 

 —

 

 

(96)

Recognized net actuarial gain

 

 

 —

 

 

(71)

 

 

 —

 

 

(3)

Net expense included in current income

 

$

10

 

$

401

 

$

14

 

$

605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 29, 2017

 

September 30, 2016

 

 

Non-Qualified

 

Postretirement

 

Non-Qualified

 

Postretirement

($ in thousands)

 

Pension Plan

 

Benefit Plans

 

Pension Plan

 

Benefit Plans

Service cost

 

$

 —

 

$

488

 

$

 —

 

$

619

Interest cost

 

 

29

 

 

1,216

 

 

40

 

 

1,491

Amortization of prior service credits

 

 

 —

 

 

(287)

 

 

 —

 

 

(288)

Recognized net actuarial gain

 

 

 —

 

 

(214)

 

 

 —

 

 

(9)

Net expense included in current income

 

$

29

 

$

1,203

 

$

40

 

$

1,813

 

 

(14) Discontinued Operations

 

In connection with our 2014 Restructuring Plan, we elected to exit the fixed-price Power EPC business, which was a stand-alone operating segment.  We intended to complete our remaining contracted fixed-price Power EPC contracts, the largest of which was a project in Australia through a consolidated joint venture partnership with an Australian construction contractor and a major U.S.-based gas power technology manufacturer (the “Consortium”) to engineer, procure, construct and start-up a combined cycle power plant that will supply power to a large liquefied natural gas facility in Australia.  On January 24, 2017, the Consortium terminated its contract with its client, JKC Australia LNG Pty (the “Contractor”) on the grounds that the Contractor had by its actions repudiated the contract.  As a result of the termination of the contract, we substantially completed all of our operations in the fixed-price Power EPC business, and, therefore, have presented the results of operations, financial position, cash flows and disclosures related to the fixed-price Power EPC business as discontinued operations in our consolidated financial statements.  The majority of the financial information presented in our discontinued operations in the consolidated financial statements for the three and nine months ended September 29, 2017 and September 30, 2016 relate to the Australian fixed-price Power EPC contract.

 

Additionally, because the substantive engineering and construction operations ceased on January 24, 2017 as a result of the contract termination, we determined that we were no longer the primary beneficiary of the joint venture and deconsolidated the partnership from our consolidated financial statements.  As the negative book value of our 50% retained interest in the noncontrolling investment in the joint venture partnership as of January 24, 2017 of $86.0 million approximated the fair value of our investment in the joint venture partnership, there was no gain or loss upon deconsolidation.

22


 

 

Due to a variety of issues, the joint venture partnership experienced project losses of $280.0 million in 2014, of which our portion of the loss was $140.0 million, and $301.5 million in 2016, of which our portion of the loss was $154.1 million.  These contract losses were previously accrued and recognized in the periods when known and estimable.  The joint venture has demobilized from the site in the first quarter of 2017 and expects to continue to incur legal costs until the dispute is resolved.  The Consortium continues to assess the expected future costs to close out the contract and terminate its current subcontractor obligations.  It is possible that certain subcontractors could file claims against the Consortium as a result of our termination of their subcontract which could be material to our consolidated financial statements.  Additionally, the joint venture’s performance on the project is secured by certain bonds totaling approximately $50.0 million, of which our portion is approximately $25.0 million, which could potentially be called by our client at some time in the future.

 

The Consortium and the Contractor are currently in dispute over the termination, materials and equipment used in the work, and the Contractor’s right to call the bonds issued on behalf of the individual Consortium members.  In connection with the parties’ primary dispute over the contract termination, in August 2017, the Consortium filed a Request for Arbitration against the Contractor with the International Chamber of Commerce, seeking that the Contractor pay the Consortium for its claims based on the difference in the amount of the Consortium’s contract and the amount actually spent, which the Consortium alleges is likely to exceed $665.5 million.  In the alternative, the Consortium also asserts that the Contractor owes for certain contract claims, in amounts to be determined through the arbitration.  If the Consortium is ultimately unsuccessful in our claim that the contract was repudiated by the Contractor, the Consortium could be liable for the completion of the project by a separate contractor and other related damages.  The Contractor has claimed that the Consortium’s termination was not valid, and we anticipate that the Contractor will file counter claims.  We expect a lengthy, multi-year arbitration process and at this time we are unable to predict the timing of resolution or the outcome of disputes.  While we continue to assess the possible impacts to our financial statements, the ultimate outcome of the dispute will depend upon contested issues of fact and law.  These additional costs could be materially adverse to our results of operations, cash flow and financial condition in the future.  Management believes the existing accruals will be sufficient for any known or expected costs which can be estimated at this time.

 

The following table presents a reconciliation of the major classes of line items constituting the net loss from discontinued operations related the fixed-price Power EPC business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 29,

 

September 30,

 

September 29,

 

September 30,

($ in thousands)

 

2017

 

2016

 

2017

 

2016

Gross revenue

 

$

490

 

$

(23,379)

 

$

9,694

 

$

(7,663)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Direct cost of services

 

 

(926)

 

 

(82,241)

 

 

(7,291)

 

 

(286,756)

Selling, general and administrative

 

 

(1,831)

 

 

(1,106)

 

 

(4,881)

 

 

(3,532)

Loss from discontinued operations before provision for income taxes

 

 

(2,267)

 

 

(106,726)

 

 

(2,478)

 

 

(297,951)

Benefit for income taxes related to discontinued operations

 

 

789

 

 

19,527

 

 

859

 

 

62,099

Net loss from discontinued operations

 

$

(1,478)

 

$

(87,199)

 

$

(1,619)

 

$

(235,852)

 

23


 

The following table presents a reconciliation of the carrying amounts of the major classes of assets and liabilities included in discontinued operations related the fixed-price Power EPC business:

 

 

 

 

 

 

 

 

 

   

September 29,

 

December 30,

($ in thousands)

 

2017

 

2016

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

9,664

Client accounts

 

 

 —

 

 

1,787

Unbilled revenue

 

 

276

 

 

972

Other receivables, net

 

 

 —

 

 

16

Prepaid expenses and other current assets

 

 

 —

 

 

2,010

Current assets of discontinued operations

 

 

276

 

 

14,449

Property, plant and equipment, net

 

 

 —

 

 

1,836

Total assets of discontinued operations

 

$

276

 

$

16,285

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued subcontractor costs

 

$

 —

 

$

20,317

Billings in excess of revenue

 

 

922

 

 

(933)

Other accrued liabilities

 

 

 —

 

 

188,721

Current liabilities of discontinued operations

 

 

922

 

 

208,105

Investments in unconsolidated affiliates

 

 

77,920

 

 

 —

Total liabilities of discontinued operations

 

$

78,842

 

$

208,105

 

 

 

(15) 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 that have not yet been terminated through settlement would not result in a material adverse effect on our results of operations or financial condition even if the final outcome is adverse to the 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.  As of September 29, 2017 and December 30, 2016, accruals for potential estimated claim liabilities were $2.4 million and $8.9 million, respectively.

