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 June 30, 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)
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Delaware |
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93-0549963 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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9191 South Jamaica Street, |
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Englewood, CO |
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80112-5946 |
(Address of principal executive offices) |
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(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.
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Large accelerated filer ☐ |
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Accelerated filer ☐ |
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Non-accelerated filer ☒ |
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Smaller reporting company ☐ |
(Do not check if a |
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smaller reporting company) |
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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 August 3, 2017 was 24,591,691.
CH2M HILL COMPANIES, LTD.
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PART I. FINANCIAL INFORMATION |
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Item 1. |
FINANCIAL STATEMENTS |
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Consolidated Balance Sheets as of June 30, 2017 and December 30, 2016 (unaudited) |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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2
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
(Unaudited)
(Dollars in thousands)
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June 30, |
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December 30, |
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2017 |
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2016 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
112,400 |
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$ |
121,365 |
Receivables, net— |
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Client accounts |
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568,386 |
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602,363 |
Unbilled revenue |
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573,162 |
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529,779 |
Other |
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13,678 |
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11,469 |
Income tax receivable |
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25,031 |
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18,375 |
Prepaid expenses and other current assets |
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103,899 |
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92,097 |
Current assets of discontinued operations |
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827 |
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14,449 |
Total current assets |
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1,397,383 |
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1,389,897 |
Investments in unconsolidated affiliates |
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73,626 |
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66,329 |
Property, plant and equipment, net |
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233,536 |
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246,596 |
Goodwill |
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499,221 |
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477,752 |
Intangible assets, net |
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30,496 |
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38,024 |
Deferred income taxes |
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348,446 |
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363,251 |
Employee benefit plan assets and other |
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93,594 |
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86,777 |
Long-term assets of discontinued operations |
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— |
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1,836 |
Total assets |
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$ |
2,676,302 |
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$ |
2,670,462 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
2,231 |
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$ |
2,242 |
Accounts payable and accrued subcontractor costs |
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369,515 |
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394,934 |
Billings in excess of revenue |
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211,141 |
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227,501 |
Accrued payroll and employee related liabilities |
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290,407 |
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272,458 |
Other accrued liabilities |
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194,668 |
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210,121 |
Current liabilities of discontinued operations |
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1,239 |
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208,105 |
Total current liabilities |
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1,069,201 |
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1,315,361 |
Long-term employee related liabilities |
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294,643 |
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308,118 |
Long-term debt |
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520,234 |
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495,632 |
Other long-term liabilities |
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102,216 |
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105,813 |
Long-term liabilities of discontinued operations |
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77,920 |
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— |
Total liabilities |
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2,064,214 |
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2,224,924 |
Commitments and contingencies (Note 15) |
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Stockholders’ equity: |
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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 June 30, 2017 and as of December 30, 2016 |
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48 |
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48 |
Common stock, $0.01 par value, 100,000,000 shares authorized; 24,580,276 and 25,148,399 issued and outstanding at June 30, 2017 and December 30, 2016, respectively |
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246 |
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251 |
Additional paid-in capital |
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144,197 |
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169,573 |
Retained earnings |
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642,504 |
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586,252 |
Accumulated other comprehensive loss |
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(171,234) |
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(209,408) |
Total CH2M common stockholders’ equity |
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615,761 |
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546,716 |
Noncontrolling interests of continuing operations |
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(3,673) |
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(8,643) |
Noncontrolling interests of discontinued operations |
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— |
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(92,535) |
Total stockholders' equity |
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612,088 |
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445,538 |
Total liabilities and stockholders’ equity |
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$ |
2,676,302 |
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$ |
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 Operation s
(Unaudited)
(Dollars in thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 24, |
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June 30, |
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June 24 |
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2017 |
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2016 |
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2017 |
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2016 |
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Gross revenue |
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$ |
1,284,859 |
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$ |
1,290,965 |
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$ |
2,525,292 |
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$ |
2,577,975 |
Equity in earnings of joint ventures and affiliated companies |
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15,378 |
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8,717 |
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22,739 |
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17,770 |
Operating expenses: |
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Direct cost of services |
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(1,022,267) |
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(1,078,582) |
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(2,103,575) |
Selling, general and administrative |
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(205,342) |
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(235,151) |
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(394,998) |
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(465,199) |
Operating income (loss) |
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72,628 |
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(14,051) |
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102,079 |
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26,971 |
Other income (expense): |
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Interest income |
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108 |
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110 |
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208 |
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170 |
Interest expense |
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(9,837) |
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(2,879) |
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(16,410) |
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(6,146) |
Income (loss) from continuing operations before provision for income taxes |
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62,899 |
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(16,820) |
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85,877 |
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20,995 |
(Provision) benefit for income taxes from continuing operations |
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(15,739) |
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11,162 |
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(20,951) |
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(2,808) |
Net income (loss) from continuing operations |
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47,160 |
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(5,658) |
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64,926 |
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18,187 |
Net loss from discontinued operations |
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(531) |
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(148,532) |
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(141) |
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(148,653) |
Net income (loss) |
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46,629 |
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(154,190) |
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64,785 |
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(130,466) |
Less: income attributable to noncontrolling interests from continuing operations |
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(4,336) |
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(4,348) |
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(8,593) |
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(4,819) |
Less: loss attributable to noncontrolling interests from discontinued operations |
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— |
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96,496 |
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60 |
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97,822 |
Net income (loss) attributable to CH2M |
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$ |
42,293 |
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$ |
(62,042) |
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$ |
56,252 |
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$ |
(37,463) |
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Net income (loss) attributable to CH2M per common share 1 : |
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Basic net income (loss) from continuing operations per common share |
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$ |
1.24 |
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$ |
(0.41) |
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$ |
1.55 |
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$ |
0.60 |
Basic net loss from discontinued operations per common share |
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(0.01) |
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(2.12) |
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— |
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(2.27) |
Basic net income (loss) per common share |
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$ |
1.23 |
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$ |
(2.53) |
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$ |
1.55 |
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$ |
(1.67) |
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Diluted net income (loss) from continuing operations per common share |
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$ |
1.24 |
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$ |
(0.41) |
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$ |
1.55 |
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$ |
0.60 |
Diluted net loss from discontinued operations per common share |
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(0.01) |
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(2.12) |
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— |
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(2.27) |
Diluted net income (loss) per common share |
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$ |
1.23 |
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$ |
(2.53) |
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$ |
1.55 |
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$ |
(1.67) |
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Basic weighted average number of common shares |
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Diluted weighted average number of common shares |
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1 Represents net income (loss) attributable to CH2M less (i) income allocated to preferred stockholders of $6,372 and $8,106 for the three and six months ended June 30, 2017, respectively, and $0 for the three and six months ended June 24, 2016, and (ii) accrued dividends attributable to preferred stockholders of $5,654 and $9,643 for the three and six months ended June 30, 2017, and $3,612 and $6,176 for the three and six months ended June 24, 2016.
The accompanying notes are an integral part of these consolidated financial statements.
4
CH2M HILL COMPANIES, LTD.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Dollars in thousands)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 24, |
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June 30, |
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June 24 |
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2017 |
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2016 |
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2017 |
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2016 |
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Net income (loss) |
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$ |
46,629 |
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$ |
(154,190) |
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$ |
64,785 |
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$ |
(130,466) |
Other comprehensive income: |
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Foreign currency translation adjustments |
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20,332 |
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10,599 |
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33,940 |
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11,765 |
Benefit plan adjustments, net of tax |
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2,257 |
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1,950 |
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4,234 |
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4,070 |
Other comprehensive income |
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22,589 |
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12,549 |
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38,174 |
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15,835 |
Comprehensive income (loss) |
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69,218 |
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(141,641) |
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102,959 |
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(114,631) |
Less: income attributable to noncontrolling interests from continuing operations |
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4,742 |
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4,348 |
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9,135 |
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4,819 |
Less: loss attributable to noncontrolling interests from discontinued operations |
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— |
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(96,496) |
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(60) |
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(97,822) |
Comprehensive income (loss) attributable to CH2M |
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$ |
64,476 |
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$ |
(49,493) |
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$ |
93,884 |
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$ |
(21,628) |
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)
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Six Months Ended |
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June 30, |
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June 24, |
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2017 |
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2016 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
64,785 |
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$ |
(130,466) |
Adjustments to reconcile net income to net cash provided by (used in) continuing operating activities: |
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Net loss from discontinued operations |
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141 |
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148,653 |
Depreciation and amortization |
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29,994 |
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30,944 |
Stock-based employee compensation |
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17,302 |
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18,277 |
Loss on disposal of property, plant and equipment |
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852 |
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202 |
Amortization of debt issuance costs |
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289 |
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— |
Allowance for uncollectible accounts |
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2,366 |
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347 |
Deferred income taxes |
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19,005 |
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(82,022) |
Undistributed earnings and gains from unconsolidated affiliates |
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(22,739) |
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(17,770) |
Distributions of income from unconsolidated affiliates |
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29,061 |
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27,203 |
Contributions to defined benefit pension plans |
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(12,781) |
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(19,026) |
Excess tax benefits from stock-based compensation |
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1,368 |
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2,502 |
Change in assets and liabilities of continuing operations: |
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Receivables and unbilled revenue |
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934 |
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28,518 |
Prepaid expenses and other |
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(16,112) |
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(11,778) |
Accounts payable and accrued subcontractor costs |
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(31,027) |
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(47,696) |
Billings in excess of revenue |
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(19,326) |
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37,625 |
Accrued payroll and employee related liabilities |
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17,936 |
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(18,095) |
Other accrued liabilities |
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(19,830) |
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(17,336) |
Income tax receivable |
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(6,723) |
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20,606 |
Long-term employee related liabilities and other |
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(8,265) |
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30,559 |
Net cash provided by operating activities from continuing operations |
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47,230 |
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1,247 |
Net cash used in operating activities from discontinued operations |
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(14,215) |
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(113,692) |
Net cash provided by (used in) operating activities |
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33,015 |
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(112,445) |
Cash flows from investing activities: |
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Capital expenditures |
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(9,006) |
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(67,357) |
Acquisition related payments |
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(213) |
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(15,788) |
Investments in unconsolidated affiliates |
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(13,866) |
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(12,315) |
Distributions of capital from unconsolidated affiliates |
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875 |
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6,663 |
Proceeds from sale of operating assets |
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1,485 |
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|
815 |
Net cash used in investing activities from continuing operations |
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(20,725) |
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(87,982) |
Net cash used in investing activities from discontinued operations |
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(8,109) |
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(169) |
Net cash used in investing activities |
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(28,834) |
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(88,151) |
Cash flows from financing activities: |
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Borrowings on long-term debt |
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1,118,126 |
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1,235,328 |
Payments on long-term debt |
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(1,093,833) |
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(1,142,074) |
Repurchases and retirements of common stock |
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(42,683) |
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(76,387) |
Proceeds from the issuance of preferred stock, net of issuance costs |
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— |
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99,800 |
Settlement of tax-withholding obligation on stock-based compensation |
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(2,407) |
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(2,607) |
Net distributions to noncontrolling interests for continuing operations |
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(2,847) |
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(2,860) |
Net cash (used in) provided by financing activities from continuing operations |
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(23,644) |
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111,200 |
Net cash provided by financing activities from discontinued operations |
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4,635 |
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48,739 |
Net cash (used in) provided by financing activities |
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(19,009) |
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159,939 |
Effect of deconsolidation of a joint venture partnership on cash |
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(13,011) |
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— |
Effect of exchange rate changes on cash |
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9,210 |
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1,019 |
Decrease in cash and cash equivalents |
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$ |
(18,629) |
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$ |
(39,638) |
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Cash and cash equivalents from continuing operations, beginning of period |
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$ |
121,365 |
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$ |
148,979 |
Cash and cash equivalents from discontinued operations, beginning of period |
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9,664 |
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48,042 |
Cash and cash equivalents, beginning of period |
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$ |
131,029 |
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$ |
197,021 |
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Cash and cash equivalents from continuing operations, end of period |
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$ |
112,400 |
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$ |
149,737 |
Cash and cash equivalents from discontinued operations, end of period |
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— |
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|
7,646 |
Cash and cash equivalents, end of period |
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$ |
112,400 |
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$ |
157,383 |
Supplemental disclosures: |
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Cash paid for interest |
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$ |
13,658 |
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$ |
5,860 |
Cash paid for income taxes |
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$ |
4,686 |
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$ |
10,347 |
The accompanying notes are an integral part of these consolidated financial statements .
6
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and according to instructions to Form 10-Q and the provisions of Article 10 of Regulation S-X that are applicable to interim financial statements. Accordingly, these statements do not include all of the information required by GAAP or the Securities and Exchange Commission (“SEC”) rules and regulations for annual audited financial statements. The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions have been prepared on the basis of the most current and best available information. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 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.
7
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.
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.
8
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.
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.
9
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 common stock for the 401(k) Plan for the three and six months ended June 30, 2017 were $8.6 million and $11.2 million, respectively, as compared to $7.4 million and $12.9 million for the three and six months ended June 24, 2016, respectively.
Recently 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 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
10
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 $15.8 million of acquisition related payments within our investing cash flows for the six months ended June 30, 2017 and June 24, 2016, respectively, will be reclassified to financing cash flows as a result of adopting this ASU.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payments Accounting . During the three months ended September 30, 2016, the Company elected to early adopt ASU 2016-09 with an effective date of December 26, 2015. As a result, the Company recognized the excess tax benefit of $1.4 million within income tax benefit on the consolidated statements of income for the six months ended June 30, 2017, and, upon adoption, previously unrecognized excess tax benefits of $11.1 million resulted in a cumulative-effect adjustment to retained earnings for the year ended December 30, 2016. The adoption did not impact the existing classification of awards. Excess tax benefits from stock-based compensation of $2.5 million for the six months ended June 24, 2016 were restated into cash flows from operating activities from cash flows from financing activity. Additionally, adopted retrospectively, the Company reclassified $2.4 million and $2.6 million of employee withholding taxes paid from operating activities into financing activities for the six months ended June 30, 2017 and June 24, 2016, respectively. Following the adoption of the standard, the Company elected to continue estimating the number of awards expected to be forfeited and adjust its estimate on an ongoing basis.
