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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