 

CH2M-WG Idaho, LLC (“CWI”), owned 50.5% by CH2M HILL Constructors, Inc., a wholly owned subsidiary of CH2M HILL Companies, Ltd., is a remediation contractor for the U.S. Department of Energy (“DOE”) at the Idaho National Laboratory site.  The original remediation contract was to run from May 2005 through September 2012, was extended through September 2015, and was extended again through March 31, 2016.  CWI disagrees with DOE regarding CWI’s final fee for the base contract period from May 2005 through September 2012.  In December 2013, the DOE issued a final determination that was approximately $30.0 million less than what CWI expected to receive in the fee determination.  On March 6, 2014, CWI filed a Certified Claim with the Contracting Officer for a total fee owed of $40.1 million.  The Certified Claim was rejected through a Contracting Officer’s Final Decision in May 2014, and CWI filed its appeal to the U.S. Civilian Board of Contract Appeals (the “CBCA”) on May 30, 2014.  The trial was held from April 12 through 28, 2016, and the post-trial briefing phase was completed by December 2016.  On September 7, 2017, the CBCA issued its trial decision granting CWI’s claim for fees in the amount of $33.3 million plus interest.  The CBCA disallowed that portion of CWI’s claim for certain cost transfers of $7.9 million.  The DOE is expected to seek relief from the decision, and, if unsuccessful, to appeal. Based on information presently known to management, we believe that the outcome of this dispute will not have a material adverse effect on our financial condition, cash flows or results of operations.

In 2006, Halcrow Consulting Engineers & Architects, Ltd., Qatar Branch (“Halcrow”) entered into a Consulting Services Agreement with Qatari Diar Real Estate Investment Company (“QD”) to perform Pre and Post Contract Consultancy and Quantity

24


 

Surveying Services for Lusail Development Primary Infrastructure, Marine, Earthworks, and Site Preparation Works (the “Project”) in Lusail, Qatar.  The detailed design portion of the contract was extended from ten months to over seven years due primarily to employer delays and added scope, which were the responsibility of QD.  On March 9, 2017, QD called Halcrow’s letter of credit for $6.7 million.  On April 12, 2017, QD filed court proceedings in Qatari court (Qatari Civil and Commercial Court) against Halcrow.  The claims asserted by QD for Halcrow’s alleged bridge design defects, cost of redesign, work to remedy the bridge defects, and loss of profit and reputation, together with a further claim for alleged breach of contract relating to as yet unspecified infrastructure works, are approximately $182.0 million.  QD’s alternative damage amount for decennial liability under Qatari law (a form of strict liability) is approximately $129.0 million. On October 1, 2017, Halcrow filed a defense vigorously refuting all of QD’s claims and counterclaims against QD, including, without limitation, Halcrow’s entitlement to certified receivables of $4.0 million, delay claims of a minimum of approximately $20.0 million, and the wrongful calling of the letter of credit of $6.7 million.  Halcrow also asserted the defense that the Agreement contains a limitation of liability provision capping any negligence damages against Halcrow at approximately $10.0 million. QD’s response to Halcrow’s defense and counterclaims is due in mid-November 2017, after which Halcrow is expected to be granted time to answer QD’s response.

In 2012, CH2M HILL Australia Pty Limited entered into a 50/50 integrated joint venture with UGL Infrastructure Pty Limited (“UGL”), an Australian construction contractor (“CH2M-UGL JV” or “JV”).  The JV entered into a Consortium Agreement with General Electric and GE Electrical International Inc (“Consortium”).  The Consortium was awarded a contract by JKC Australia LNG Pty Limited (“JKC”) for the engineering, procurement, construction and commissioning of a 360 MW Combined Cycle Power Plant (the “Project”) for INPEX Operations Australia Pty Limited (“Inpex”) at Blaydin Point, Darwin, NT, Australia (the “Subcontract”).  On January 24, 2017, the Consortium terminated the Subcontract because of JKC’s repudiatory breach.  The Consortium also demobilized from the work site.  The Consortium issued a termination letter which described JKC’s failure to properly administer the Subcontract. JKC claims the Consortium has abandoned the work and, as such, JKC has now purported to terminate the Subcontract.  The Consortium and JKC are now in dispute over the termination.  In connection with the parties’ primary dispute over the contract termination, on August 3, 2017, the Consortium filed a Request for Arbitration against JKC with the International Chamber of Commerce, seeking that JKC pay the Consortium for its repudiatory breach of the Subcontract based on the difference in the amount of the Consortium’s contract and the amount actually spent, which the Consortium alleges is likely to exceed $665.5 million.  In the alternative, the Consortium also asserts that JKC owes for unresolved contract claims and change orders, in amounts in the hundreds of millions of dollars range to be determined through the arbitration.  We expect the arbitration to be lengthy and at this time are unable to predict the timing of resolution or the outcome of disputes, which will depend on disputed issues of fact and law. The outcome could be materially adverse to our results of operations, cash flow and financial condition.  The primary dispute over the termination is to be decided in an International Chamber of Commerce arbitration in Singapore.  On October 31, 2017, JKC gave the Consortium notice of JKC's intention to have recourse to the bond guarantees provided by CH2M HILL Australia Pty Limited and UGL in order to recover costs JKC alleges it has incurred since the Consortium terminated the Subcontract.  The amount of CH2M HILL Australia Pty Limited's bond guarantees to JKC are approximately $25.6 million.  The Consortium has challenged JKC's right to have recourse against the bond guarantees.  The Consortium has initiated an arbitration proceeding under the rules of the International Chamber of Commerce and an action in the Australian court system seeking an injunction against JKC's attempt to collect on the bonds.  We expect a ruling in the fourth quarter of 2017.

 

 

 

25


 

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

 

The following discussion and analysis is intended to assist in understanding 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 30, 2016.

 

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 Quarterly 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 continually 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 Quarterly Report are based upon information available to us on the date of this Quarterly 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, the risks and uncertainties set forth under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 30, 2016, and the 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 20,000 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 and advanced technologies.

 

Proposed Acquisition by Jacobs Engineering

 

On August 1, 2017, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Jacobs Engineering Group Inc. (“Jacobs”) and Basketball Merger Sub Inc. (“Merger Sub”).  The Merger Agreement provides for the merger of Merger Sub with and into CH2M, with CH2M continuing as the surviving company and a direct, wholly-owned subsidiary of Jacobs.

Under the terms of the Merger Agreement, each outstanding share of our common stock will be cancelled and converted into the right to receive, at the election of the holder thereof, (i) a combination of $52.85 in cash and 0.6677 shares of Jacobs common stock, (ii) $88.08 in cash or (iii) 1.6693 shares of Jacobs common stock.  Each outstanding share of our preferred stock will be deemed converted into shares of our common stock in accordance with the Certificate of Designation for such preferred stock, and such shares will also be automatically converted into the right to receive, at the election of the holder thereof, the same merger consideration.  Stockholder elections with respect to the form of merger consideration to be received in connection with the Merger Agreement will be subject to proration, such that the overall consideration to be paid by Jacobs in connection with the Merger will be 60% in the form of cash and 40% in the form of shares of Jacobs common stock.

The merger is subject to approval by our stockholders, performance by the parties of all their obligations under the Merger Agreement, regulatory approvals and the satisfaction of other customary closing conditions.  On September 25, 2017, the parties satisfied the requirements under the Canadian Competition Act.  On October 18, 2017, Jacobs and CH2M received early termination

26


 

of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, from the Federal Trade Commission.  On October 25, 2017, Jacobs and CH2M received clearance from the European Commission pursuant to Council Regulation (EC) No. 139/2004 of 20 January 2004 on the Control of Concentrations Between Undertakings, as amended.  On November 9, 2017, CH2M filed a definitive proxy statement with the Securities and Exchange Commission (“SEC”) announcing that a special meeting of CH2M stockholders will be held on December 13, 2017 at 10:00 a.m. Mountain time, at CH2M’s World Headquarters, 9191 South Jamaica Street, Englewood, Colorado, 80112, USA, to seek adoption of the merger agreement, among other things.  Also on November 9, 2017, the SEC declared effective the amended registration statement filed on Form S-4 by Jacobs.  On or about November 10, 2017, CH2M commenced mailing the Notice of Special Meeting and the definitive proxy statement to stockholders of CH2M as of the close of business on November 8, 2017, the record date for the special meeting.  We anticipate that the transaction will be consummated prior to the end of calendar 2017.  However, we cannot predict with certainty whether and when all of the required closing conditions will be satisfied or if the merger will close.