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 December 30, 2016, 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 of June 30, 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
11
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 85% complete as of June 30, 2017. In the three and six months ended June 24, 2016, we experienced cost growth resulting in total changes in estimated costs of approximately $60.0 million. This cost growth was primarily a result of survey engineering and design challenges, rework of previously installed work and client-caused delays, including limited daytime access to portions of the site, greater than expected subcontractor costs, subcontracting work previously planned to be self-performed, the sum of which resulted in increased material quantities and work and delivery schedule extensions. We also had severe weather including record rainfall, and production shortfalls resulting from differing site conditions and engineering rework.
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 are being included in claims submitted to the client. We did not incur additional cost growth during the three months ended June 30, 2017. While the project team believes that the increase in costs during the six months ended June 30, 2017 is sufficient to cover known issues, additional design, fabrication, construction or labor resource issues could be encountered resulting in further cost growth. Certain of these additional costs are believed to be the result of noise barrier fabrication errors incurred by a subcontractor, sound wall design issues, as well as specifications provided by the client that were determined to be incorrect.
We expect to seek resolution of these first quarter 2017 issues from the fabrication/installation subcontractor in addition to seeking resolution of the outstanding change orders and claims through a combination of submissions to the Disputes Board under the terms of the contract and direct negotiations with the client. Change orders and claims totaling approximately $110.0 million have been submitted to the client. We have received favorable, non-binding recommendations from the Disputes Board on some of the claims. We are in the process of trying to reach a mutual resolution with the client on these claims and the other submitted change orders. CH2M will continue to aggressively pursue its entitlements based on claims and change orders, including litigation if it cannot reach resolution with the client. Accordingly, we cannot currently estimate the timing or amounts of recoveries or costs that may be achieved or incurred through these resolution processes, and as such, we have not included any recoveries from these change orders and claims in our current estimated project loss.
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. These possible cost increases include extensions of the schedule to complete the job, lower than expected productivity levels, and performance issues with our subcontractors. 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 $47.6 million and $71.2 million as of June 30, 2017 and December 30, 2016, respectively. Refer to Note 14 – Discontinued Operations for additional details regarding projects reported within discontinued operations.
(3) Segment Information
In the first quarter of 2017, we implemented a new organizational structure to more fully align global operations with the Company’s client-centric strategy , resulting in three sectors: National Governments, Private, and State & Local Governments. Each of these sectors has been identified as a reportable operating segment.
Costs for corporate selling, general and administrative expenses, restructuring costs and amortization expense related to intangible assets have been allocated to each segment based on the estimated benefits provided by corporate functions. This allocation is primarily based upon metrics that reflect the proportionate volume of project-related activity and employee labor costs within each segment.
12
Certain financial information relating to the three and six months ended June 30, 2017 and June 24, 2016 for each segment is provided below. Prior year amounts have been revised to conform to the current year presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017 |
|
Three Months Ended June 24, 2016 |
||||||||||||||
|
|
Gross |
|
Equity in |
|
Operating |
|
Gross |
|
Equity in |
|
Operating |
||||||
($ in thousands) |
|
Revenue |
|
Earnings |
|
Income |
|
Revenue |
|
Earnings |
|
Income (Loss) |
||||||
National Governments |
|
$ |
481,484 |
|
$ |
11,153 |
|
$ |
14,903 |
|
$ |
482,186 |
|
$ |
4,931 |
|
$ |
7,011 |
Private |
|
|
302,923 |
|
|
454 |
|
|
10,150 |
|
|
330,441 |
|
|
307 |
|
|
12,883 |
State & Local Governments |
|
|
500,452 |
|
|
3,771 |
|
|
47,575 |
|
|
478,338 |
|
|
3,479 |
|
|
(33,945) |
Total |
|
$ |
1,284,859 |
|
$ |
15,378 |
|
$ |
72,628 |
|
$ |
1,290,965 |
|
$ |
8,717 |
|
$ |
(14,051) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017 |
|
Six Months Ended June 24, 2016 |
||||||||||||||
|
|
Gross |
|
Equity in |
|
Operating |
|
Gross |
|
Equity in |
|
Operating |
||||||
($ in thousands) |
|
Revenue |
|
Earnings |
|
Income |
|
Revenue |
|
Earnings |
|
Income (Loss) |
||||||
National Governments |
|
$ |
957,163 |
|
$ |
15,646 |
|
$ |
25,569 |
|
$ |
928,909 |
|
$ |
11,240 |
|
$ |
7,774 |
Private |
|
|
592,203 |
|
|
324 |
|
|
19,420 |
|
|
678,539 |
|
|
594 |
|
|
27,380 |
State & Local Governments |
|
|
975,926 |
|
|
6,769 |
|
|
57,090 |
|
|
970,527 |
|
|
5,936 |
|
|
(8,183) |
Total |
|
$ |
2,525,292 |
|
$ |
22,739 |
|
$ |
102,079 |
|
$ |
2,577,975 |
|
$ |
17,770 |
|
$ |
26,971 |
(4) Stockholders’ Equity
The changes in stockholders’ equity for the six months ended June 30, 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 |
|
(880) |
|
— |
|
|
(42,683) |
Shares issued in connection with stock-based compensation and employee benefit plans |
|
312 |
|
— |
|
|
17,302 |
Net income attributable to CH2M |
|
— |
|
— |
|
|
56,252 |
Other comprehensive income, net of tax |
|
— |
|
— |
|
|
38,174 |
Other comprehensive income attributable to noncontrolling interest, net of tax |
|
|
|
|
|
|
(542) |
Deconsolidation of a subsidiary's noncontrolling interest |
|
— |
|
— |
|
|
87,838 |
Income attributable to noncontrolling interests from continuing operations |
|
— |
|
— |
|
|
8,593 |
Loss attributable to noncontrolling interests from discontinued operations |
|
|
|
|
|
|
(60) |
Investment in affiliates, net |
|
— |
|
— |
|
|
1,676 |
Stockholders’ equity, June 30, 2017 |
|
24,580 |
|
4,822 |
|
$ |
612,088 |
Preferred Stock
As of June 30, 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
13
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 June 30, 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 six months ended June 30, 2017 and June 24, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 24, |
|
June 30, |
|
June 24, |
||||
(in thousands, except per share amounts) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
Numerator - basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
47,160 |
|
$ |
(5,658) |
|
$ |
64,926 |
|
$ |
18,187 |
Net loss from discontinued operations |
|
|
(531) |
|
|
(148,532) |
|
|
(141) |
|
|
(148,653) |
Net income (loss) |
|
|
46,629 |
|
|
(154,190) |
|
|
64,785 |
|
|
(130,466) |
Less: income attributable to noncontrolling interests from continuing operations |
|
|
(4,336) |
|
|
(4,348) |
|
|
(8,593) |
|
|
(4,819) |
Less: loss attributable to noncontrolling interests from discontinued operations |
|
|
— |
|
|
96,496 |
|
|
60 |
|
|
97,822 |
Net income (loss) attributable to CH2M |
|
|
42,293 |
|
|
(62,042) |
|
|
56,252 |
|
|
(37,463) |
Less: accrued dividends attributable to preferred stockholders |
|
|
5,654 |
|
|
3,612 |
|
|
9,643 |
|
|
6,176 |
Less: income allocated to preferred stockholders - basic |
|
|
6,372 |
|
|
— |
|
|
8,106 |
|
|
— |
Income (loss) available to common stockholders - basic and diluted |
|
$ |
30,267 |
|
$ |
(65,654) |
|
$ |
38,503 |
|
$ |
(43,639) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic |
|
|
24,664 |
|
|
25,993 |
|
|
24,810 |
|
|
26,065 |
Dilutive effect of common stock equivalents |
|
|
3 |
|
|
— |
|
|
5 |
|
|
— |
Diluted adjusted weighted-average common shares outstanding, assuming conversion of common stock equivalents |
|
|
24,667 |
|
|
25,993 |
|
|
24,815 |
|
|
26,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) from continuing operations per common share |
|
$ |
1.24 |
|
$ |
(0.41) |
|
$ |
1.55 |
|
$ |
0.60 |
Basic net loss from discontinued operations per common share |
|
|
(0.01) |
|
|
(2.12) |
|
|
— |
|
|
(2.27) |
Basic net income (loss) per common share |
|
$ |
1.23 |
|
$ |
(2.53) |
|
$ |
1.55 |
|
$ |
(1.67) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) from continuing operations per common share |
|
$ |
1.24 |
|
$ |
(0.41) |
|
$ |
1.55 |
|
$ |
0.60 |
Diluted net loss from discontinued operations per common share |
|
|
(0.01) |
|
|
(2.12) |
|
|
— |
|
|
(2.27) |
Diluted net income (loss) per common share |
|
$ |
1.23 |
|
$ |
(2.53) |
|
$ |
1.55 |
|
$ |
(1.67) |
For the three and six months ended June 30, 2017, options to purchase 1.8 million shares of common stock and 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 net losses for the three and six months ended June 24, 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 5.0 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
15
qualitative assessment begins with an understanding of the nature of the risks associated with the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and how they were marketed, and the parties involved in the design of the entity. All of the variable interests held by parties involved with the VIE are identified and a determination is made of which activities are most significant to the economic performance of the entity and which variable interest holder has the power to direct those activities. 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 June 30, 2017 and December 30, 2016, total assets of VIEs that were consolidated were $319.8 million and $220.3 million, respectively, and liabilities were $293.7 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. Additionally, o n July 3, 2017, because of the closing of the SNC-Lavalin Group Inc. 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 were the primary beneficiary of a joint venture and deconsolidated the partnership from our consolidated financial statements. Refer to Note 16 – Subsequent Events for additional details.
We held investments in unconsolidated VIEs and equity method investments related to continuing operations of $73.6 million and $66.3 million at June 30, 2017 and December 30, 2016, respectively. As of June 30, 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 June 30, 2017 and December 30, 2016, the total assets of VIEs related to continuing operations that were not consolidated were $433.6 million and $479.2 million, respectively, and total liabilities were $340.9 million and $304.9 million, respectively. As of June 30, 2017, total assets and liabilities of the unconsolidated VIE related to the Australian fixed-price Power EPC joint venture included in discontinued operations were $8.3 million and $175.2 million, respectively. These assets and liabilities consist almost entirely of working capital accounts associated with the performance of single contracts. The maximum exposure to losses is limited to the funding of any future losses incurred by those entities under their respective contracts with the project company.
(7) Goodwill and Intangible Assets
The following table presents the changes in goodwill by segment during the six months ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ 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 |
|
|
773 |
|
|
2,623 |
|
|
18,073 |
|
|
21,469 |
Balance as of June 30, 2017 |
|
$ |
13,526 |
|
$ |
149,536 |
|
$ |
336,159 |
|
$ |
499,221 |
The following table presents the changes in intangible assets by segment during the six months ended June 30, 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 |
|
|
(261) |
|
|
(1,958) |
|
|
(6,687) |
|
|
(8,906) |
Foreign currency translation |
|
|
18 |
|
|
887 |
|
|
473 |
|
|
1,378 |
Balance as of June 30, 2017 |
|
$ |
190 |
|
$ |
22,917 |
|
$ |
7,389 |
|
$ |
30,496 |
16
Intangible assets with finite lives consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Net finite-lived |
||
($ in thousands) |
|
Cost |
|
Amortization |
|
intangible assets |
|||
June 30, 2017 |
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
178,462 |
|
$ |
(147,966) |
|
$ |
30,496 |
Total finite-lived intangible assets |
|
$ |
178,462 |
|
$ |
(147,966) |
|
$ |
30,496 |
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 $4.7 million and $4.7 million for the three months ended June 30, 2017 and June 24, 2016, respectively, and $8.9 million and $9.5 million for the six months ended June 30, 2017 and June 24, 2016, respectively. All intangible assets are expected to be fully amortized in 2024.
As of June 30, 2017, the future estimated amortization expense related to these intangible assets was:
|
|
|
|
|
|
Amortization |
|
($ in thousands) |
|
Expense |
|
2017 (six months remaining) |
|
$ |
7,176 |
2018 |
|
|
4,332 |
2019 |
|
|
3,599 |
2020 |
|
|
3,599 |
2021 |
|
|
3,599 |
2022 |
|
|
3,599 |
Thereafter |
|
|
4,592 |
|
|
$ |
30,496 |
(8) Property, Plant and Equipment
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
June 30, |
|
December 30, |
||
($ in thousands) |
|
2017 |
|
2016 |
||
Land |
|
$ |
5,021 |
|
$ |
5,021 |
Building and land improvements |
|
|
105,817 |
|
|
107,140 |
Furniture and fixtures |
|
|
25,044 |
|
|
26,009 |
Computer and office equipment |
|
|
160,257 |
|
|
157,542 |
Field equipment |
|
|
127,378 |
|
|
130,681 |
Leasehold improvements |
|
|
77,283 |
|
|
75,492 |
|
|
|
500,800 |
|
|
501,885 |
Less: Accumulated depreciation |
|
|
(267,264) |
|
|
(255,289) |
Net property, plant and equipment |
|
$ |
233,536 |
|
$ |
246,596 |
Depreciation expense from continuing operations reflected in the consolidated statements of operations was $10.3 million and $10.7 million for the three months ended June 30, 2017 and June 24, 2016, respectively, and $21.1 million and $21.5 million for the six months ended June 30, 2017 and June 24, 2016, respectively.