 

2016 Restructuring Plan

 

During the third quarter of 2016, the Company began a process to review the structure and resources within its business segments and formulate a restructuring plan to more fully align global operations with the Company’s client-centric strategy, including a simplified organization structure and streamlined delivery model to achieve higher levels of profitable growth (“2016 Restructuring Plan”).  The restructuring activities primarily included workforce reductions and facilities consolidations.  For the nine months ended September 29, 2017, we incurred $13.1 million of costs for restructuring activities related to the 2016 Restructuring Plan, which have been included in selling, general and administrative expense on the consolidated statements of operations.  The restructuring activities under the 2016 Restructuring Plan were substantially complete in the first quarter of 2017, and, as such, no restructuring costs were incurred during the three months ended September 29, 2017.  Overall, as of September 29, 2017, we incurred aggregate costs of $55.3 million in total restructuring charges under the 2016 Restructuring Plan, and we expect aggregate annual cost savings of approximately $100.0 million.

 

Summary of Operations

 

In the first quarter of 2017, we implemented a new organizational structure to more fully align global operations with the Company’s client-centric strategy, resulting in three sectors: National Governments, Private, and State & Local Governments.  Each of these sectors has been identified as a reportable operating segment.  Additionally, the termination of the Australian fixed-price Power EPC contract resulted in the substantial completion and discontinuation of our former Power EPC operating segment.  As a result, our fixed-price Power EPC business is no longer reported as a separate operating segment, and revenues and operating income from this former segment are no longer reflected within our consolidated results of continuing operations but rather reflected as a single, net amount of net income or loss from discontinued operations.  Refer to Note 14 – Discontinued Operations for additional details regarding the results of operation and financial position of our discontinued operations.

 

Certain financial information relating to the three and nine months ended September 29, 2017 and September 30, 2016 for each segment is provided below.  Prior year amounts have been revised to conform to the current year presentation.  Costs for corporate selling, general and administrative expenses, restructuring costs and amortization expense related to intangible assets have been allocated to each segment based on the estimated 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.

 

Results of Operations for the Three Months Ended September 29, 2017 and September 30, 2016

 

On a consolidated basis, our gross revenue decreased by $62.0 million, and our consolidated operating income, which included $8.8 million of acquisition related expense incurred with the pending merger with Jacobs, increased $85.2 million for the three months ended September 29, 2017 as compared to September 30, 2016.  The following table summarizes our results of operation by segment for the three months ended September 29, 2017 as compared to the three months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

September 29, 2017

 

September 30, 2016

 

Change

 

 

Gross

 

Operating

 

Gross

 

Operating

 

Gross

 

Operating

($ in thousands) 

  

Revenue

  

Income (Loss)

  

Revenue

  

Income (Loss)

  

Revenue

  

Income (Loss)

National Governments

 

$

402,734

 

$

24,720

 

$

482,968

 

$

8,952

 

$

(80,234)

 

$

15,768

Private

 

 

294,967

 

 

8,345

 

 

330,797

 

 

17,244

 

 

(35,830)

 

 

(8,899)

State & Local Governments

 

 

542,945

 

 

50,544

 

 

488,844

 

 

(27,820)

 

 

54,101

 

 

78,364

Total

 

$

1,240,646

 

$

83,609

 

$

1,302,609

 

$

(1,624)

 

$

(61,963)

 

$

85,233

 

27


 

National Governments

 

Our National Governments sector experienced an $80.2 million decrease in revenue for the three months ended September 29, 2017 as compared to the three months ended September 30, 2016 primarily due to the deconsolidation of a joint venture through which we are executing a large Canadian nuclear project.  On July 3, 2017, following the closing of SNC-Lavalin Group Inc.’s acquisition of WS Atkins plc., both of whom were partners with CH2M in a joint venture through which we are executing a large Canadian nuclear project, we determined that we were no longer the primary beneficiary of the joint venture.  Accordingly, we deconsolidated the joint venture from our consolidated financial statements as of July 3, 2017 and prospectively accounted for the joint venture as an equity method investment within investments in unconsolidated affiliates, which resulted in a decrease in revenue of approximately $137.4 million in the three months ended September 29, 2017 as compared to the three months ended September 30, 2016.  Refer to Note 6 – Variable Interest Entities and Equity Method Investments of the Notes to Consolidated Financial Statements for additional detail.    The decrease related to the deconsolidation of the joint venture was partially offset by an increase in revenue of approximately $33.0 million on a domestic federal consulting project related to nuclear remediation due to scope expansion and increased mobilization of staff.  Additionally, our domestic and international consulting revenue increased due to overall volume growth related to several large awards and accelerated work in the three months ended September 29, 2017 as compared to the three months ended September 30, 2016.

 

National Governments operating income increased $15.8 million for the three months ended September 29, 2017 as compared to the three months ended September 30, 2016.  The increase in operating income was primarily related to the scope expansion on the domestic federal consulting project related to nuclear remediation and the overall volume growth in our domestic and international consulting business as discussed above.  Additionally, National Governments experienced a reduction in its selling, general and administrative costs due to significant efficiencies gained from the 2016 Restructuring Plan realized in the three months ended September 29, 2017 related to staffing reductions, better client-alignment and utilization of our workforce as well as reduced business development costs related to lower volumes of large United States federal government procurements in the three months ended September 29, 2017 as compared to the three months ended September 30, 2016.  Operating income for the three months ended September 29, 2017 as compared to the three months ended September 30, 2016 was not significantly impacted by the deconsolidation of our large nuclear Canadian joint venture discussed above.

 

Private

 

Private sector revenue decreased $35.8 million for the three months ended September 29, 2017 as compared to the three months ended September 30, 2016.  Revenue decreased approximately $19.0 million due to reduced volume of oil and gas construction activities on the North Slope in Alaska as well as reduced volume on large oil and gas program management projects in the Middle East as a result of the continued market challenges within the oil and gas industry.  The remaining decrease in revenue was primarily attributable to the substantial completion of multiple domestic projects within our chemicals business as well as reduced volume of operations and maintenance projects within our oil and gas business.

Private operating income decreased $8.9 million for the three months ended September 29, 2017 as compared to the three months ended September 30, 2016.  The decrease in operating income was primarily related to the reduction in project volumes within our oil and gas business and our chemicals business as discussed above.  The decreased results from operations were partially offset by reduced selling, general and administrative costs due to efficiencies gained from the various restructuring plans realized in the three months ended September 29, 2017 related to staffing reductions, better utilization of our workforce, and facilities consolidations as well as continued efforts to reduce overhead costs.

 

State & Local Governments

 

Our State & Local Governments sector’s revenue increased $54.1 million in the three months ended September 29, 2017 as compared to the three months ended September 30, 2016.  The increase in revenue was primarily due to overall volume growth in our global consulting and operations and maintenance businesses, including an increase of approximately $12.0 million related to a large rail consulting project in the United Kingdom which began operations in the second quarter of 2017.  Additionally, revenue increased $31.7 million as a result of reaching a mutual settlement agreement with the client on a fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States in September 2017.  Refer to Note 2 – Changes in Project-Related Estimates of the Notes to Consolidated Financial Statements for additional detail.

 

State & Local Governments operating income increased $78.4 million for the three months ended September 29, 2017 as compared to the three months ended September 30, 2016.  The increase was predominantly related to our fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States, which had operating income of $11.2 million ($31.7 million of revenue recognized of the agreed upon settlement balance offset by additional cost growth

28


 

of $20.5 million) in the three months ended September 29, 2017 as compared to an operating loss of $65.6 million in the three months ended September 30, 2016, caused by cost growth resulting in changes in the estimated costs to complete.  Refer to Note 2 – Changes in Project-Related Estimates of the Notes to Consolidated Financial Statements for additional detail.  While the majority of the construction efforts on the roadways are complete, possible cost increases may be incurred to complete efforts to install and repair sound walls along the roadway as well as unanticipated future warranty costs that may arise.  These potential changes in estimates could be materially adverse to the Company’s results of operations, cash flow or liquidity.  The remaining increase in operating income was primarily due to the growth in our global consulting and operations and maintenance businesses discussed above.

 

Results of Operations for the Nine Months Ended September 29, 2017 and September 30, 2016

 

On a consolidated basis, our gross revenue decreased by $114.6 million and our consolidated operating income, which included $8.8 million of acquisition related expense incurred with the pending merger with Jacobs, increased $160.3 million for the nine months ended September 29, 2017 as compared to September 30, 2016.  The following table summarizes our results of operation by segment for the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

September 29, 2017

 

September 30, 2016

 

Change

 

 

Gross

 

Operating

 

Gross

 

Operating

 

Gross

 

Operating

($ in thousands) 

    

Revenue

    

Income (Loss)

    

Revenue

    

Income (Loss)

    

Revenue

    

Income (Loss)

National Governments

 

$

1,359,897

 

$

50,290

 

$

1,411,877

 

$

16,726

 

$

(51,980)

 

$

33,564

Private

 

 

887,170

 

 

27,766

 

 

1,009,336

 

 

44,624

 

 

(122,166)

 

 

(16,858)

State & Local Governments

 

 

1,518,871

 

 

107,632

 

 

1,459,371

 

 

(36,003)

 

 

59,500

 

 

143,635

Total

 

$

3,765,938

 

$

185,688

 

$

3,880,584

 

$

25,347

 

$

(114,646)

 

$

160,341

 

National Governments

 

The National Governments sector experienced a $52.0 million decrease in revenue for the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016 primarily due to the deconsolidation of a joint venture through which we are executing a large Canadian nuclear project.  On July 3, 2017, following the closing of SNC-Lavalin Group Inc.’s acquisition of WS Atkins plc., both of whom were partners with CH2M in a joint venture through which we are executing a large Canadian nuclear project, we determined that we were no longer the primary beneficiary of the joint venture.  Accordingly, we deconsolidated the joint venture from our consolidated financial statements as of July 3, 2017 and prospectively account for the joint venture as an equity method investment within investments in unconsolidated affiliates, which resulted in a decrease in revenue of approximately $137.4 million in the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016.  Refer to Note 6 – Variable Interest Entities and Equity Method Investments of the Notes to Consolidated Financial Statements for additional detail.  Additionally, revenue declined due to the winding down of a large environmental and nuclear consulting project in the United Kingdom.  These decreases in revenue were partially offset by revenue growth of approximately $90.0 million on a domestic federal consulting project related to nuclear remediation due to scope expansion and increased mobilization of staff as well as an increase in our domestic and international consulting revenue due to overall volume growth in the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016.

 

National Governments operating income increased $33.6 million for the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016.  The increase in operating income was primarily related to the scope expansion on the domestic federal consulting project related to nuclear remediation and the overall volume growth in our domestic and international consulting business as discussed above.  Additionally, National Governments experienced a reduction in its selling, general and administrative costs due to significant efficiencies gained from the 2016 Restructuring Plan realized in the nine months ended September 29, 2017 related to staffing reductions, better client-alignment and utilization of our workforce as well as reduced business development costs related to lower volumes of large United States federal government procurements in the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016.  Operating income for the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016 was not significantly impacted by the deconsolidation of our large nuclear Canadian joint venture discussed above.

 

Private

 

Our Private sector experienced an $122.2 million decrease in revenue for the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016.  As a result of the continued market challenges within the oil and gas industry, revenue decreased approximately $59.4 million due to reduced volume of oil and gas construction activities and operations and maintenance projects on the North Slope in Alaska, including a large oil and gas construction project which was substantially

29


 

completed during the second quarter of 2016.  Additionally, revenue decreased approximately $36.5 million due to reduced volume on large oil and gas program management projects in the Middle East as well as reduced scope of services on multiple domestic operations and maintenance projects within our oil and gas business.  The remaining decrease in revenue was primarily attributable to the substantial completion of multiple domestic projects within our chemicals business as well as lower volumes of international consulting services within our industrial and advanced technology business.

Private operating income decreased $16.9 million for the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016.  The decrease in operating income was primarily related to the reduction in project volumes within our oil and gas business due to the continued market challenges within the oil and gas industry as discussed above.  The decreased results from operations were partially offset by reduced selling, general and administrative costs due to efficiencies gained from the various restructuring plans realized in the nine months ended September 29, 2017 related to staffing reductions, better utilization of our workforce, and facilities consolidations as well as continued efforts to reduce overhead costs.

 

State & Local Governments

 

Our State & Local Governments sector’s revenue increased $59.5 million in the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016.  The increase in revenue was primarily due to overall volume growth in our global consulting and operations and maintenance businesses, including an increase of approximately $56.0 million related to a large rail consulting project in the United Kingdom which began operations in the second quarter of 2017.  Additionally, revenue increased $31.7 million as a result of reaching a mutual settlement agreement with the client on a fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States in September 2017.  Refer to Note 2 – Changes in Project-Related Estimates of the Notes to Consolidated Financial Statements for additional detail.  These increases in revenue were partially offset by the negative effects of a weaker British Pound related to our transportation consulting services in the United Kingdom as well as the substantial completion of two design-build-operate contracts for water treatment facilities in the western United States, which were not replaced with similar projects.

 

State & Local Governments operating income increased $143.6 million for the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016.  The increase was predominantly related to our fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States, which had an operating loss of $12.3 million ($31.7 million of revenue recognized of the agreed upon settlement balance offset by additional cost growth of $44.0 million) in the nine months ended September 29, 2017 as compared to an operating loss of $125.6 million in the nine months ended September 30, 2016, caused by cost growth resulting in changes in the estimated costs to complete.  Refer to Note 2 – Changes in Project-Related Estimates of the Notes to Consolidated Financial Statements for additional detail.  While the majority of the construction efforts on the roadways are complete, possible cost increases may be incurred to complete efforts to install and repair sound walls along the roadway as well as unanticipated future warranty costs that may arise.  These potential changes in estimates could be materially adverse to the Company’s results of operations, cash flow or liquidity.  The remaining increase in operating income was primarily due to the growth in our global consulting and operations maintenance businesses discussed above as well as reduced selling, general and administrative costs due to efficiencies gained from the various restructuring plans related to better client-alignment and utilization of our workforce.

 

Income Taxes

 

After adjusting for the impact of income attributable to noncontrolling interests, the effective tax rate related to continuing operations on the income attributable to CH2M for the three months ended September 29, 2017 was 27.0% compared to 668.0% on the loss for the same period in the prior year, and the effective tax rate related to continuing operations on the income attributable to CH2M for the nine months ended September 29, 2017 was 27.1% compared to (646.2)% on the loss for the same period in the prior year.  The effective tax rate attributable to CH2M for the three months ended September 29, 2017 was lower compared to the same period in the prior year and higher for the nine months ended September 29, 2017 compared to the same period in the prior year primarily due to large losses in the prior period and the favorable impacts associated with the release of valuation allowances related to pension and net operating loss deferred tax assets due to the renegotiation of pension agreements and transfer pricing in the prior year period.  In addition, the lower rate is partially attributable to the current year’s favorable impacts associated with increased foreign earnings and favorable investment results related to key employee life assets. Recent discussions regarding tax reform may result in changes to long-standing tax principles which could adversely affect our effective tax rate or result in higher cash tax liabilities.  These discussions include a reduced corporate tax rate and repatriation of foreign earnings, cash, and cash equivalents.  Additionally, our effective tax rate continues to be negatively impacted by the effect of disallowed portions of meals and entertainment expenses.