(9) Fair Value of Financial Instruments
Cash and cash equivalents, client accounts receivable, unbilled revenue, accounts payable and accrued subcontractor costs and billings in excess of revenue are carried at cost, which approximates fair value due to their short maturities. Fair value of long ‑ term debt, including the current portion, is estimated based on Level 2 inputs, except the amount outstanding on the revolving credit facility for which the carrying value approximates fair value. Fair value is determined by discounting future cash flows using interest
17
rates available for issues with similar terms and average maturities. The estimated fair values of our financial instruments where carrying values do not approximate fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017 |
|
December 30, 2016 |
||||||||
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
||||
($ in thousands) |
|
Amount |
|
Value |
|
Amount |
|
Value |
||||
Second Lien Notes |
|
$ |
200,000 |
|
$ |
151,451 |
|
$ |
— |
|
$ |
— |
Equipment financing |
|
|
7,105 |
|
|
6,737 |
|
|
8,152 |
|
|
7,662 |
Note payable by consolidated joint venture |
|
$ |
2,486 |
|
$ |
2,329 |
|
$ |
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 June 30, 2017, we had forward foreign exchange contracts on major world currencies with varying durations, none of which extend beyond one year. As of June 30, 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 |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 24, |
|
June 30, |
|
June 24, |
||||
(in thousands) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
Unrealized (loss) gain from changes in derivative fair values |
|
$ |
(1,259) |
|
$ |
(775) |
|
$ |
(865) |
|
$ |
177 |
Realized gain (loss) from changes in derivative fair values |
|
$ |
854 |
|
$ |
(2,001) |
|
$ |
(852) |
|
$ |
(2,775) |
(10) Long-Term Debt
Our nonrecourse and other long-term debt consist of the following:
|
|
|
|
|
|
|
|
|
June 30, |
|
December 30, |
||
($ in thousands) |
|
2017 |
|
2016 |
||
Revolving Credit Facility, average rate of interest of 4.33% |
|
$ |
317,609 |
|
$ |
487,009 |
Second Lien Notes, net of $4.9 million of debt issuance costs. These notes bear interest of 10% due May 1 and November 1 annually |
|
|
195,089 |
|
|
— |
Equipment financing, due in monthly installments to September 2021, secured by equipment. These notes bear interest ranging from 0.22% to 3.29% |
|
|
7,105 |
|
|
8,152 |
Note payable by consolidated joint venture, due July 2019. This note bears interest at 6-month LIBOR plus 2.5% |
|
|
2,486 |
|
|
2,483 |
Other notes payable |
|
|
176 |
|
|
230 |
Total debt |
|
|
522,465 |
|
|
497,874 |
Less: current portion of debt |
|
|
2,231 |
|
|
2,242 |
Total long-term portion of debt |
|
$ |
520,234 |
|
$ |
495,632 |
As of June 30, 2017 and December 30, 2016, company-wide issued and outstanding letters of credit and bank guarantee facilities were $129.0 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 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; |
18
|
· |
|
Required CH2M to maintain, on a consolidated basis, a maximum consolidated first lien leverage ratio no greater than 3.00 x ; |
|
· |
|
Required CH2M to maintain a minimum consolidated fixed charge coverage ratio no less than 1.50x; |
|
· |
|
Restricts CH2M’s ability to repurchase its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock, and r equire s compliance with the terms of the Second Lien Indenture, which also limits certain restricted payment and participation in the employee stock ownership program as described below. |
The Credit Agreement contains c ustomary 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, merge or consolidate, and dispose of assets, in each case subject to customary exceptions for credit facilities of this size and type . Additionally, t he 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 June 30, 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 its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock. 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 repurchases of our common stock 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, 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 |
|
|
% |
From April 29, 2018 through April 28, 2019 |
|
|
% |
From April 29, 2019 through October 28, 2019 |
|
|
% |
From October 29, 2019 through April 28, 2020 (maturity date) |
|
|
% |
19
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 June 30, 2017 was 26.9% compared to 52.7% 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 six months ended June 30, 2017 was 27.1% compared to 16.0% on the loss for the same period in the prior year. The effective tax rate attributable to CH2M for the three months ended June 30, 2017 was lower compared to the same period in the prior year and higher for the six months ended June 30, 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 due to 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, repatriation of foreign earnings, cash, and cash equivalents, and cross border adjustability. Additionally, our effective tax rate continues to be negatively impacted by the effect of disallowed portions of meals and entertainment expenses.
As of June 30, 2017 and December 30, 2016, we had $6.1 million and $8.0 million, respectively, recorded as a liability for uncertain tax positions, included in which was approximately $1.7 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 six months ended June 30, 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 June 30, 2017. Overall, as of June 30, 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 $100.0 million.
2014 Restructuring Plan. In September 2014, the Company commenced certain restructuring activities in order to achieve important business objectives, including reducing overhead costs, improving efficiency, and reducing risk (“2014 Restructuring Plan”). These restructuring activities, which continued into 2015, included such items as a voluntary retirement program, workforce reductions, facilities consolidations and closures, and evaluation of certain lines of business . The restructuring activities under the
20
2014 Restructuring Plan were substantially complete as of December 25, 2015, and as such no restructuring costs were incurred during the three and six months ended June 24, 2016.
The changes in the provision for the restructuring activities for the six months ended June 30, 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Restructuring Plan |
|
2016 Restructuring Plan |
|
|
||||||||||||
($ 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 |
|
|
— |
|
|
(1,958) |
|
|
(9,482) |
|
|
(4,262) |
|
|
(412) |
|
|
(16,114) |
Non-cash settlements |
|
|
— |
|
|
— |
|
|
— |
|
|
(453) |
|
|
— |
|
|
(453) |
Balance, June 30, 2017 |
|
$ |
1,015 |
|
$ |
12,037 |
|
$ |
912 |
|
$ |
18,776 |
|
$ |
— |
|
$ |
32,740 |
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 Non ‑ U.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 six months ended June 30, 2017 and June 24, 2016 are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||||||||
|
|
June 30, 2017 |
|
June 24, 2016 |
||||||||
|
|
U.S. |
|
Non-U.S. |
|
U.S. |
|
Non-U.S. |
||||
($ in thousands) |
|
Pension Plans |
|
Pension Plans |
|
Pension Plans |
|
Pension Plans |
||||
Service cost |
|
$ |
88 |
|
$ |
1,079 |
|
$ |
671 |
|
$ |
1,378 |
Interest cost |
|
|
2,734 |
|
|
6,236 |
|
|
2,954 |
|
|
10,487 |
Expected return on plan assets |
|
|
(3,016) |
|
|
(9,807) |
|
|
(2,921) |
|
|
(8,822) |
Amortization of prior service credits |
|
|
(14) |
|
|
(2,555) |
|
|
(188) |
|
|
— |
Recognized net actuarial loss |
|
|
1,907 |
|
|
2,676 |
|
|
1,629 |
|
|
693 |
Net expense (income) included in current income |
|
$ |
1,699 |
|
$ |
(2,371) |
|
$ |
2,145 |
|
$ |
3,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||||||||
|
|
June 30, 2017 |
|
June 24, 2016 |
||||||||
|
|
U.S. |
|
Non-U.S. |
|
U.S. |
|
Non-U.S. |
||||
($ in thousands) |
|
Pension Plans |
|
Pension Plans |
|
Pension Plans |
|
Pension Plans |
||||
Service cost |
|
$ |
177 |
|
$ |
2,153 |
|
$ |
1,342 |
|
$ |
2,755 |
Interest cost |
|
|
5,467 |
|
|
12,295 |
|
|
5,908 |
|
|
20,964 |
Expected return on plan assets |
|
|
(6,033) |
|
|
(19,322) |
|
|
(5,842) |
|
|
(17,636) |
Amortization of prior service credits |
|
|
(27) |
|
|
(5,034) |
|
|
(376) |
|
|
— |
Recognized net actuarial loss |
|
|
3,815 |
|
|
5,270 |
|
|
3,258 |
|
|
1,386 |
Net expense (income) included in current income |
|
$ |
3,399 |
|
$ |
(4,638) |
|
$ |
4,290 |
|
$ |
7,469 |
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
21
postretirement medical benefits on a pay ‑ as ‑ you ‑ go 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 six months ended June 30, 2017 and June 24, 2016 are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||||||||
|
|
June 30, 2017 |
|
June 24, 2016 |
||||||||
|
|
Non-Qualified |
|
Postretirement |
|
Non-Qualified |
|
Postretirement |
||||
($ in thousands) |
|
Pension Plan |
|
Benefit Plans |
|
Pension Plan |
|
Benefit Plans |
||||
Service cost |
|
$ |
— |
|
$ |
162 |
|
$ |
— |
|
$ |
206 |
Interest cost |
|
|
9 |
|
|
406 |
|
|
13 |
|
|
497 |
Amortization of prior service credits |
|
|
— |
|
|
(95) |
|
|
— |
|
|
(96) |
Recognized net actuarial gain |
|
|
— |
|
|
(72) |
|
|
— |
|
|
(3) |
Net expense included in current income |
|
$ |
9 |
|
$ |
401 |
|
$ |
13 |
|
$ |
604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||||||||
|
|
June 30, 2017 |
|
June 24, 2016 |
||||||||
|
|
Non-Qualified |
|
Postretirement |
|
Non-Qualified |
|
Postretirement |
||||
($ in thousands) |
|
Pension Plan |
|
Benefit Plans |
|
Pension Plan |
|
Benefit Plans |
||||
Service cost |
|
$ |
— |
|
$ |
325 |
|
$ |
— |
|
$ |
413 |
Interest cost |
|
|
19 |
|
|
811 |
|
|
27 |
|
|
994 |
Amortization of prior service credits |
|
|
— |
|
|
(191) |
|
|
— |
|
|
(192) |
Recognized net actuarial gain |
|
|
— |
|
|
(143) |
|
|
— |
|
|
(6) |
Net expense included in current income |
|
$ |
19 |
|
$ |
802 |
|
$ |
27 |
|
$ |
1,209 |
(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 six months ended June 30, 2017 and June 24, 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. The negative book value of our 50% retained interest in the noncontrolling investment in the joint venture partnership as of January 24, 2017 was approximately $86.0 million.
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
22
the amount of the Consortium’s contract and the amount actually spent, which the Consortium alleges is likely to exceed $665.5 million. In the alternative, the Consortium also asserts that the Contractor owes for certain contract claims, in amounts to be determined through the arbitration. If we are ultimately unsuccessful in our claim that the contract was repudiated by our client, the Consortium could be liable for the completion of the project by a separate contractor and other related damages. The Contractor has claimed that the Consortium’s termination was not valid, and we anticipate that the Contractor will file counter claims. We expect a lengthy, multi-year arbitration process and at this time we are unable to predict the timing of resolution or the outcome of disputes. While we continue to assess the possible impacts to our financial statements, the ultimate outcome of the dispute will depend upon contested issues of fact and law. These additional costs could be materially adverse to our results of operations, cash flow and financial condition in the future. Management believes the existing accruals will be sufficient for any known or expected costs which can be estimated at this time.
The following table presents a reconciliation of the major classes of line items constituting the net income (loss) from discontinued operations related the fixed-price Power EPC business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 24, |
|
June 30, |
|
June 24, |
||||
($ in thousands) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
Gross revenue |
|
$ |
1,368 |
|
$ |
(40,682) |
|
$ |
9,204 |
|
$ |
15,716 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services |
|
|
(1,889) |
|
|
(149,188) |
|
|
(6,365) |
|
|
(204,515) |
Selling, general and administrative |
|
|
(243) |
|
|
(1,199) |
|
|
(3,050) |
|
|
(2,426) |
Loss from discontinued operations before provision for income taxes |
|
|
(764) |
|
|
(191,069) |
|
|
(211) |
|
|
(191,225) |
Benefit for income taxes related to discontinued operations |
|
|
233 |
|
|
42,537 |
|
|
70 |
|
|
42,572 |
Net loss from discontinued operations |
|
$ |
(531) |
|
$ |
(148,532) |
|
$ |
(141) |
|
$ |
(148,653) |
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:
|
|
|
|
|
|
|
|
|
June 30, |
|
December 30, |
||
($ in thousands) |
|
2017 |
|
2016 |
||
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
$ |
9,664 |
Client accounts |
|
|
753 |
|
|
1,787 |
Unbilled revenue |
|
|
74 |
|
|
972 |
Other receivables, net |
|
|
— |
|
|
16 |
Prepaid expenses and other current assets |
|
|
— |
|
|
2,010 |
Current assets of discontinued operations |
|
|
827 |
|
|
14,449 |
Property, plant and equipment, net |
|
|
— |
|
|
1,836 |
Total assets of discontinued operations |
|
$ |
827 |
|
$ |
16,285 |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable and accrued subcontractor costs |
|
$ |
— |
|
$ |
20,317 |
Billings in excess of revenue |
|
|
1,239 |
|
|
(933) |
Other accrued liabilities |
|
|
— |
|
|
188,721 |
Current liabilities of discontinued operations |
|
|
1,239 |
|
|
208,105 |
Investments in unconsolidated affiliates |
|
|
77,920 |
|
|
— |
Total liabilities of discontinued operations |
|
$ |
79,159 |
|
$ |
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
23
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 June 30, 2017 and December 30, 2016, accruals for potential estimated claim liabilities were $5.0 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 Civilian Board of Contract Appeals on May 30, 2014. The trial was held from April 12 through 28, 2016, and the post-trial briefing phase is now complete. We are awaiting the decision from the Board. 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 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 $180.0 million. QD’s alternative damage amount for decennial liability under Qatari law (a form of strict liability) is approximately $127.0 million. We intend to vigorously defend against QD’s claims, and to assert counterclaims against QD, including without limitation counterclaims for 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. We will also assert the defense that the Agreement contains a limitation of liability provision capping any negligence damages against Halcrow of approximately $10.0 million.
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 has claimed that the Consortium’s termination was not valid. 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.
24
(16) Subsequent Events
On July 3, 2017, because of the closing of the acquisition of WS Atkins plc. by SNC-Lavalin Group Inc., both of whom were partners with CH2M in a joint venture through which we are executing a large Canadian nuclear project, we believe that we may no longer be the primary beneficiary of the joint venture, and we expect to deconsolidate the joint venture from our consolidated financial statements. As of June 30, 2017, total assets and liabilities of the consolidated joint venture were $225.1 million and $223.5 million, respectively, and the revenue of the consolidated joint venture for the three and six months ended June 30, 2017 was $155.3 million and $323.5 million, respectively. Net income attributable to CH2M will not be impacted as a result of the deconsolidation.
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.
Each outstanding share of our common stock will be cancelled and converted in the merger 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. We anticipate that the transaction will be consummated prior to the end of calendar 2017. However, we cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if the merger will close.
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 the Merger Agreement with Jacobs. 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.
Each outstanding share of our common stock will be cancelled and converted in the merger 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. We anticipate that the transaction will be consummated prior to the end of calendar 2017. However, we cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if the merger will close.
26
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 six months ended June 30, 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 June 30, 2017. Overall, as of June 30, 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 six months ended June 30, 2017 and June 24, 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 June 30, 2017 and June 24, 2016
On a consolidated basis, our gross revenue decreased by $6.1 million, or 0.5%, and our consolidated operating income increased $86.7 million for the three months ended June 30, 2017 as compared to June 24, 2016. The following table summarizes our results of operation by segment for the three months ended June 30, 2017 as compared to the three months ended June 24, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
||||||||||||||
|
|
June 30, 2017 |
|
June 24, 2016 |
|
Change |
||||||||||||
|
|
Gross |
|
Operating |
|
Gross |
|
Operating |
|
Gross |
|
Operating |
||||||
($ in thousands) |
|
Revenue |
|
Income (Loss) |
|
Revenue |
|
Income (Loss) |
|
Revenue |
|
Income (Loss) |
||||||
National Governments |
|
$ |
481,484 |
|
$ |
14,903 |
|
$ |
482,186 |
|
$ |
7,011 |
|
$ |
(702) |
|
$ |
7,892 |
Private |
|
|
302,923 |
|
|
10,150 |
|
|
330,441 |
|
|
12,883 |
|
|
(27,518) |
|
|
(2,733) |
State & Local Governments |
|
|
500,452 |
|
|
47,575 |
|
|
478,338 |
|
|
(33,945) |
|
|
22,114 |
|
|
81,520 |
Total |
|
$ |
1,284,859 |
|
$ |
72,628 |
|
$ |
1,290,965 |
|
$ |
(14,051) |
|
$ |
(6,106) |
|
$ |
86,679 |
National Governments
Our National Governments sector gross revenue was relatively flat for the three months ended June 30, 2017 as compared to the three months ended June 24, 2016, experiencing a slight decrease of $0.7 million, or 0.1%. Revenue on a domestic federal consulting project related to nuclear remediation increased approximately $36.0 million due to scope expansion and increased mobilization of staff. However, this was largely offset by comparatively lower volume of operations on a large Canadian nuclear project in a consolidated joint venture and the winding down of a large environmental and nuclear consulting project in the United Kingdom. Additionally, National Governments consulting revenue in the United Kingdom was negatively impacted by the effects of a weaker British Pound.
For the three months ended June 30, 2017 as compared to the three months ended June 24, 2016, National Governments operating income increased $7.9 million primarily as a result of the reduction in its selling, general and administrative costs due to significant efficiencies gained from the 2016 Restructuring Plan realized in the three months ended June 30, 2017 related to staffing
27
reductions, better client-alignment and utilization of our workforce. Additionally, selling, general and administrative costs decreased due to reduced business development costs for the three months ended June 30, 2017 as compared to the three months ended June 24, 2016 primarily related to lower volumes of United States federal government procurements, which have been slower to materialize in 2017 as compared to 2016.
On July 3, 2017, because of the closing of the acquisition of WS Atkins plc. by SNC-Lavalin Group Inc., both of whom were partners with CH2M in a joint venture through which we are executing a large Canadian nuclear project within our National Governments sector, we believe that we may no longer be the primary beneficiary of the joint venture, and we expect to deconsolidate the joint venture from our consolidated financial statements. For the three months ended June 30, 2017 and June 24, 2016, revenue of the consolidated joint venture was $155.3 million and $171.1 million, respectively. Operating income of the consolidated joint venture was insignificant for each of the three months ended June 30, 2017 and June 24, 2016.
Private
Our Private sector experienced a $27.5 million, or 8%, decrease in revenue for the three months ended June 30, 2017 as compared to the three months ended June 24, 2016. Revenue primarily declined due to the decreased volume of oil and gas activities on the North Slope in Alaska, including approximately $28.5 million related to a large oil and gas construction project which was substantially completed during the second quarter of 2016, as well as reduced volume related to a large oil and gas program management project in the Middle East. The decline in revenue from the continued challenges in the oil and gas industry were partially offset by increased volume within our electronics business in the industrial and advanced technology industry.
Private operating income decreased $2.7 million, or 21%, for the three months ended June 30, 2017 as compared to the three months ended June 24, 2016. The decrease in operating income was primarily related to the reduction in project volumes related to the oil and gas industry as discussed above. The decreased results from operations were partially offset by reduced selling, general and administrative costs in the three months ended June 30, 2017 as compared to the three months ended June 24, 2016 due to efficiencies gained from the various restructuring plans and continuing efforts to reduce overhead as well as reduced business development costs consistent with reduced opportunities in the depressed oil and gas industry.
State and Local Governments
Our State and Local Governments sector’s revenue increased $22.1 million, or 5%, in the three months ended June 30, 2017 as compared to the three months ended June 24, 2016. Revenue increased due to overall volume growth in our consulting business, primarily attributable to two rail transportation projects in the United Kingdom and Middle East as well as a water reclamation project in the Asia Pacific region. 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 declining volumes of design-build projects in the United States.
State and Local Governments operating income increased $81.5 million for the three months ended June 30, 2017 as compared to the three months ended June 24, 2016. The increase was predominantly caused by cost growth resulting in changes in estimated costs of $60.0 million to complete a fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States in the three months ended June 24, 2016. We did not incur additional cost growth during the three months ended June 30, 2017. Refer to Note 2 – Changes in Project-Related Estimates of the Notes to Consolidated Financial Statements for additional detail. While management believes that it has recorded an appropriate provision to complete this project, our project team may determine that it will incur additional costs and losses to complete the project. These possible cost increases include extensions of the schedule to complete the job, lower than expected productivity levels, and performance issues with our subcontractors. 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 consulting business 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.
28
Results of Operations for the six months ended June 30, 2017 and June 24, 2016
On a consolidated basis, our gross revenue decreased by $52.7 million, or 2%, and our consolidated operating income increased $75.1 million for the six months ended June 30, 2017 as compared to June 24, 2016. The following table summarizes our results of operation by segment for the six months ended June 30, 2017 as compared to the six months ended June 24, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
||||||||||||||
|
|
June 30, 2017 |
|
June 24, 2016 |
|
Change |
||||||||||||
|
|
Gross |
|
Operating |
|
Gross |
|
Operating |
|
Gross |
|
Operating |
||||||
($ in thousands) |
|
Revenue |
|
Income (Loss) |
|
Revenue |
|
Income (Loss) |
|
Revenue |
|
Income (Loss) |
||||||
National Governments |
|
$ |
957,163 |
|
$ |
25,569 |
|
$ |
928,909 |
|
$ |
7,774 |
|
$ |
28,254 |
|
$ |
17,795 |
Private |
|
|
592,203 |
|
|
19,420 |
|
|
678,539 |
|
|
27,380 |
|
|
(86,336) |
|
|
(7,960) |
State & Local Governments |
|
|
975,926 |
|
|
57,090 |
|
|
970,527 |
|
|
(8,183) |
|
|
5,399 |
|
|
65,273 |
Total |
|
$ |
2,525,292 |
|
$ |
102,079 |
|
$ |
2,577,975 |
|
$ |
26,971 |
|
$ |
(52,683) |
|
$ |
75,108 |
National Governments
Our National Governments sector had a $28.2 million, or 3%, increase in revenue for the six months ended June 30, 2017 as compared to the six months ended June 24, 2016. R evenue on a domestic federal consulting project related to nuclear remediation increased approximately $57.0 million primarily as a result of scope expansion and increased mobilization of staff. Additionally, approximately $9.0 million of the increase in revenue was caused by higher volumes of operations on a large Canadian nuclear project in a consolidated joint venture. These increases in revenue were partially offset by the winding down of a large environmental and nuclear consulting project in the United Kingdom. Moreover, revenue was negatively impacted by a weaker British Pound on consulting revenue in the United Kingdom .
For the six months ended June 30, 2017 as compared to the six months ended June 24, 2016, National Governments operating income increased $17.8 million as a result of the above described increases in revenues as well as the reduction in its selling, general and administrative costs due to significant efficiencies gained from the 2016 Restructuring Plan realized in the six months ended June 30, 2017 related to staffing reductions, better client-alignment and utilization of our workforce. Additionally, selling, general and administrative costs decreased due to reduced business development costs for the six months ended June 30, 2017 as compared to the six months ended June 24, 2016 primarily related to lower volumes of United States federal government procurements, which have been slower to materialize in 2017 as compared to 2016.
On July 3, 2017, because of the closing of the acquisition of WS Atkins plc. by SNC-Lavalin Group Inc., both of whom were partners with CH2M in a joint venture through which we are executing a large Canadian nuclear project within our National Governments sector, we believe that we may no longer be the primary beneficiary of the joint venture, and we expect to deconsolidate the joint venture from our consolidated financial statements. For the six months ended June 30, 2017 and June 24, 2016, revenue of the consolidated joint venture was $323.5 million and $314.4 million, respectively. Operating income of the consolidated joint venture was insignificant for each of the six months ended June 30, 2017 and June 24, 2016.
Private
Our Private sector experienced an $86.3 million, or 13%, decrease in revenue for the six months ended June 30, 2017 as compared to the six months ended June 24, 2016. Revenue primarily declined due to the decreased volume of oil and gas activities on the North Slope in Alaska, including approximately $42.2 million related to a large oil and gas construction project which was substantially completed during the second quarter of 2016. This activity was not replaced with a similar volume in 2017 due to the continued market challenges within the oil and gas industry. Additionally, within our oil, gas and chemicals business, several large consulting projects in Latin America and the Middle East as well as multiple domestic operations and maintenance projects achieved substantial completion in 2016 or experienced reduced volume of activity or scope of services in 2017, resulting in a decrease in revenue of approximately $38.1 million. The remaining decrease in revenue was caused by lower volumes of consulting services within our industrial and advanced technology business in Asia during the first half of 2017 as compared to the first half of 2016.
Private operating income decreased $8.0 million, or 29%, for the six months ended June 30, 2017 as compared to the six months ended June 24, 2016. The decrease in operating income was primarily related to the reduction in project volumes related to the oil, gas, and chemicals business as discussed above. The decreased results from operations were partially offset by reduced selling, general and administrative costs in the six months ended June 30, 2017 as compared to the six months ended June 24, 2016 due to efficiencies gained from the various restructuring plans and continuing efforts to reduce overhead as well as reduced business development costs consistent with reduced opportunities in the depressed oil and gas industry.
29
State and Local Governments
Our State and Local Governments sector’s revenue increased $5.4 million, or 1%, in the six months ended June 30, 2017 as compared to the six months ended June 24, 2016. Revenue increased due to overall volume growth in our consulting business, primarily attributable to two rail transportation projects in the United Kingdom and Middle East as well as a water reclamation project in the Asia Pacific region. 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 s ubstantial completion of two design-build-operate contracts for water treatment facilities in the western United States, which were not replaced with similar projects .
State and Local Governments operating income increased $65.3 million for the six months ended June 30, 2017 as compared to the six months ended June 24, 2016. The increase was predominantly caused by cost growth resulting in changes in estimated costs to complete a fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States of $60.0 million in the six months ended June 24, 2016 as compared to $23.5 million in the six months ended June 30, 2017. Refer to Note 2 – Changes in Project-Related Estimates of the Notes to Consolidated Financial Statements for additional detail. While management believes that it has recorded an appropriate provision to complete this project, our project team may determine that it will incur additional costs and losses to complete the project. These possible cost increases include extensions of the schedule to complete the job, lower than expected productivity levels, and performance issues with our subcontractors. 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 consulting business 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 June 30, 2017 was 26.9% compared to 52.7% 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 six months ended June 30, 2017 was 27.1% compared to 16.0% on the loss for the same period in the prior year. The effective tax rate attributable to CH2M for the three months ended June 30, 2017 was lower compared to the same period in the prior year and higher for the six months ended June 30, 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 due to 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, repatriation of foreign earnings, cash, and cash equivalents, and cross border adjustability. Additionally, our effective tax rate continues to be negatively impacted by the effect of disallowed portions of meals and entertainment expenses.
Discontinued Operations
In connection with our 2014 Restructuring Plan, we elected to exit the fixed-price Power EPC business. 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 six months ended June 30, 2017 and June 24, 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
30
partnership from our consolidated financial statements. The negative book value of our 50% retained interest in the noncontrolling investment in the joint venture partnership as of January 24, 2017 was approximately $86.0 million.
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 we are ultimately unsuccessful in our claim that the contract was repudiated by our client, 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 June 30, 2017 and December 30, 2016, cash held in foreign bank accounts totaled $92.1 million and $108.7 million, respectively, of which $9.7 million as of 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 June 30, 2017 and December 30, 2016, cash and cash equivalents held in our consolidated joint ventures and reflected on the consolidated balance sheets totaled $35.9 million and $46.6 million, respectively.
During the six months ended June 30, 2017, cash provided by operations was $33.0 million as compared to cash used in operations of $112.4 million in the six months ended June 24, 2016. The $145.5 million improvement in cash flows from operations in the six months ended June 30, 2017 as compared to the six months ended June 24, 2016 primarily resulted from the $99.5 million decrease in cash used from discontinued operations combined with a $46.7 million increase in net income from continuing operations.