 

30


 

Discontinued Operations

 

In connection with our 2014 Restructuring Plan, we elected to exit the fixed-price Power EPC business, which was a stand-alone operating segment.  We intended to complete our remaining contracted fixed-price Power EPC contracts, the largest of which was a project in Australia through a consolidated joint venture partnership with an Australian construction contractor and a major U.S.-based gas power technology manufacturer (the “Consortium”) to engineer, procure, construct and start-up a combined cycle power plant that will supply power to a large liquefied natural gas facility in Australia.  On January 24, 2017, the Consortium terminated its contract with its client, JKC Australia LNG Pty (the “Contractor”) on the grounds that the Contractor had by its actions repudiated the contract.  As a result of the termination of the contract, we substantially completed all of our operations in the fixed-price Power EPC business, and, therefore, have presented the results of operations, financial position, cash flows and disclosures related to the fixed-price Power EPC business as discontinued operations in our consolidated financial statements.  The majority of the financial information presented in our discontinued operations in the consolidated financial statements for the three and nine months ended September 29, 2017 and September 30, 2016 relate to the Australian fixed-price Power EPC contract.  Refer to Note 14 – Discontinued Operations of the Notes to Consolidated Financial Statements for additional detail regarding the results of operation and the financial position for the fixed-price Power EPC business.

 

Additionally, because the substantive engineering and construction operations ceased on January 24, 2017 as a result of the contract termination, we determined that we were no longer the primary beneficiary of the joint venture and deconsolidated the partnership from our consolidated financial statements.  As the negative book value of our 50% retained interest in the noncontrolling investment in the joint venture partnership as of January 24, 2017 of $86.0 million approximated the fair value of our investment in the joint venture partnership, there was no gain or loss upon deconsolidation.

 

Due to a variety of issues, the joint venture partnership experienced project losses of $280.0 million in 2014, of which our portion of the loss was $140.0 million, and $301.5 million in 2016, of which our portion of the loss was $154.1 million.  These contract losses were previously accrued and recognized in the periods when known and estimable.  The joint venture has demobilized from the site in the first quarter of 2017 and expects to continue to incur legal costs until the dispute is resolved.  The Consortium continues to assess the expected future costs to close out the contract and terminate its current subcontractor obligations.  It is possible that certain subcontractors could file claims against the Consortium as a result of our termination of their subcontract which could be material to our consolidated financial statements.  Additionally, the joint venture’s performance on the project is secured by certain bonds totaling approximately $50.0 million, of which our portion is approximately $25.0 million, which could potentially be called by our client at some time in the future.

 

The Consortium and the Contractor are currently in dispute over the termination, materials and equipment used in the work, and the Contractor’s right to call the bonds issued on behalf of the individual Consortium members.  In connection with the parties’ primary dispute over the contract termination, in August 2017, the Consortium filed a Request for Arbitration against the Contractor with the International Chamber of Commerce, seeking that the Contractor pay the Consortium for its claims based on the difference in the amount of the Consortium’s contract and the amount actually spent, which the Consortium alleges is likely to exceed $665.5 million.  In the alternative, the Consortium also asserts that the Contractor owes for certain contract claims, in amounts to be determined through the arbitration.  If the Consortium is ultimately unsuccessful in our claim that the contract was repudiated by the Contractor, the Consortium could be liable for the completion of the project by a separate contractor and other related damages.  The Contractor has claimed that the Consortium’s termination was not valid, and we anticipate that the Contractor will file counter claims.  We expect a lengthy, multi-year arbitration process and at this time we are unable to predict the timing of resolution or the outcome of disputes.  While we continue to assess the possible impacts to our financial statements, the ultimate outcome of the dispute will depend upon contested issues of fact and law.  These additional costs could be materially adverse to our results of operations, cash flow and financial condition in the future.  Management believes the existing accruals will be sufficient for any known or expected costs which can be estimated at this time.

 

Liquidity and Capital Resources

 

Our primary sources of liquidity are cash flows from operations and borrowings under our secured revolving line of credit. Our primary uses of cash have been working capital, acquisitions, capital expenditures and purchases of stock in our internal market, and we expect our primary use of cash going forward will be working capital.  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 work completed during the period.  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 September 29, 2017 and December 30, 2016, cash held in foreign bank accounts totaled $127.2 million and $108.7 million, respectively, of which $9.7 million as of

31


 

December 30, 2016 related to an Australian fixed-price Power EPC joint venture which was deconsolidated in the first quarter of 2017.

 

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 September 29, 2017 and December 30, 2016, cash and cash equivalents held in our consolidated joint ventures and reflected on the consolidated balance sheets totaled $24.1 million and $46.6 million, respectively.

 

During the nine months ended September 29, 2017, cash provided by operations was $65.6 million as compared to cash used in operations of $129.9 million in the nine months ended September 30, 2016.  The $195.5 million improvement in cash flows from operations in the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016 primarily resulted from the $137.7 million decrease in cash used from discontinued operations combined with a $46.9 million increase in net income from continuing operations.

 

For the nine months ended September 29, 2017, changes in working capital components resulted in a $117.9 million decrease to cash flow from operations, due to an $95.1 million reduction in cash flow from operations related to receivables and unbilled revenue primarily due to the recognition of $31.7 million of estimated agreed upon settlement change orders and milestone delivery payments in the three months ended September 29, 2017 related to a fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States as well as timing of issuing invoices related to several consulting projects in the Middle East.  Additionally, cash flow from operations decreased as a result of $35.1 million of changes in billings in excess of revenue as well as a reduction in other accrued liabilities of $27.9 million, which were partially offset by an $51.0 million increase related to changes in accounts payable and accrued subcontractor costs.  Cash used from discontinued operations of $15.5 million was primarily related to costs to demobilize from the Australian project site as a result of the contract termination as discussed above.  In the nine months ended September 29, 2017, we made payments of $18.6 million for restructuring costs related to the 2016 Restructuring Plan and 2014 Restructuring Plan.

 

Cash used in investing activities was $41.6 million for the nine months ended September 29, 2017 as compared to $109.0 million for the nine months ended September 30, 2016.  A significant factor contributing to change in cash used in investing activities was the $71.3 million decrease in capital expenditures in the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016 primarily as a result of the 2016 construction of employee housing units for oilfield workers in Alaska to support our oil and gas operations.    We periodically make working capital advances to certain of our unconsolidated joint ventures; these advances are repaid to us from the joint ventures in the normal course of the joint venture activities.  During the nine months ended September 29, 2017, we received distributions from our unconsolidated joint ventures of $0.9 million as compared to $10.5 million for the nine months ended September 30, 2016.  These repayments are offset by additional investments made in our unconsolidated joint ventures, which were $20.6 million and $16.6 million for the nine months ended September 29, 2017  and September 30, 2016, respectively.  Additionally, we made investments in our unconsolidated joint venture related to our discontinued fixed-price Power EPC operations of $8.1 million in the nine months ended September 29, 2017 as compared to $0.2 million of capital expenditures for our fixed-price Power EPC business in the nine months ended September 30, 2016.