For the six months ended June 30, 2017, changes in working capital components resulted in a $82.4 million decrease to cash flow from operations, primarily as a result of reduced accounts payable and accrued subcontractor costs of $31.0 million caused by lower volumes of subcontractor activity and changes in billings in excess of revenue of $19.3 million. Additionally, other accrued liabilities decreased by $19.8 million primarily due to progress toward completion on the fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States, which reduced the outstanding loss
31
provision on the project. Cash used from discontinued operations of $14.2 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 six months ended June 30, 2017, we made payments of $16.1 million for restructuring costs related to the 2016 Restructuring Plan and 2014 Restructuring Plan.
Cash used in investing activities was $28.8 million for the six months ended June 30, 2017 as compared to $88.2 million for the six months ended June 24, 2016. A significant factor contributing to change in cash used in investing activities was the $58.4 million decrease in capital expenditures in the six months ended June 30, 2017 as compared to the six months ended June 24, 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 six months ended June 30, 2017, we received working capital repayments from our unconsolidated joint ventures of $0.9 million as compared to $6.7 million for the six months ended June 24, 2016. These repayments are offset by additional investments made in our unconsolidated joint ventures, which were $13.9 million and $12.3 million for the six months ended June 30, 2017 and June 24, 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 six months ended June 30, 2017 as compared to $0.2 million of capital expenditures for our fixed-price Power EPC business in the six months ended June 24, 2016.
Cash used in financing activities was $19.0 million in the six months ended June 30, 2017 as compared to cash provided by financing activities of $159.9 million for the six months ended June 24, 2016. The change in financing cash flows was primarily caused by the net borrowings on long-term debt of $24.3 million for the six months ended June 30, 2017 as compared to $93.3 million for the six months ended June 24, 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 a significant impact on our net borrowings on long-term debt. There was a $33.7 million decrease in cash used in financing activities related to repurchases of common stock during the six months ended June 30, 2017 as compared to the six months ended June 24, 2016. Additionally, net cash provided by financing activities from discontinued operations decreased $44.1 million in the six months ended June 30, 2017 as compared to the six months ended June 24, 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.
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; |
|
· |
|
Restricts CH2M’s ability to repurchase its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock, and r equire s compliance with the terms of the Second Lien Indenture, which also limits certain restricted payment and participation in the employee stock ownership program as described below. |
At June 30, 2017, we had $317.6 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 4.33% as of June 30, 2017. At June 30, 2017 company-wide issued and outstanding letters of credit, and bank guarantee facilities of $129.0 million were outstanding, compared to $134.2 million at December 30, 2016. Additionally, t he 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. O ur remaining unused borrowing capacity under the Credit Facility was over $400.0 million as of June 30, 2017.
32
As of June 30, 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 its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock. 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 repurchases of our common stock 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, 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 |
|
|
% |
From April 29, 2018 through April 28, 2019 |
|
|
% |
From April 29, 2019 through October 28, 2019 |
|
|
% |
From October 29, 2019 through April 28, 2020 (maturity date) |
|
|
% |
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.
33
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.
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 June 30, 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
34
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 June 30, 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 .
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.
35
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 June 30, 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 June 30, 2017, the outstanding balance on the credit facility was $317.6 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 $3.2 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.
As of June 30, 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 June 30, 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.
36
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
Management has developed a plan with the oversight of the Audit Committee of the Board of Directors to remediate these internal control deficiencies, although remediation actions may evolve as the controls are implemented and tested for operating effectiveness:
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
|
· |
|
Developing 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. |
|
· |
|
Finalized the development 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. |
|
· |
|
Delivering training for personnel in key roles on responsibilities for these controls. |
Deficient control related to the evaluation of project cost estimates not updated in the last month of a reporting period
|
· |
|
Finalized the development 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. |
|
· |
|
Delivering 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. |
|
· |
|
Delivering 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 June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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
37
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.
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 Civilian Board of Contract Appeals on May 30, 2014. The trial was held from April 12 through 28, 2016, and the post-trial briefing phase is now complete. We are awaiting the decision from the Board. 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 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 $180.0 million. QD’s alternative damage amount for decennial liability under Qatari law (a form of strict liability) is approximately $127.0 million. We intend to vigorously defend against QD’s claims, and to assert counterclaims against QD, including without limitation counterclaims for 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. We will also assert the defense that the Agreement contains a limitation of liability provision capping any negligence damages against Halcrow of approximately $10.0 million.
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 has claimed that the Consortium’s termination was not valid. 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.
38
The following risk factors update and supplement the risk factors set forth in our Annual Report on Form 10-K for the year ended December 30, 2016.
Before making an investment decision with respect to our common stock, you should carefully consider these factors, in addition to the other risk factors set forth in our Annual Report Form 10-K for the year ended December 30, 2016, as well as the other financial and business disclosures contained in our current and periodic reports filed with the SEC.
Risks Related to Our Pending Acquisition by Jacobs
The announcement and pendency of the Merger Agreement with Jacobs may have an adverse impact on our business.
Our pending acquisition by Jacobs could have an adverse impact on our revenue in the near term. While we are attempting to address this risk through communications with our clients, current and prospective clients may be reluctant to move forward on projects with us due to potential uncertainty about the direction of our business. Additionally, we are subject to additional risks in connection with the announcement and pendency of the merger, including:
|
· |
|
Potential adverse effects on our relationships with our current business partners, or those with which we are seeking to establish business relationships; |
|
· |
|
The restrictions imposed on our business and operations pursuant to certain covenants set forth in the Merger Agreement, which may prevent us from pursuing certain opportunities without Jacobs’ approval; |
|
· |
|
We may forego opportunities we might otherwise pursue absent the Merger Agreement; |
|
· |
|
Potential adverse effects on our ability to attract, recruit, retain and motivate current and prospective employees who may be uncertain about their future roles and relationships with us following the completion of the merger; and |
|
· |
|
The diversion of our employees’ and management’s attention due to activities related to the transactions contemplated by the Merger Agreement. |
We intend to file a definitive proxy statement and other relevant materials in connection with the Merger Agreement and the merger. The definitive proxy statement will be sent or given to our stockholders. We urge our stockholders to read the proxy statement and the other relevant materials because they contain important information about the transaction, including, but not limited to, other risks relating to the transaction.
The failure of our pending acquisition by Jacobs to be completed may adversely impact our business.
Completion of our pending acquisition by Jacobs is subject to certain customary conditions, including, adoption of the Merger Agreement by CH2M stockholders, approval of the listing of the shares of Jacobs common stock to be issued in the Merger on the New York Stock Exchange, receipt of required antitrust approvals and effectiveness of Jacobs’ registration statement on Form S-4 registering the shares to be issued in connection with the Merger. There can be no assurance that these conditions to the completion of the transaction will be satisfied in a timely manner or at all. In addition, other factors, such as Jacobs’ ability to obtain the debt financing it needs to consummate the transaction, may affect when and whether the merger will occur. If the acquisition is not completed, we may suffer consequences that could adversely affect our business, results of operations and share price, including the following:
|
· |
|
We could be required to pay a termination fee of up to approximately $85.5 million to Jacobs under certain circumstances as described in the Merger Agreement; |
|
· |
|
We could be required to reimburse Jacobs for its out-of-pocket transaction expenses, up to $15.0 million, in the event our stockholders fail to approve the transaction; |
|
· |
|
We would have incurred significant costs in connection with the acquisition that we would be unable to recover; |
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· |
|
We may be subject to legal proceedings related to the acquisition; |
|
· |
|
The failure of the acquisition to be consummated may result in negative publicity and a negative impression of us in the investment community; |
|
· |
|
Any disruptions to our business resulting from the announcement and pendency of the acquisition, including any adverse changes in our relationships with our customers, suppliers and employees, may continue or intensify in the event the merger is not consummated; |
|
· |
|
We may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures; and, |
39
|
· |
|
We may experience a departure of employees. |
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 six months ended June 30, 2017.
Issuer Purchases of Equity Securities
The following table covers the purchases of our common shares by our company not previously reported during the six months ended June 30, 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 |
|
April |
|
— |
|
$ |
— |
|
— |
|
— |
May |
|
— |
|
|
— |
|
— |
|
— |
June (a) |
|
353,467 |
|
|
50.69 |
|
— |
|
— |
Total |
|
353,467 |
|
$ |
50.69 |
|
— |
|
— |
|
(a) |
|
Shares purchased by CH2M in the Internal Market. |
40
* Filed herewith
41
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: August 8, 2017 |
/s/ GARY L. MCARTHUR |
|
Gary L. McArthur |
|
Chief Financial Officer |
42
Exhibit 10.2
CH2M HILL Companies, Ltd.
Amended and Restated Long Term Incentive Plan
ARTICLE I
INTRODUCTION
|
1.1 |
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Establishment . CH2M HILL Companies, Ltd., a Delaware corporation, hereby amends and restates the CH2M HILL Companies, Ltd. Long Term Incentive Plan (LTIP) effective February 20, 2017 to award incentive compensation to eligible Participants. This Plan amends, restates, and supersedes the CH2M HILL Companies, Ltd. Amended and Restated Long Term Incentive Plan dated February 11, 2016 and applies to Awards granted on or after February 20, 2017. Awards granted prior to February 20, 2017 shall remain subject to the terms of the LTIP as in effect at the time of grant. |
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1.2 |
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Purposes . The purposes of the Plan are to: |
● Reward a limited group of executives and senior leaders for the creation of value in the organization through the achievement of financial and/or strategic goals, and/or
● Provide financial incentives to Plan Participants to incentivize their contribution to the annual and long-term financial performance of the Company, thereby increasing shareholder value.
ARTICLE II
DEFINITIONS
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2.1 |
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Affiliate means any entity controlling, controlled by or under common control with the Company or any entity of which the Company directly or indirectly owns at least 20% of the equity and whose employees, directors, officers or consultants are selected by either the Committee or the Board to participate in the Plan. |
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2.2 |
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Award means a grant of Stock Instruments and/or cash under the Plan. |
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2.3 |
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Board means the Board of Directors of the Company. |
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2.4 |
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Cause means unless otherwise provided in a Grant Notice, (a) “Cause” as defined in any individual employment agreement to which the applicable Participant and the Plan Sponsor are parties, or (b) if there is no such individual employment agreement or if it does not define Cause: (i) commission of (A) a felony (or its equivalent in a non-United States jurisdiction) or (B) other conduct of a criminal nature that has or is likely to have a material adverse effect on the reputation or standing in the community of the Plan Sponsor or an Affiliate or that legally prohibits the Participant from working for the Plan Sponsor or any Affiliate; (ii) breach by the Participant of a regulatory rule that adversely affects the Participant’s ability to perform the Participant’s duties to the Plan Sponsor and the Affiliates; (iii) dishonesty in the course of fulfilling the Participant’s employment duties; (iv) any material breach by the Participant of any provision of any agreement or understanding between the Plan Sponsor or an Affiliate and the Participant regarding the terms of the Participant’s service as an employee or other service provider of the Plan Sponsor or an Affiliate, including the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee or other service provider of the Plan Sponsor or an Affiliate, other than as a result of having a Disability, or a breach of any applicable invention assignment, confidentiality or other restrictive covenant agreement or similar agreement between the Plan Sponsor or an Affiliate and the Participant; or (iv) any other misconduct by the Participant that is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Plan Sponsor or an Affiliate. |
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2.5 |
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CEO means Chief Executive Officer of CH2M HILL Companies, Ltd. |
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2.6 |
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Change in Control. For purposes of the Plan, a Change in Control will occur if any one of the following events occurs: |
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a. |
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Any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of the total fair market value of Company stock. However, if any one person or more than one person acting as a group, owns more than 50% of the total fair market value of Company stock, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the Company (or to cause a change in the effective control of the Company). |
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b. |
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There is a change in the effective control of the Company. A change in the effective control of the Company occurs on the date that either: |
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i. |
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Any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company that represents 30% or more of the total voting power of Company stock; or |
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ii. |
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a majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. |
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c. |
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Any one person, or more than one person acting as a group, acquires ownership of all or substantially all of the assets of CH2M HILL Companies, Ltd. |
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d. |
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The stockholders of the Company approve a plan of liquidation or dissolution of CH2M HILL Companies, Ltd. and such transaction is consummated. |
For purposes of this definition “persons acting as a group” shall have the following meaning: Persons will not be considered to be acting as a group solely because they purchased stock of the Company at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.
For the avoidance of doubt, this Section shall be interpreted in accordance with Treasury guidance for the definition of “change in the ownership of a corporation” and “change in the effective control of a corporation” under Section 409A of the Code.