 

Cash used in financing activities was $2.3 million in the nine months ended September 29, 2017 as compared to cash provided by financing activities of $185.2 million for the nine months ended September 30, 2016.  The change in financing cash flows was primarily caused by the net borrowings on long-term debt of $43.4 million for the nine months ended September 29, 2017 as compared to $118.5 million for the nine months ended September 30, 2016, which were largely driven from the negative operating cash flows and investing cash flow requirements as discussed above.  As the net proceeds of the Second Lien Notes were used to repay a portion of the outstanding revolving credit loans under our credit facility, the Second Lien Notes did not have an impact on our net borrowings on long-term debt.  There was a $60.3 million decrease in cash used in financing activities related to repurchases of common stock during the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016, primarily as a result of CH2M determining not to hold an internal market trade in September 2017 and beyond pending shareholder voting on the proposed Merger Agreement with Jacobs.  Additionally, net cash provided by financing activities from discontinued operations decreased $75.4 million in the nine months ended September 29, 2017 as compared to the nine months ended September 30, 2016 due to reduced contributions by the noncontrolling interest partner in the formerly consolidated Australian joint venture partnership as a result of the contract termination and demobilization of the fixed-price Power EPC project in the first quarter of 2017.

 

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Revolving Credit Facility

 

On April 28, 2017, we entered into a Fourth Amendment to our Amended and Restated Credit Agreement (“Credit Agreement”).  The Fourth Amendment allowed for the issuance and sale of the Second Lien Notes, as discussed below, and lowered our maximum revolving credit facility to $875.0 million from $925.0 million.  The credit facility matures on March 28, 2019 and includes a subfacility for the issuance of standby letters of credit up to $450.0 million, a subfacility of up to $300.0 million for multicurrency borrowings, and a subfacility of up to $50.0 million for swingline loans.  Other technical and operating changes to the Credit Agreement specifically achieved the following:

 

·

Increased the maximum consolidated leverage ratio to 4.00x from 3.00x;

·

Modified the definition of adjusted EBITDA as used in the financial covenant calculation;

·

Required CH2M to maintain, on a consolidated basis, a maximum consolidated first lien leverage ratio no greater than 3.00x;

·

Required CH2M to maintain a minimum consolidated fixed charge coverage ratio no less than 1.50x;

·

Restricted CH2M’s ability to repurchase of its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock, and required compliance with the terms of the Second Lien Indenture, which also limits certain Restricted Payments and participation in the employee stock ownership program as described below.

 

At September 29, 2017, we had $337.3 million in outstanding borrowings of the Credit Facility, compared to $487.0 million at December 30, 2016.  The average rate of interest charged on that balance was 4.36% as of September 29, 2017.  At September 29, 2017 company-wide issued and outstanding letters of credit, and bank guarantee facilities of $132.1 million were outstanding, compared to $134.2 million at December 30, 2016.  Additionally, the obligations of CH2M and its subsidiaries that are either borrowers or guarantors under the Credit Facility are secured by first-priority security interests in substantially all of the domestic assets of CH2M and such subsidiaries. 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.  Our remaining unused borrowing capacity under the Credit Facility was over $400.0 million as of September 29, 2017.

 

As of September 29, 2017, we were in compliance with the covenants required by the Credit Agreement.  Management continually assesses it potential future compliance with the Credit Agreement covenants based upon estimates of future earnings and cash flows.  If there is an expected possibility of non-compliance, we will discuss possibilities with the Company’s lenders or utilize other means of capitalizing the Company to waive or remedy any non-compliance.  In the context of our current debt structure and projected cash needs, there can be no assurance that the capacity under our Credit Facility will be adequate to fund future operations, to restructure operations, or to allow the Company to repurchase stock in our internal market in any significant amount or at all.

 

Based on second quarter results of operation and our current business outlook, we believe that our sources of liquidity, including bank facility credit capacity and issuances of debt, equity or other securities, will satisfy our working capital needs, capital expenditures, investment requirements, contractual obligations, commitments, principal and interest payments on our debt and other liquidity requirements for the next 12 months.  However, we cannot be certain that we will generate improved cash flows or that we will be able to obtain additional financing or investment on satisfactory terms.  In addition, our liquidity is constrained due to results of operations and in the event our liquidity is insufficient, we may be required to curtail spending and implement additional cost saving measures and restructuring actions or enter into new financing arrangements.

 

Second Lien Indenture

 

On April 28, 2017, we entered into a Second Lien Indenture through which we issued Senior Second Lien Notes with an aggregate principal amount of $200.0 million at an annual interest rate of 10% (the “Second Lien Notes”).  The Second Lien Notes mature on April 28, 2020, and interest is payable on May 1 and November 1 of each year, commencing on November 1, 2017.  The net proceeds of the Second Lien Notes were used to repay a portion of the outstanding revolving credit loans under our credit facility.  The Second Lien Notes are unsubordinated, senior obligations of CH2M and are secured by second-priority liens on substantially all of CH2M’s and certain CH2M subsidiaries’ domestic assets.

 

The Second Lien Indenture contains financial covenants that require CH2M to maintain a consolidated leverage ratio no greater than 4.50x and restricts CH2M’s ability to repurchase of its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock (“Restricted Payments”).  Specifically, while the Second Lien Notes are outstanding, the amount CH2M may spend to repurchase its common stock in connection with its employee stock ownership program, other than legally required repurchases of common stock held in benefit plans, which are not restricted, will be limited to an aggregate

33


 

of $75.0 million during the term of the Second Lien Notes plus a cumulative amount equal to 50% of CH2M’s consolidated net income, or minus 100% of any net loss, from April 1, 2017 to the date on which any such repurchase is to be made.  The amount available to make Restricted Payments shall also be reduced to the extent that CH2M makes legally required repurchases of common stock held in benefit plans in excess of $50.0 million in any period of four consecutive quarters and that CH2M makes certain payments on subordinated indebtedness in accordance with the terms of the Second Lien Indenture.

 

The Second Lien Indenture contains affirmative and negative covenants and other terms that are customary for obligations similar to the Second Lien Notes, which include covenants that limit or restrict our ability to incur additional indebtedness, grant liens to secure their obligations, make certain kinds of investments or acquisitions, dispose of assets outside the ordinary course of business, create contractual restrictions on the ability to pay dividends or make certain other payments,  merge or consolidate, sell all or substantially all of our assets, and enter into certain transactions with affiliates unless the transaction is comparable to an arm’s length transaction with a non-affiliate.

 

CH2M may, at its option, redeem the Second Lien Notes in whole at any time or from time to time in part, upon notice at a premium on the principal amount plus any accrued and unpaid interest to the date of redemption as shown below:

 

 

 

 

 

Redemption Period

 

Redemption Price

From April 28, 2017 (issue date) through April 28, 2018

 

110.0

%

From April 29, 2018 through April 28, 2019

 

103.0

%

From April 29, 2019 through October 28, 2019

 

101.5

%

From October 29, 2019 through April 28, 2020 (maturity date)

 

100.0

%

 

Upon the occurrence of a change of control, any holder of Second Lien Notes will have the right to require CH2M to repurchase all or any portion of the holder’s Second Lien Notes at a purchase price in cash equal to 101% of the outstanding principal and accrued and unpaid interest, if any, through the date of repurchase.

 

The Second Lien Indenture also contains customary events of default.  If an event of default occurs, the holders of the Second Lien Notes may declare any outstanding principal, accrued and unpaid interest, and premium to be immediately due and payable.  Additionally, certain events of bankruptcy or insolvency are events of default which shall result in the Second Lien Notes being due and payable immediately upon the occurrence of such events of default.

 

Furthermore, on April 28, 2017, we entered into an Intercreditor Agreement with the agents of the Second Lien Notes and the lenders of the Fourth Amendment to our Credit Agreement that states that the liens on common collateral securing the claims of the Credit Agreement have priority over, and are senior to, the liens on the common collateral securing Second Lien Notes.  The senior claims are defined in the Intercreditor Agreement to include, among other things, the principal amount of all indebtedness incurred under the Fourth Amendment to our Credit Agreement and certain additional senior indebtedness permitted under the Intercreditor Agreement.

 

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 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.  Total proceeds from the preferred stock offering were $99.8 million, net of issuance costs of $0.2 million.