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2.7 |
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Code means the Internal Revenue Code of 1986, as amended from time to time. |
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2.8 |
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Committee means a committee established under Article V of the Plan. |
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2.9 |
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Company means the Plan Sponsor. |
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2.10 |
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Disability means a disability of the Employee pursuant to which the Employee is entitled to disability benefits from the long-term disability program of the Company or an Affiliate. |
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2.11 |
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Employee means an individual who is employed by the Company or an Affiliate. |
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2.12 |
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Effective Date means the effective date of the Plan, which is February 20, 2017. |
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2.13 |
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Good Reason means, without the Participant’s consent following a Change in Control: (a) a material reduction in the position or responsibilities of the Participant; (b) a material reduction in the Participant’s base salary; or (c) a relocation of the Participant’s primary assigned work location to a distance of more than fifty (50) miles from its location as of the date of a Change in Control. |
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2.14 |
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Grant Notice means the notice delivered from the Company to the Participant (including via a third party vendor utilized by the Company to facilitate such grant notification) which sets forth the terms and conditions of the Participant’s Award for a Program Period. |
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2.15 |
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Internal Market means the limited internal market maintained by the Company for the purchase and sale of its common stock. |
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2.16 |
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Participant means an Employee designated to be eligible to receive an Award under the Plan as provided in Article III. |
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2.17 |
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Performance-Based Compensation means compensation under an Award that is intended to satisfy the requirements of Section 162(m) of the Code for “performance-based compensation” paid to a participant who is deemed a “covered employee” within the meaning of Code § 162(m)(3). Notwithstanding the foregoing, nothing in the Plan shall be construed to mean that an Award which does not satisfy the requirements for “performance-based compensation” under Code § 162(m) does not constitute performance-based compensation for other purposes, including for purposes of Code Section 409A. |
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2.18 |
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Plan or LTIP means the CH2M HILL Companies, Ltd. Long Term Incentive Plan. |
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2.19 |
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Plan Sponsor means CH2M HILL Companies, Ltd. |
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2.20 |
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Program means each three-year LTIP cycle. |
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2.21 |
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Program Period means a period beginning on January 1st of the Program year and completing 36 months thereafter (ex. January 1, 2017 through December 31, 2019). |
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2.22 |
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Retirement means the termination of employment by the Participant on or after age 55, other than an involuntary termination for Cause, if the sum of the Participant’s age and years of service equals 65 or more . |
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2.23 |
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RSU means a right to receive a share of Stock in the future upon satisfaction of the applicable vesting conditions. RSUs constitute Stock Instruments hereunder. |
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2.25 |
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Target Award means the target award amount established under the Plan for Participants. |
ARTICLE III
PARTICIPATION
The Committee, in its sole discretion and except as otherwise delegated pursuant to Sections 5.3 and 5.4 below, shall designate the Employees who may participate in the Plan for any Program Period from among the Employees of the Company or an Affiliate. Participation in the Plan will be on a Program Period by Program Period basis, and participation in a Program Period will not, in and of itself, entitle an Employee to participate in any other Program Period. The Committee shall provide each Participant with a Grant Notice reflecting the additional terms and conditions applicable to the Participant’s Award.
ARTICLE IV
LTIP AWARDS
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4.1 |
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Target Awards and Performance Goals . Within 90 days of the beginning of each Program Period, as required by the Code, the Committee (or the CEO as authorized pursuant to Sections 5.3 and 5.4 below) in its sole discretion shall establish the Target Award for each Participant and the performance goals for the Program Period and notify participants in writing. The performance required to achieve a payout at target (100% of target), as well as the minimum and maximum payouts and any interim performance goals, will be determined by the Committee. Performance goals for a Participant who is a “covered employee” within the meaning of Code § 162(m)(3) that are intended to be Performance-Based Compensation must be approved by Company shareholders in accordance with the procedures set forth in Section 162(m) of the Code. |
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4.2 |
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Award Determination Process . As soon as practicable after the end of each Program Period, and promptly following each interim performance period, the Committee shall compare actual performance during the Program Period to the performance goals for the Program Period and determine the payout percentage. The actual aggregate payout value of the Award will be the Target Award adjusted up or down according to the payout percentage, and may be further adjusted based on individual Participant performance, or such other reason as determined in accordance with this Section 4.2. All determinations made related to attainment of performance goals shall be made in the sole discretion of the Committee, and shall be final and binding on all Participants. Unless otherwise determined by the Committee in its sole discretion, Award provisions shall not be modified or amended if the modification or amendment would cause compensation payable pursuant to such Award to fail to constitute qualified performance-based compensation under Code § 162(m). |
All payments for a Program Period are totally discretionary. The Committee (or the CEO under any delegation of authority made pursuant to Sections 5.3 and 5.4 below) may, for any reason (including, but not limited to, if the individual Participant’s actions during the Program Period, directly or indirectly, resulted in a significant negative impact to the Company and/or the advancement of the Company’s strategic objectives, and/or resulted in a violation of Company policy(ies), ethical breaches, misconduct, negligence and/or poor job performance), choose to pay an Award to any Participant that is less than the amount that would be paid based on actual achievement of the performance goals for the Program Period, including an actual payout of $0 to such Participant; provided that this authority shall not apply in connection with or following a Change in Control. If an eligible Employee becomes a Participant in the Plan after the Program Period has begun, the Participant’s Award will be prorated accordingly. In addition, Awards will be prorated for a Participant who converts to or from a part-time or flex employment status during a Program Period.
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4.3 |
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Minimum and Maximum Award Payout. The minimum Award payout for any Program Period shall be $0. The maximum Award payout for each Participant for any LTIP Program Period, shall generally not exceed 200% (2 times) of the Target Award as determined by the Committee (or the CEO under any delegation of authority made pursuant to Sections 5.3 and 5.4 below) based on performance , but will be within the discretion of the Committee to determine subject to Section 4.4 with respect to compliance with the requirements of Code § 162(m). Notwithstanding the above, the maximum award payout for any Participant for any Program Period shall not exceed $10,000,000 for any Program Period and may be adjusted to a lesser amount at the discretion of the Committee. |
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4.4 |
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Code § 162(m) Compliance . The Company intends that the Awards to Participants who are deemed “covered employees” within the meaning of Code § 162(m)(3) will satisfy the performance-based compensation requirements of Code § 162(m) so that the Company may deduct any compensation paid under the Plan for federal income tax purposes without limitation. If any provision of this Plan or any Award would otherwise conflict with such intent, that provision, to the extent possible, shall be interpreted and deemed amended so as to avoid such conflict. To the extent any amount payable hereunder is intended to constitute Performance-Based Compensation, such payment shall not be made unless the Committee has certified the achievement of the applicable performance goals. |
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4.5 |
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Payouts of LTIP Awards . The achievement of performance goals will be evaluated for each calendar year during a Program Period. For the first and second years of a Program Period, a portion of the Award shall be determined and convert to time-vesting RSUs or such other consideration as determined by the Committee. Following the end of the Program Period, the final amount of the earned Award shall be determined and converted to time-vesting RSUs or such other consideration as determined by the Committee. Notwithstanding any other provision of the Plan to the contrary, no portion of an Award shall convert to RSUs or other consideration following a Participant’s termination of employment for any reason, and no payment shall be made with respect thereto, unless determined otherwise by the Committee in its sole discretion. Except as provided in Article VI or Article VII or as otherwise determined by the Committee in its sole discretion, a Participant must be employed by the Company or an Affiliate as of the applicable vesting date of the RSUs or other consideration to receive a payment with respect thereto, and any RSUs shall be settled in shares of Stock (or, if determined by the Committee in its sole discretion, cash equal to the fair market value of the shares) or other consideration promptly following the applicable vesting date, and in all events no later than two and one-half months following the applicable vesting date. Notwithstanding any other provision hereof, to the extent an Award payout would result in a Participant exceeding any ownership limits under the Company’s Articles of Incorporation and/or Bylaws, the Award shall be paid out in cash. |
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4.6 |
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Non-Transferability of Awards . No Award shall be assignable or transferable. |
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4.7 |
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Restrictions on Transfers of Instruments . All Stock Instruments transferred to a Participant in accordance with the Plan will be subject to the terms, conditions, and restrictions on Company Stock set forth in the Company’s Articles of Incorporation and Bylaws, as amended from time to time, and its filings with the U.S. Securities and Exchange Commission, including: (a) restrictions that grant the Company the right (but not the obligation) to repurchase shares upon termination of the shareholder’s affiliation with the Company; (b) restrictions that grant the Company a right of first refusal if the shareholder wishes to sell shares other than in the Internal Market; (c) restrictions that require the approval of the Company for any other sale of shares; and (d) the rules of the Company’s Internal Market, including but not limited to proration. |
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4.8 |
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Withholding Requirement . All Awards are subject to withholding of all taxes, government mandated social benefit contributions, or other payments required to be withheld which are applicable to the Participants. If Company stock is awarded, a Participant will receive shares net of his or her tax withholding obligation if not enough cash is awarded to cover taxes. The foregoing notwithstanding, the Committee may, in its sole discretion, permit a Participant to satisfy his or her tax withholding obligations by other means. |
ARTICLE V
PLAN ADMINISTRATION
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5.1 |
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Committee . Except as otherwise set forth in this Plan, the Plan shall be administered by the Compensation Committee appointed by and serving at the pleasure of the Board. The composition of the Committee shall consist of those members as described in the Charter of the Committee, as may be amended from time to time (the “Charter”). |
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5.2 |
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Committee Meetings and Actions . The Committee shall hold meetings and have the authority to take such action as determined in the Charter . |
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5.3 |
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Powers of Committee . The Committee shall, in its sole discretion, select the Participants from among the Employees, select the performance goals for each Program Period, establish Target Awards for Participants for each Program Period, determine the time at which Awards are to be paid, determine actual performance against the established performance goals for purposes of Award payout calculations, and establish such other terms under the Plan as the Committee may deem necessary or desirable and consistent with the terms of the Plan. The Committee may, for any reason, choose to pay an Award to any Participant that is less than the amount that would be paid based on actual achievement of the performance goals for the Program Period, including an actual payout of $0 to such Participant . The Committee shall have the full and exclusive right to grant and determine terms and conditions of all Awards granted under the Plan. The Committee shall determine the form of notice that shall evidence the particular provisions, terms, and conditions. The Committee may from time to time adopt such rules and regulations for carrying out the purposes of the Plan, as it may deem proper and in the best interests of the Company. |
The Committee may from time to time delegate its responsibilities as it determines is necessary, in its sole discretion. The Committee may correct any defect, supply any omission, and reconcile any inconsistency in the Plan. No member of the Committee shall be liable for any action or determination made in good faith. The determinations, interpretations and other actions of the Committee pursuant to the provisions of the Plan shall be binding and conclusive for all purposes and on all persons.
The Committee shall approve participation, Target Awards, and any Award payout amounts for any Section 16 officers under the securities laws.
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5.4 |
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Delegation of Authority . Pursuant to Section 5.3, the Committee delegates to the CEO the authority to select those Employees (other than Section 16 officers under the securities laws and any key executives as determined by the Committee) who shall participate in the Plan from time to time, and to establish the eligibility criteria and Target Awards for Employees participating in the Plan (other than Section 16 officers under the securities laws and any key executives as determined by the Committee). The CEO may, for any reason, choose to pay an Award to any Participant (other than Section 16 officers under the securities laws and any key executives as determined by the Committee) that is less than the amount that would be paid based on actual achievement of the performance goals for the Program Period, including an actual payout of $0 to such Participant, provided however that such authority may only be exercised by the CEO after the Committee has determined actual performance against the established performance goals for purposes of meeting Plan criteria for the payout of Plan Awards and has determined the payout percentage under the Plan. The CEO shall inform the Committee of any such decisions at the next regularly scheduled Committee meeting. |
Day-to-day administration of the Plan shall be performed by employees of the Company.
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5.5 |
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Interpretation of Plan . The determination of the Committee as to any disputed question arising under the Plan, including questions of construction and interpretation, shall be final, binding and conclusive upon all persons, including the Company, its shareholders, and all persons having any interest in Stock Instruments which may be or have been granted pursuant to the Plan. |
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5.6 |
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Limitation of Liability and Indemnification . |
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a. |
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No member of the Committee or of the Board, nor the CEO, shall be liable for any action or determination made in good faith. |
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b. |
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Each person who is or shall have been a member of the Committee or of the Board, and the CEO, shall be indemnified and held harmless by the Plan Sponsor against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid in settlement thereof, with the Company’s approval, or paid in satisfaction of a judgment in any such action, suit or proceeding against him or her, provided such person shall give the Company an opportunity, at its own expense, to handle and defend the same before undertaking to handle and defend it on such person’s own behalf. |
ARTICLE VI
CHANGE IN CONTROL
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6.1 |
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Pre-2017 Grants . All outstanding Awards granted prior to February 20, 2017 shall become immediately payable in full at target and in cash upon the occurrence of a Change in Control event, except as otherwise may be provided in an individual agreement with a Participant (e.g., a Change of Control Agreement). |
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6.2 |
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Later Grants . Unless the Committee determines otherwise in its sole discretion, and except as otherwise may be provided in an individual agreement with a Participant (e.g., a Change of Control Agreement), the following rules shall govern the treatment of Awards granted on or after February 20, 2017 upon the occurrence of a Change in Control Event: |
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a. |
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To the extent the Award is not continued, assumed or substituted by the successor employer of the Participant or an Affiliate, (i) the RSUs or other consideration granted with respect to calendar years ending upon or prior to the date of the Change in Control shall fully vest, and (ii) the portion of the Award that relates to calendar years ending after the date of the Change in Control shall be converted into fully-vested RSUs or other fully-vested consideration immediately prior to the consummation of the Change in Control based on assumed achievement of the applicable performance goals at the target level of performance. All the vested RSUs or other consideration described herein shall be settled in the form of cash or Stock Instruments promptly following the Change in Control. |
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b. |
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To the extent the Award is continued, assumed or substituted by the successor employer of the Participant or an Affiliate, (i) the RSUs or other consideration granted with respect to calendar years ending upon or prior to the date of the Change in Control shall remain outstanding in accordance with their terms, and (ii) the portion of the Award that relates to calendar years ending after the date of the Change in Control shall be converted into RSUs or other consideration immediately prior to the consummation of the Change in Control based on assumed achievement of the applicable performance goals at the target level of performance that vest in such manner as determined by the Committee. Notwithstanding the foregoing, if the Participant’s employment is terminated without Cause or by the Participant for Good Reason, in either case during the two (2)-year period following the Change in Control, all then-outstanding RSUs or other consideration described in this Section 6.2(b) shall be 100% vested. All RSUs or other consideration described in this Section 6.2(b) shall be settled in the form of cash or Stock Instruments promptly following the applicable vesting date. |
For purposes of this Section 6.2, Awards shall be considered “assumed” if, following the Change in Control, the Award confers the right to receive, for each share of Stock subject to the Award immediately prior to the Change in Control, (i) the consideration (whether stock, cash, or other securities or property) received in the Change in Control by holders of Stock for each share held on the effective date of the Change in Control, or (ii) common stock of the successor to the Company of substantially equivalent economic value to the consideration received in the Change in Control by holders of Stock for each share held on the effective date of the Change in Control (as determined by the Committee in its discretion). The Award will be considered “substituted for” if the successor or acquiror replaces the Award with equity awards of substantially equivalent economic value measured as of the date the Change in Control occurs (as determined by the Committee in its discretion).
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6.3 |
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Section 409A . In all events, any action under this Article VI shall comply with the applicable requirements of Section 409A of the Code (such that, for the avoidance of doubt, no action shall be taken by the Committee pursuant to this Article VI that would violate the requirements of Section 409A of the Code). |
ARTICLE VII
TERMINATION OF EMPLOYMENT
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7.1 |
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General Rule . Except as provided in Article VI, upon the Participant’s termination of employment or other service for any reason, all outstanding Awards (including, without limitation, any RSUs or other consideration issued with respect to completed calendar years in a Program Period) shall be forfeited unless determined otherwise by the Committee in its sole discretion. |
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7.2 |
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Retirement . If a Participant terminates his or her employment with the Company and its Affiliates due to Retirement, any RSUs other consideration issued for calendar years ending prior to the date of such Retirement shall, subject to the Participant’s continued compliance with any covenants in the Grant Notice, continue to vest and be paid out at the times specified in Section 4.5 as if the Participant had remained actively employed by the Company or an Affiliate. For the avoidance of doubt, any portion of the Award relating to calendar years ending after the date of termination shall be forfeited and no payments shall be made with respect thereto. Under this Section 7.2, continued eligibility to vest and be paid out at the times specified in Section 4.5 is conditioned on the Participant remaining retired from the Company and not competing against the Company as such is defined in the Grant Notice. |
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7.3 |
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Death/Disability . If a Participant’s employment with the Company and its Affiliates terminates due to the Participant’s death or Disability, any RSUs or other consideration issued for calendar years ending prior to the date of such termination shall vest and shall be settled in Shares (or, if determined by the Committee in its sole discretion, cash equal to the fair market value of the Shares) as reasonably practicable thereafter and delivered to the Participant (and in all events no later than two and one-half months following the date of termination). For the avoidance of doubt, any portion of the Award relating to calendar years ending after the date of termination shall be forfeited and no payments shall be made with respect thereto. |
ARTICLE VIII
REQUIREMENTS OF LAW
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8.1 |
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Requirements of Law . All Awards pursuant to the Plan shall be subject to all applicable laws, rules and regulations. |
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8.2 |
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Governing Law . The Plan and all agreements under the Plan shall be construed in accordance with and governed by the laws of the State of Delaware, United States of America. |
ARTICLE IX
CLAWBACK
This Plan incorporates by reference the Company’s clawback policy, and any Participant’s participation in this Plan is subject to such clawback policy as in effect from time-to-time.
ARTICLE X
AMENDMENT, MODIFICATION AND TERMINATION
The Committee may amend or modify any provision of the Plan at any time, and may suspend the granting of Awards under the Plan. The Board may terminate the Plan at any time.
The Committee may determine that any Awards granted under the Plan shall be subject to additional and/or modified terms and conditions, and the terms of the Award shall be adjusted accordingly, as may be necessary to comply with or take account of any securities, exchange control, taxation laws, regulations or practice of any territory which may have application to the relevant Participant.
ARTICLE XI
MISCELLANEOUS
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11.1 |
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Gender and Number . Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. |
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11.2 |
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No Right to Continued Employment . Nothing contained in the Plan or in any Award granted under the Plan shall confer upon any Participant any right with respect to the continuation of the Participant’s employment by, or consulting relationship with, the Company or an Affiliate, or interfere in any way with the right of the Company or an Affiliate, subject to the terms of any separate employment agreement or other contract to the contrary, at any time to terminate such services or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an award. Any Participant who leaves the employment of the Company or an Affiliate shall not be entitled to any compensation for any loss of any right or any benefit or prospective right or benefit under this Plan which the Participant might otherwise have enjoyed whether such compensation is claimed by way of damages for wrongful dismissal or other breach of contract or by way of compensation for loss of office or otherwise. |
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11.3 |
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Section 409A . This Plan and all Awards hereunder shall, to the extent Section 409A of the Code applies, be interpreted and applied in accordance with the requirements of Section 409A of the Code. For the avoidance of doubt, if a Participant is a “specified employee” (as determined pursuant to Section 409A of the Code), any payments hereunder shall be delayed until six months following the Participant’s separation from service to the extent required by Section 409A of the Code, and “termination of employment” shall mean “separation from service” to the extent required by Section 409A of the Code. |
Exhibit 10.3
CH2M HILL Companies, Ltd.
Amended and Restated Restricted Stock Plan
ARTICLE I
INTRODUCTION
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1.1 |
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Establishment . CH2M HILL Companies, Ltd., a Delaware corporation, hereby amends and restates the CH2M HILL Companies, Ltd. Restricted Stock Plan (the “Plan”) effective as of February 28, 2017. All restricted stock grants issued and granted under the previous Restricted Stock Policy and Administration Plan shall remain in full force and effect as provided under the plan. All shares of common stock that may be canceled under the previous plan shall roll into the Plan and be available for grant under this Plan. This Plan permits the grants of Restricted Stock and Restricted Stock Units to eligible Participants. |
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1.2 |
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Purposes . The purpose of the Plan is to provide selected individuals with added incentives to continue in the long‑term service of CH2M. The Plan is also designed to help CH2M attract, retain and motivate high quality people and to provide financial incentives to Plan participants to maximize the financial performance of CH2M, thereby increasing shareholder value. |
ARTICLE II
DEFINITIONS
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2.1 |
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Affiliate means any entity controlling, controlled by or under common control with CH2M or any entity of which CH2M directly or indirectly owns at least 20% of the equity and whose employees, directors, officers or consultants are selected by either the Committee or the Board to participate in the Plan. |
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2.2 |
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Award means an award of Restricted Stock or RSUs hereunder. |
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2.3 |
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Board means the Board of Directors of CH2M HILL Companies, Ltd. |
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2.4 |
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Cause means unless otherwise provided in a Grant Notice, (a) “Cause” as defined in any individual employment agreement to which the applicable Participant and CH2M are parties, or (b) if there is no such individual employment agreement or if it does not define Cause: (i) commission of (A) a felony (or its equivalent in a non-United States jurisdiction) or (B) other conduct of a criminal nature that has or is likely to have a material adverse effect on the reputation or standing in the community of CH2M or an Affiliate or that legally prohibits the Participant from working for CH2M or any Affiliate; (ii) breach by the Participant of a regulatory rule that adversely affects the Participant’s ability to perform the Participant’s duties to CH2M and the Affiliates; (iii) dishonesty in the course of fulfilling the Participant’s employment duties; (iv) any material breach by the Participant of any provision of any agreement or understanding between CH2M or an Affiliate and the Participant regarding the terms of the Participant’s service as an employee or other service provider of CH2M or an Affiliate, including the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee or other service provider of CH2M or an Affiliate, other than as a result of having a Disability, or a breach of any applicable invention assignment, confidentiality or other restrictive covenant agreement or similar agreement between CH2M or an Affiliate and the Participant; or (v) any other misconduct by the Participant that is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, CH2M or an Affiliate. |
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2.5 |
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Change in Control means: |
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a. |
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Any one person, or more than one person acting as a group, acquires ownership of stock of CH2M that, together with stock held by such person or group, constitutes more than 50% of the total fair market value of the Stock. However, if any one person or more than one person acting as a group, owns more than 50% of the total fair market value of the Stock, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of CH2M (or to cause a change in the effective control of CH2M). |
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b. |
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There is a change in the effective control of CH2M. A change in the effective control of CH2M occurs on the date that either: (i) Any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of Stock that represents 30% or more of the total voting power of the Stock; or (ii) a majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election . |
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c. |
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Any one person, or more than one person acting as a group, acquires ownership of all or substantially all of the assets of CH2M. |
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d. |
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The stockholders of CH2M approve a plan of liquidation or dissolution of CH2M and such transaction is consummated. |
For purposes of this definition “persons acting as a group” shall have the following meaning: Persons will not be considered to be acting as a group solely because they purchased stock of CH2M at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.
For the avoidance of doubt, this definition shall be interpreted in accordance with Treasury guidance for the definition of “change in the ownership of a corporation” and “change in the effective control of a corporation” under Section 409A of the Code.
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2.6 |
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Code means the Internal Revenue Code of 1986, as amended. |
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2.7 |
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Committee means the Compensation Committee of the Board empowered to take actions with respect to the administration of the Plan as described in Article V of this document. |
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2.8 |
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CH2M means CH2M HILL Companies, Ltd., a Delaware corporation. |
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2.9 |
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Disabilit y shall have the meaning given to such term in Section 22(e)(3) of the Code. |
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2.10 |
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Good Reason means, without the Participant’s consent following a Change in Control: (a) a material reduction in the position or responsibilities of the Participant; (b) a material reduction in the Participant’s base salary; or (c) a relocation of the Participant’s primary assigned work location to a distance of more than fifty (50) miles from its location as of the date of a Change in Control. |
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2.11 |
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Grant Notice means the notice delivered from CH2M to the Participant (including via a third party vendor utilized by the Company to facilitate such grant notification) which sets forth the number of shares of Restricted Stock or Restricted Stock Units granted, the grant date, the nature of the restrictions, and any other terms as may be determined from time to time. |
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2.12 |
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Internal Market means the limited internal market maintained by CH2M for the purchase and sale of its common stock. |
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2.13 |
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Participant means an employee, consultant, officer or director designated by the Committee during the term of the Plan to receive one or more Awards under the Plan. |
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2.14 |
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Plan means the CH2M HILL Companies, Ltd. Amended and Restated Restricted Stock Plan which amends and restates the Restricted Stock Policy and Administration Plan effective on January 1, 2000 as amended and restated as of September 13, 2013. |
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2.15 |
|
Restricted Stock means one share of CH2M common stock granted pursuant to the Plan which is subject to the restrictions set forth in the Grant Notice. |
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2.16 |
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Restricted Stock Unit or RSU means a right to receive shares of Stock (or the cash equivalent thereof) in the future upon satisfaction of the applicable restrictions set forth in the Grant Notice. |
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2.17 |
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Stock means the common stock of CH2M, and any stock issued or issuable in substitution for the common stock. |
ARTICLE III
PARTICIPATION
The Committee, in its sole discretion shall, from time to time, determine which employees, directors, officers and consultants shall be Participants in the Plan, and be granted one or more Awards of Restricted Stock and/or RSUs.
ARTICLE IV
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
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4.1 |
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Grant of Restricted Stock and Restricted Stock Units . A Participant may be granted one or more shares of Restricted Stock and/or one or more RSUs. Restricted Stock and RSUs shall be granted on and as of the date specified in the Grant Notice. Each Restricted Stock and RSU Award shall be separately approved, and the receipt of one Award shall not result in automatic receipt of any other Award. Upon determination by the Committee or its delegate to grant Restricted Stock or RSUs to a Participant, CH2M shall deliver a Grant Notice to the Participant. The Committee may delegate to one or more officers of CH2M the authority to grant shares of Restricted Stock and/or RSUs, subject to such limits and other terms and conditions as may be specified by the Committee. All grants of Restricted Stock and RSUs to Section 16 officers must be approved by the Committee in advance of the grant. |
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4.2 |
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Grant Notice . The specific terms of each Restricted Stock and RSU Award granted under the Plan shall be set forth in the Grant Notice. A Grant Notice shall be delivered by CH2M to the Participant to whom the Award is granted and in such form as may be approved by the Committee. |
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a. |
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Number of Shares of Restricted Stock or RSUs . The Grant Notice shall state the specific number of shares of Restricted Stock or RSUs, as determined by the Committee. |
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b. |
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Vesting of Restricted Stock or RSUs . The Grant Notice shall state the specific vesting schedule to which the Restricted Stock or RSUs is subject including whether and to what extent performance features and metrics affect the vesting schedule and shall include the specific performance metrics, if any. In the absence of a vesting schedule in the Grant Notice, the entire Award shall vest on the third anniversary of the date the Award is granted. |
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i. |
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Termination of Services for Any Reason . Except as otherwise provided in (ii) or (iv) below, if a Participant terminates service for any reason and is not 100% vested in all Restricted Stock or RSUs he or she holds as of the date of such termination, he or she shall be entitled only to the portion of Restricted Stock or RSU Award which was vested on the day he or she terminates service, and shall not be entitled to any portion of the non-vested Restricted Stock or RSUs under the Plan. |
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ii. |
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Termination of Services by Reason of Death or Disability . With respect to a Participant who terminates service by reason of death or Disability, the Participant shall become automatically 100% vested in all outstanding Restricted Stock and RSUs held under the Plan. |
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iii. |
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Definition of Termination of Services . Termination of services occurs as of the first day on which the Participant is no longer performing services for CH2M or its Affiliates, voluntarily or at CH2M’s request. In the event of any dispute as to whether a Participant has terminated service, such a determination shall be made by the Committee in its sole discretion. If the Participant’s employment or other service relationship is with an Affiliate and that entity ceases to be an Affiliate, a termination of service shall be deemed to have occurred when the entity ceases to be an Affiliate unless the Participant transfers his or her employment or other service relationship to CH2M or its remaining Affiliates. Notwithstanding the foregoing, with respect to any Award subject to Section 409A of the Code, a Participant’s termination of service shall be the date of his or her “separation from service” as determined pursuant to Section 409A and applicable guidance thereunder. |
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iv. |
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Change in Control Vesting. |
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1. |
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All Restricted Stock which was granted prior to February 28, 2017 shall be 100% vested as of the date on which a Change in Control occurs, except as otherwise may be provided in an individual agreement with a Participant (e.g., a Change of Control Agreement). |
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2. |
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For Awards granted on or after February 28, 2017, unless otherwise provided in a Grant Notice or an individual agreement with the Participant (e.g., a Change of Control Agreement), if a Participant’s employment is terminated without Cause or by the Participant for Good Reason, in either case during the two (2)-year period following a Change in Control, all then-outstanding Awards shall be 100% vested. |
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c. |
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Cancellation of Restricted Stock Grant . The Committee may cancel a Restricted Stock or RSU grant at any time upon written notice of cancellation to a Participant. Upon cancellation of a Restricted Stock or RSU grant, the Participant shall not have any right to continue vesting in the Restricted Stock or RSUs granted under the Plan. Neither CH2M nor the Committee shall have any liability to the Participant with respect to not yet vested Restricted Stock or RSUs under the canceled Restricted Stock or RSU grant. As a precondition to such cancellation, CH2M shall replace cancelled not yet vested Restricted Stock or RSUs with instruments of approximately equal value as of the date of cancellation. “Equal value” shall be determined by the Committee in its sole discretion. Neither CH2M nor the Committee shall have any liability to the Restricted Stock or RSU holder with respect to any adverse tax implications of such cancellation and substitution. Notwithstanding the foregoing, no such action shall be taken that would violate Section 409A of the Code. |
|
4.3 |
|
Non-Transferability of Restricted Stock or RSUs . No Restricted Stock or RSUs shall be assignable or transferable. |
|
4.4 |
|
Restrictions on Transfers and Sale of Instruments Upon 100% Vesting . All Restricted Stock transferred to a Participant and RSUs granted to the Participant in accordance with the Plan will be subject to the terms, conditions, and restrictions on Stock set forth in CH2M's Articles of Incorporation and Bylaws, as amended from time to time, and its filings with the U.S. Securities and Exchange Commission, including: (a) restrictions that grant CH2M the right to repurchase shares upon termination of the shareholder's affiliation with CH2M; (b) restrictions that grant CH2M a right of first refusal if the shareholder wishes to sell shares other than in the Internal Market; (c) restrictions that require the approval of CH2M for any other sale of shares, and (d) the rules of the Company’s Internal Market, including but not limited to proration . |
Notwithstanding any other provision of the Plan, CH2M will not be required to transfer Stock to any person if, immediately after the transfer, the recipient would own more shares of Stock than that person is permitted to own under the Articles of Incorporation and Bylaws of CH2M, as amended from time to time.