 

In connection with the issuance of the Second Lien Notes and the Fourth Amendment to our Third Amended and Restated Credit Agreement on April 28, 2017, as discussed in Note 10 – Long-Term Debt,  we obtained consent from our Series A Preferred Stockholder with respect to the incurrence of the notes and filed a Certificate of Amendment to the Certificate of Designation of Series A Preferred Stock which increases the annual rate at which dividends accrue on the Series A Preferred Stock from 5% to 7% beginning April 1, 2017.  Dividends on the Series A Preferred Stock are cumulative and accrue quarterly in arrears 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.  The other terms and conditions of the Series A Preferred Stock set forth in the Certificate of Designation, as summarized in our Annual Report on Form 10-K for the year ended December 30, 2016, remain unchanged.

34


 

 

Under our agreement with Apollo, the maximum consolidated leverage ratio is 4.00x for 2017 and beyond, consistent with the Fourth Amendment to our Amended and Restated Credit Agreement.  As of September 29, 2017, we were in compliance with this covenant.  Management continually assesses its potential future compliance with the consolidated leverage ratio covenant based on estimates of future earnings and cash flows.  If there is an expected possibility of non-compliance, we will discuss possibilities with Apollo to modify the covenant consistent with discussions with the Company’s lenders or utilize other means of capitalizing the Company to anticipate or remedy any non-compliance.

 

Additionally, the Certificate of Designations for the Series A Preferred Stock prohibits the repurchase by the Company of shares of our common stock in excess of negotiated pre-approved amounts.  In 2017, the Company is permitted to repurchase shares of common stock in an amount determined by a formula based upon our cash flow from operations, minus capital expenditures, for fiscal 2016.  Depending upon our results of operations for fiscal year 2016, the Company may be limited or altogether prohibited in its ability to repurchase shares of common stock in the internal market unless it is able to obtain the consent of the holders of at least a majority of the Series A Preferred Stock.  During January and March in 2017, the Company received from the Series A Preferred Stockholder consents permitting the Company to spend up to $100.0 million, in the aggregate, to make legally required repurchases of common stock and to repurchase common stock in the internal market in 2017.  No assurance can be given that in the future the Company will be able to obtain an acknowledgment and consent from the Series A Preferred Stockholder permitting the Company to repurchase common stock in the internal market if such an acknowledgment and consent is required.

 

Internal Market Trades

 

CH2M’s common stock has historically traded on an internal market four times per year, though CH2M determines whether to participate in the internal market on a quarterly basis.  Prior to each quarterly trade date, we have historically reviewed the outstanding orders and any resulting imbalance between sell orders and buy orders and decided whether or not CH2M should participate in the internal market by buying shares.  In making that determination, CH2M’s management and Board of Directors have considered 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.

 

On August 1, 2017, we entered into the Merger Agreement with Jacobs.  As a result of the Merger Agreement, CH2M has determined not to hold an internal market trade in September 2017 and beyond pending shareholder voting on the proposed Merger Agreement.

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 September 29, 2017, when compared to the disclosures provided in our Annual Report on Form 10-K for the year ended December 30, 2016.

 

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.

 

35


 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. 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 30, 2016.

 

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 15 – 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, we are exposed to foreign currency exchange rate risk on transactions in numerous countries, particularly with respect to our operations in the United Kingdom and Canada.  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 September 29, 2017, we had derivative liabilities of $2.0 million of forward foreign exchange contracts on world currencies with varying durations, none of which extend beyond one year.

 

Interest rates.    Our interest rate exposure is primarily limited to our revolving credit facility.  As of September 29, 2017, the outstanding balance on the credit facility was $337.3 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 $3.4 million.

 

Item 4.  Controls and Procedures

 

Disclosure Controls and Procedures

 

Within our Annual Report on Form 10-K (“Form 10-K”), Part II – Item 9A – Controls and Procedures for the year ended December 30, 2016, which was filed on March 7, 2017, we identified three internal control deficiencies that involve the development of project cost estimates for long-term contracts accounted for under the percentage-of-completion method.  The material weakness resulted in misstated consolidated financial statements during 2015 that were corrected in the amended 2015 Form 10-K/A for the year ended December 25, 2015, which was filed on January 19, 2017.

 

Management has developed a plan with the oversight of the Audit Committee of the Board of Directors to remediate these internal control deficiencies, which are discussed in detail below.  New and revised key internal controls have been developed and

36


 

implemented, and are being tested for design and operating effectiveness.  Management intends to complete repetitive testing of these internal controls, and report on their effectiveness in the 2017 Form 10-K.  While the initial testing of the newly implemented controls has been positive, until such time as all of our testing is complete, we expect to continue to report that a material weakness in internal controls exists.  As a result, as of September 29, 2017, we carried out an evaluation, 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, and as a result of the previously reported material weakness in the design of internal control over financial reporting, we concluded that our disclosure controls and procedures continue to be not effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is (a) timely recorded, processed, summarized, and reported and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure until such as the material weakness is fully remediated.  See the discussion of remediation activities below.

 

In light of the material weakness identified below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements are prepared in accordance with GAAP and reflect our financial position and results of operations as of and for the quarter ended September 29, 2017.  As a result, notwithstanding the material weakness, management concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

 

Those internal control deficiencies and the status of management’s remediation action plans are summarized below.

 

Description of Internal Control Deficiencies that resulted in a Material Weakness

 

Process level control activities related to the processes used to develop project cost estimates for large fixed-firm price engineering, procurement and construction projects.  The Company did not identify these basis of estimate process level control activities as key internal controls, and, as such, they were not designed to operate at the required level of rigor, precision and consistency, and include the retention of adequate documentation.

 

An internal control that ensures cost estimates on client projects that are not updated during the last month of the reporting period are evaluated for potential accounting implications.  The existing control was not designed effectively as it did not sufficiently identify items requiring follow-up and how such items were to be resolved.

 

A certification process whereby key management roles on client projects identified with inherently high risk of material change in the estimate of cost to complete a project did not operate effectively.  This internal control as designed did not adequately identify items requiring follow-up and how such items were to be resolved, including the preparation and review of appropriate documentation of the resolution.

 

Remediation Efforts to Address the Material Weakness

 

The following is a discussion of the new and revised controls that have been developed and implemented during 2017, and are currently being tested for design and operating effectiveness.  Management intends to complete repetitive testing of these internal controls, and report on their effectiveness in the 2017 Form 10-K.

 

Deficient control related to the inadequate design of process level controls dealing with the basis of estimate for large fixed-firm price engineering, procurement and construction projects

 

·

Developed and implemented process level controls that require preparation and documentation of the basis of estimate for major project cost components with significant financial reporting risks, e.g., schedule, labor, subcontractors, materials, change management, and risk register/contingency, and that those estimates and the supporting basis of estimate be evaluated for reasonableness during each reporting period.  

·

Developed and implemented a control that documents management’s quarterly evaluation of large fixed-firm price engineering, procurement and construction projects to determine whether any of these projects merit an independent evaluation of risk and their impact on the reliability of cost estimates.

·

Delivered training for personnel in key roles on responsibilities for these controls.

37


 

 

Deficient control related to the evaluation of project cost estimates not updated in the last month of a reporting period 

 

·

Developed and implemented a control that systematically identifies client projects whose estimate of cost to complete have not been updated during the last month of the reporting period, and which includes a management review process that will result in the cost estimate being updated, or documented rationale why a revised estimate was not required.

·

Delivered training for personnel in key roles on responsibilities for this control.

 

Deficient control related to the certification process

 

·

Revised the certification control to ensure that project management and corporate accounting identify items requiring follow-up and how such items are to be resolved, including adequate documentation of the resolution. The revised control was fully implemented in the second quarter of 2017.

·

Delivered training for personnel in key roles on responsibilities for this control.