|
4.5 |
|
Withholding Requirement . All grants hereunder are subject to withholding of all taxes, government mandated social benefit contributions, or other payments required to be withheld which are applicable to the Participants. Upon vesting of Restricted Stock or settlement of RSUs, as applicable, a Participant will receive shares net of his or her tax withholding obligation if not enough cash is awarded to cover taxes. The foregoing notwithstanding, the Committee may, in its sole discretion, permit a Participant to satisfy his or her tax withholding obligations by other means. |
|
4.6 |
|
No Equity Holder Privileges . No Participant shall have any privileges as an equity holder with respect to any non-vested Restricted Stock or with respect to RSUs until the underlying Stock is issued to the Participant. |
ARTICLE V
PLAN ADMINISTRATION
|
5.1 |
|
Committee . The Plan shall be administered by the Compensation Committee appointed by and serving at the pleasure of the Board. The composition of the Compensation Committee shall consist of those members as described in the Charter of the Committee, as may be amended from time to time (the “Charter”). |
|
5.2 |
|
Committee Meetings and Actions . The Committee shall hold meetings and have the authority to take such action as determined in the Charter. |
|
5.3 |
|
Powers of Committee . The Committee shall, in its sole discretion (a) select the Participants from among the eligible employees, directors, officers, and consultants, (b) determine the Awards to be made pursuant to the Plan, and (c) determine the time at which such Awards are to be made. The Committee shall have the full and exclusive right to grant and determine terms and conditions of all Awards granted under the Plan and establish such other terms under the Plan as the Committee may deem necessary or desirable and consistent with the terms of the Plan. The Committee shall determine the form or forms of notice that shall set forth the terms and conditions of the grants under the Plan. The Committee may from time to time adopt such rules and regulations for carrying out the purposes of the Plan as it may deem proper and in the best interests of CH2M. The Committee may delegate to one or more officers of CH2M the authority to grant shares of Restricted Stock and/or RSUs, subject to such limits and other terms and conditions as may be specified by the Committee. |
|
5.4 |
|
Interpretation of Plan . The determination of the Committee as to any disputed question arising under the Plan, including questions of construction and interpretation, shall be final, binding and conclusive upon all persons, including CH2M, its shareholders, and all persons having any interest in Awards which may be or have been granted pursuant to the Plan. |
|
5.5 |
|
Limitation of Liability and Indemnification . |
|
a. |
|
No member of the Committee or the Board shall be liable for any action or determination made in good faith. |
|
b. |
|
Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by CH2M against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid in settlement thereof, with CH2M's approval, or paid in satisfaction of a judgment in any such action, suit or proceeding against him, provided such person shall give CH2M an opportunity, at its own expense, to handle and defend the same before undertaking to handle and defend it on such person's own behalf. |
ARTICLE VI
ADJUSTMENTS TO AWARDS
|
6.1 |
|
Number of Shares of Stock . The number of shares of Stock authorized for issuance under the Plan shall be determined at the discretion of the Committee. If adjustments are required under Sections 6.3 or 6.4 to the number of Restricted Stock or RSUs granted, the number of shares of Stock authorized under the Plan shall be adjusted in a similar manner. |
|
6.2 |
|
Unused Restricted Stock and RSUs . Any Restricted Stock and RSUs that for any reason are canceled or forfeited shall automatically become available for grant under the Plan. |
|
6.3 |
|
Adjustments for Stock Splits and Stock Dividends . If there is any increase or decrease in the number of outstanding shares of Stock or any change in the rights and privileges of shares of Stock (a) as a result of the payment of a Stock dividend or any other distribution payable in Stock, or (b) through a stock split, subdivision, consolidation, combination, reclassification or re-capitalization involving the Stock, then each outstanding Restricted Stock and RSU grant the outstanding shall be appropriately modified by the Committee. |
|
6.4 |
|
Other Distributions and Changes in the Stock . If CH2M distributes assets or securities of persons other than CH2M (excluding cash or distributions referred to in Section 6.3) with respect to the Stock, or if CH2M grants rights to subscribe pro rata for additional Shares of Stock or for any other securities of CH2M to the holders of its Stock, or if there is any other change in the number or kind of outstanding shares of Stock or of any stock or other securities into which the Stock will be changed or for which it has been exchanged, and if the Committee in its discretion determines that the event equitably requires an adjustment to any Award, then such adjustments shall be made, or other action shall be taken, by the Committee as the Committee in its discretion deems appropriate. |
ARTICLE VII
REQUIREMENTS OF LAW
|
7.1 |
|
Requirements of Law . All Awards pursuant to the Plan shall be subject to all applicable laws, rules and regulations. |
|
7.2 |
|
Governing Law . The Plan and all agreements under the Plan shall be construed in accordance with and governed by the laws of the State of Delaware, United States of America. |
|
7.3 |
|
Section 409A . Each Award subject to Section 409A of the Code shall be administered in accordance with the requirements of Section 409A of the Code. |
ARTICLE VIII
AMENDMENT, MODIFICATION AND TERMINATION
The Board may amend or modify any provision of the Plan at any time. The Board may suspend the granting of any Restricted Stock and/or RSUs under the Plan or terminate the Plan at any time.
The Board may determine that any not yet vested Restricted Stock and/or RSUs granted under the Plan shall be subject to additional and/or modified terms and conditions, and the terms of the Restricted Stock and/or RSU grant shall be adjusted accordingly, as may be necessary to comply with or take account of any securities, exchange control, or taxation laws, regulations or practice of any territory which may have application to the relevant Participant.
ARTICLE IX
MISCELLANEOUS
|
9.1 |
|
Gender and Number . Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. |
|
9.2 |
|
No Right to Continued Employment . Nothing contained in the Plan or in any Award granted under the Plan shall confer upon any Participant any right with respect to the continuation of the Participant's employment by, or consulting relationship with, CH2M and/or Affiliates, or interfere in any way with the right of CH2M or Affiliates, subject to the terms of any separate employment agreement or other contract to the contrary, at any time to terminate such services or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Award. Any Participant who leaves the employment of CH2M shall not be entitled to any compensation for any loss of any right or any benefit or prospective right or benefit under this Plan which the Participant might otherwise have enjoyed whether such compensation is claimed by way of damages for wrongful dismissal or other breach of contract or by way of compensation for loss of office or otherwise. |
Exhibit 31.1
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jacqueline C. Hinman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CH2M HILL Companies, Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 8, 2017
|
|
/s/ JACQUELINE C. HINMAN |
|
Jacqueline C. Hinman |
|
Chief Executive Officer |
|
Exhibit 31.2
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Gary L. McArthur, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CH2M HILL Companies, Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 8, 2017
|
|
/s/ GARY L. MCARTHUR |
|
Gary L. McArthur |
|
Chief Financial Officer |
|
Exhibit 32.1
CERTIFICATION
PURSUANT TO RULE 13A-14(B) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, AND SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF
THE UNITED STATES CODE (18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of CH2M HILL Companies, Ltd. (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jacqueline C. Hinman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes Oxley Act of 2002 that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report.
|
|
/s/ JACQUELINE C. HINMAN |
|
Jacqueline C. Hinman |
|
Chief Executive Officer |
|
August 8, 2017
This certification “accompanies” the Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION
PURSUANT TO RULE 13A-14(B) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, AND SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF
THE UNITED STATES CODE (18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of CH2M HILL Companies, Ltd. (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gary L. McArthur, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes Oxley Act of 2002 that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report.
|
|
/s/ GARY L. MCARTHUR |
|
Gary L. McArthur |
|
Chief Financial Officer |
|
August 8, 2017
This certification “accompanies” the Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99
CH2M Internal Market Rules
The following rules, adopted from time to time by CH2M’s Board of Directors, govern the operation of the CH2M Internal Market (the “Market”).
CH2M HILL Companies, Ltd. (“CH2M”) may, but is not obligated to, facilitate a market to enable eligible participants to sell or purchase shares of CH2M common stock (the “Common Stock”) up to four times each year (each, a “Trade Date”). The Trade Dates shall be determined by the CH2M Board of Directors. All trades of Common Stock on the Market shall be made at the price determined by the CH2M Board of Directors from time to time, as provided in the CH2M Prospectus filed with the US Securities and Exchange Commission.
All eligible CH2M employees, directors, consultants, the trustees and administrators of CH2M’s qualified and non-qualified employee benefit plans, and others as determined by the Board of Directors from time to time, shall be permitted to participate in the Market. For beneficially owned Common Stock, sales must be directed by record holders in accordance with relevant instruments relating to the rights and obligations of the respective parties. CH2M may, but is not obligated to, sell or purchase Common Stock in the Market, provided that CH2M shall not be both a seller and a purchaser on the same Trade Date.
On any Trade Date, CH2M may, but shall not be obligated to, purchase Common Stock in the Market, if the Market is under-subscribed (the aggregate number of shares of Common Stock offered for sale in the Market is greater than the aggregate number of shares of Common Stock sought to be purchased by authorized buyers).
If (after taking into account all orders to purchase and sell Common Stock in the Market, including the CH2M order, if any) the aggregate number of shares of Common Stock offered for sale in the Market is greater than the aggregate number of shares of Common Stock sought to be purchased by authorized buyers, offers to sell will be treated in the following manner:
|
a) |
|
If enough orders to buy are received to purchase all the shares of Common Stock offered by each seller selling fewer shares than the Proration Amount and at least the Proration Amount of shares from each other seller, then all sell orders will be accepted up to the Proration Amount of shares and the portion of any sell orders exceeding the Proration Amount of shares will be accepted on a pro-rata basis; |
|
b) |
|
If not enough orders to buy are received to purchase all the shares offered by each seller selling fewer than the Proration Amount of shares and at least the Proration Amount of shares from each other seller, then the purchase orders will be allocated equally to each seller. |
The “Proration Amount” is the number of shares determined by CH2M’s Board of Directors from time to time, initially 500 shares, for purposes of determining whether the proration or equal allocation treatment of sell orders described above will apply on any Trade Date. Once determined, the Proration Amount will remain in effect for each subsequent Trade Date until a different Proration Amount is determined.
On any Trade Date, CH2M may, but shall not be obligated to, sell Common Stock in the Market, if the Market is over-subscribed (the aggregate number of shares of Common Stock sought to be purchased in the Market exceeds the aggregate number of shares of Common Stock offered for sale in the Market).
If (after taking into account all orders to purchase and sell Common Stock in the Market, including the CH2M order, if any) the aggregate number of shares of Common Stock sought to be purchased in the Market exceeds the aggregate number of shares of Common Stock offered for sale in the Market, the purchasers in the Market will have the following priority:
|
a) |
|
Administrator of the Payroll Deduction Stock Purchase Plan (“PDSPP”); |
|
b) |
|
Trustees of the CH2M Deferred Retirement Savings Plan (the “401(k) Plan”) |
|
c) |
|
Individual Market participants on a pro-rata basis (including purchases through the pre-tax and after-tax deferred compensation plans.) |
If CH2M elects to participate in the Market on any Trade Date, CH2M shall participate in the Market as a buyer or a seller of Common Stock at the Common Stock share price in effect on the Trade Date.
CH2M shall publish the then current Common Stock share price, Proration Amount and upcoming Trade Date as determined by the Board of Directors prior to each Trade Date through internal communications and public filings.
An independent administrator (the “Plan Administrator”), shall be appointed by the Board of Directors to manage the Market for CH2M. The Plan Administrator shall act upon the instructions received from buyers and sellers to affect trades in the Market at the price set by CH2M Board of Directors in accordance with these Internal Market Rules.
The Plan Administrator may charge transaction fees to Market participants for its services as agreed with CH2M.
The Plan Administrator will not buy or sell shares in the Market for its own account.
Common Stock obtained as a result of purchases in the Market will be subject to restrictions, as set forth in CH2M’s Restated Articles of Incorporation and Restated Bylaws, each as effected from time to time.