 

Changes in Internal Control over Financial Reporting

 

Other than the actions being taken to remediate the material weakness as described above, there have been no changes in our internal control over financial reporting during the three months ended September 29, 2017 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 that have not yet been terminated through settlement would not result in a material adverse effect on our results of operations or financial condition even if the final outcome is adverse to the 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.  As of September 29, 2017 and December 30, 2016, accruals for potential estimated claim liabilities were $2.4 million and $8.9 million, respectively.

 

CH2M-WG Idaho, LLC (“CWI”), owned 50.5% by CH2M HILL Constructors, Inc., a wholly owned subsidiary of CH2M HILL Companies, Ltd., is a remediation contractor for the U.S. Department of Energy (“DOE”) at the Idaho National Laboratory site.  The original remediation contract was to run from May 2005 through September 2012, was extended through September 2015, and was extended again through March 31, 2016.  CWI disagrees with DOE regarding CWI’s final fee for the base contract period from May 2005 through September 2012.  In December 2013, the DOE issued a final determination that was approximately $30.0 million less than what CWI expected to receive in the fee determination.  On March 6, 2014, CWI filed a Certified Claim with the Contracting Officer for a total fee owed of $40.1 million.  The Certified Claim was rejected through a Contracting Officer’s Final Decision in May 2014, and CWI filed its appeal to the U.S. Civilian Board of Contract Appeals (the “CBCA”) on May 30, 2014.  The trial was held from April 12 through 28, 2016, and the post-trial briefing phase was completed by December 2016.  On September 7, 2017, the CBCA issued its trial decision granting CWI’s claim for fees in the amount of $33.3 million plus interest.  The CBCA disallowed that portion of CWI’s claim for certain cost transfers of $7.9 million.  The DOE is expected to seek relief from the decision, and, if unsuccessful, to appeal. Based on information presently known to management, we believe that the outcome of this dispute will not have a material adverse effect on our financial condition, cash flows or results of operations.

38


 

In 2006, Halcrow Consulting Engineers & Architects, Ltd., Qatar Branch (“Halcrow”) entered into a Consulting Services Agreement with Qatari Diar Real Estate Investment Company (“QD”) to perform Pre and Post Contract Consultancy and Quantity Surveying Services for Lusail Development Primary Infrastructure, Marine, Earthworks, and Site Preparation Works (the “Project”) in Lusail, Qatar.  The detailed design portion of the contract was extended from ten months to over seven years due primarily to employer delays and added scope, which were the responsibility of QD.  On March 9, 2017, QD called Halcrow’s letter of credit for $6.7 million.  On April 12, 2017, QD filed court proceedings in Qatari court (Qatari Civil and Commercial Court) against Halcrow.  The claims asserted by QD for Halcrow’s alleged bridge design defects, cost of redesign, work to remedy the bridge defects, and loss of profit and reputation, together with a further claim for alleged breach of contract relating to as yet unspecified infrastructure works, are approximately $182.0 million.  QD’s alternative damage amount for decennial liability under Qatari law (a form of strict liability) is approximately $129.0 million. On October 1, 2017, Halcrow filed a defense vigorously refuting all of QD’s claims and counterclaims against QD, including, without limitation, Halcrow’s entitlement to certified receivables of $4.0 million, delay claims of a minimum of approximately $20.0 million, and the wrongful calling of the letter of credit of $6.7 million.  Halcrow also asserted the defense that the Agreement contains a limitation of liability provision capping any negligence damages against Halcrow at approximately $10.0 million. QD’s response to Halcrow’s defense and counterclaims is due in mid-November 2017, after which Halcrow is expected to be granted time to answer QD’s response.

In 2012, CH2M HILL Australia Pty Limited entered into a 50/50 integrated joint venture with UGL Infrastructure Pty Limited (“UGL”), an Australian construction contractor (“CH2M-UGL JV” or “JV”).  The JV entered into a Consortium Agreement with General Electric and GE Electrical International Inc (“Consortium”).  The Consortium was awarded a contract by JKC Australia LNG Pty Limited (“JKC”) for the engineering, procurement, construction and commissioning of a 360 MW Combined Cycle Power Plant (the “Project”) for INPEX Operations Australia Pty Limited (“Inpex”) at Blaydin Point, Darwin, NT, Australia (the “Subcontract”).  On January 24, 2017, the Consortium terminated the Subcontract because of JKC’s repudiatory breach.  The Consortium also demobilized from the work site.  The Consortium issued a termination letter which described JKC’s failure to properly administer the Subcontract. JKC claims the Consortium has abandoned the work and, as such, JKC has now purported to terminate the Subcontract.  The Consortium and JKC are now in dispute over the termination.  In connection with the parties’ primary dispute over the contract termination, on August 3, 2017, the Consortium filed a Request for Arbitration against JKC with the International Chamber of Commerce, seeking that JKC pay the Consortium for its repudiatory breach of the Subcontract based on the difference in the amount of the Consortium’s contract and the amount actually spent, which the Consortium alleges is likely to exceed $665.5 million.  In the alternative, the Consortium also asserts that JKC owes for unresolved contract claims and change orders, in amounts in the hundreds of millions of dollars range to be determined through the arbitration.  We expect the arbitration to be lengthy and at this time are unable to predict the timing of resolution or the outcome of disputes, which will depend on disputed issues of fact and law. The outcome could be materially adverse to our results of operations, cash flow and financial condition.  The primary dispute over the termination is to be decided in an International Chamber of Commerce arbitration in Singapore.  On October 31, 2017, JKC gave the Consortium notice of JKC's intention to have recourse to the bond guarantees provided by CH2M HILL Australia Pty Limited and UGL in order to recover costs JKC alleges it has incurred since the Consortium terminated the Subcontract.  The amount of CH2M HILL Australia Pty Limited's bond guarantees to JKC are approximately $25.6 million.  The Consortium has challenged JKC's right to have recourse against the bond guarantees.  The Consortium has initiated an arbitration proceeding under the rules of the International Chamber of Commerce and an action in the Australian court system seeking an injunction against JKC's attempt to collect on the bonds.  We expect a ruling in the fourth quarter of 2017.

 

 

Item 1A. Risk Factors

 

Before making an investment decision with respect to our common stock, you should carefully consider risk factors set forth in our Annual Report on Form 10-K for the year ended December 30, 2016 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, as well as the other financial and business disclosures contained in our current and periodic reports filed with the SEC.

 

39


 

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

 

Sales of Unregistered Equity Securities

 

We did not issue any unregistered equity securities during the three months ended September 29, 2017.

 

Issuer Purchases of Equity Securities

 

The following table covers the purchases of our common shares by our company not previously reported during the nine months ended September 29, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

 

  

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

July (a)

 

1,010

 

$

50.69

 

 —

 

 —

August

 

 —

 

 

 —

 

 —

 

 —

September

 

 —

 

 

 —

 

 —

 

 —

Total

 

1,010

 

$

50.69

 

 —

 

 —


(a)

Shares purchased by CH2M from terminated employees.

40


 

Item 6.  Exhibits

 

Exhibit Index

 

 

 

 

2.1

 

Agreement and Plan of Merger, dated as of August 1, 2017, by and among CH2M HILL Companies, Ltd., Jacobs Engineering Group Inc., and Basketball Merger Sub Inc. (filed as Exhibit 2.1 to CH2M’s Form 8‑K on August 2, 2017 (Commission File No. 000‑27261), and incorporated herein by reference)

*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

 

41


 

SIGNATURES

 

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

 

 

 

 

CH2M HILL Companies, Ltd.

 

 

 

 

Date: November 13, 2017

/s/ GARY L. MCARTHUR

 

Gary L. McArthur

 

Chief Financial Officer

 

 

 

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