UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006 |
|
OR |
|
o | 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)
Oregon | | 93-0549963 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification Number) |
| | |
9191 South Jamaica Street, | | |
Englewood, CO | | 80112-5946 |
(Address of principal executive offices) | | (Zip Code) |
(303) 771-0900
(Registrant’s telephone number, including area code)
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 ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ý | Non-Accelerated filer ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of May 4, 2006, the registrant had 32,784,170 shares of common stock, $0.01 par value per share, issued and outstanding.
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
MARCH 31, 2006
TABLE OF CONTENTS
2
PART I - - FINANCIAL INFORMATION
ITEM I - CONSOLIDATED FINANCIAL STATEMENTS
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except share data)
| | March 31, 2006 | | December 31, 2005 | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 36,594 | | $ | 66,494 | |
Receivables, net - | | | | | |
Client accounts | | 344,845 | | 398,642 | |
Unbilled revenue | | 408,403 | | 305,937 | |
Other | | 4,512 | | 5,556 | |
Prepaid expenses and other current assets | | 21,401 | | 23,138 | |
Total current assets | | 815,755 | | 799,767 | |
Investments in unconsolidated affiliates | | 46,473 | | 114,679 | |
Property, plant and equipment, net | | 33,030 | | 32,050 | |
Goodwill | | 41,992 | | 40,730 | |
Intangible assets, net | | 24,482 | | 26,168 | |
Other assets, net | | 44,156 | | 39,712 | |
Deferred income taxes | | 54,385 | | 50,833 | |
| | | | | |
Total assets | | $ | 1,060,273 | | $ | 1,103,939 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Current portion of long-term debt | | $ | 1,163 | | $ | 1,344 | |
Accounts payable and accrued subcontractor costs | | 187,630 | | 261,232 | |
Billings in excess of revenues | | 132,856 | | 121,604 | |
Accrued incentive compensation | | 15,027 | | 31,081 | |
Accrued payroll and employee related liabilities | | 129,848 | | 118,027 | |
Current income tax payable | | 30,266 | | 63,021 | |
Other accrued liabilities | | 81,440 | | 67,314 | |
Current deferred income taxes | | 10,657 | | 7,631 | |
Total current liabilities | | 588,887 | | 671,254 | |
Other long-term liabilities | | 120,649 | | 109,925 | |
Line of credit | | 30,400 | | — | |
Long-term debt | | 2,622 | | 2,780 | |
| | | | | |
Total liabilities | | 742,558 | | 783,959 | |
| | | | | |
Commitments and contingencies (Note 8) | | | | | |
| | | | | |
Shareholders’ equity: | | | | | |
Preferred stock, Class A $0.02 par value, 50,000,000 shares authorized; none issued | | — | | — | |
Common stock, $0.01 par value, 100,000,000 shares authorized; 32,765,937 and 31,892,048 issued and outstanding at March 31, 2006 and December 31, 2005, respectively | | 328 | | 319 | |
Additional paid-in capital | | 41,805 | | 45,325 | |
Retained earnings | | 292,764 | | 289,658 | |
Accumulated other comprehensive loss | | (17,182 | ) | (15,322 | ) |
Total shareholders’ equity | | 317,715 | | 319,980 | |
| | | | | |
Total liabilities and shareholders’ equity | | $ | 1,060,273 | | $ | 1,103,939 | |
The accompanying notes are an integral part of these consolidated financial statements.
3
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except share and per share data)
| | Three-Month Period Ended March 31, | |
| | 2006 | | 2005 | |
| | | | | |
Gross revenue | | $ | 984,456 | | $ | 677,615 | |
Operating expenses: | | | | | |
Direct cost of services and overhead | | (823,453 | ) | (537,899 | ) |
General and administrative | | (161,262 | ) | (137,821 | ) |
| | | | | |
Operating income (loss) | | (259 | ) | 1,895 | |
| | | | | |
Other income (expense): | | | | | |
Equity in earnings of joint ventures and affiliated companies | | 5,728 | | 8,704 | |
Interest income | | 591 | | 431 | |
Interest expense | | (918 | ) | (392 | ) |
Income before provision for income taxes | | 5,142 | | 10,638 | |
Provision for income taxes | | (2,036 | ) | (4,308 | ) |
Net income | | $ | 3,106 | | $ | 6,330 | |
| | | | | |
Net income per common share: | | | | | |
Basic | | $ | 0.10 | | $ | 0.20 | |
Diluted | | $ | 0.09 | | $ | 0.20 | |
Weighted average number of common shares: | | | | | |
Basic | | 32,349,754 | | 31,627,512 | |
Diluted | | 33,030,207 | | 32,207,838 | |
The accompanying notes are an integral part of these consolidated financial statements.
4
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| | Three-Month Period Ended March 31, | |
| | 2006 | | 2005 | |
Cash flows from operating activities: | | | | | |
Net income | | $ | 3,106 | | $ | 6,330 | |
Adjustments to reconcile net income to net cash used in operating activities - | | | | | |
Depreciation and amortization | | 3,839 | | 3,753 | |
Stock-based employee compensation expense | | 1,900 | | 5,132 | |
Loss on disposal of property, plant and equipment | | 27 | | 235 | |
Allowance for uncollectible accounts | | 376 | | 1,295 | |
Deferred income tax benefit | | 178 | | 41 | |
Distributed earnings of unconsolidated affiliates, net | | 74,973 | | 3,759 | |
Change in current assets and liabilities, net of business acquired - | | | | | |
Receivables and unbilled revenue | | (47,828 | ) | 5,611 | |
Prepaid expenses and other | | (2,444 | ) | 608 | |
Accounts payable and accrued subcontractor costs | | (73,854 | ) | (8,501 | ) |
Billings in excess of revenues | | 11,481 | | 10,864 | |
Employee related liabilities | | (657 | ) | (1,389 | ) |
Other accrued liabilities | | 13,053 | | (27,023 | ) |
Current taxes payable | | (31,414 | ) | (1,432 | ) |
Long term liabilities and other | | 10,725 | | (1,510 | ) |
Net cash used in operating activities | | (36,539 | ) | (2,227 | ) |
| | | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | | (2,447 | ) | (1,354 | ) |
Cash increase upon adoption of FIN 46(R) | | — | | 7,699 | |
Payments for acquisition earnouts | | (1,262 | ) | — | |
Investments in affiliates, net of cash received | | (8,551 | ) | 458 | |
Net cash (used in) provided by investing activities | | (12,260 | ) | 6,803 | |
| | | | | |
Cash flows from financing activities: | | | | | |
Borrowing on line of credit | | 204,100 | | 10,900 | |
Payments on line of credit and long-term debt | | (174,039 | ) | (12,381 | ) |
Purchases and retirements of stock and other | | (10,102 | ) | (11,935 | ) |
Net cash provided by (used in) financing activities | | 19,959 | | (13,416 | ) |
| | | | | |
Effect of exchange rate changes on cash | | (1,060 | ) | 610 | |
| | | | | |
Decrease in cash and cash equivalents | | (29,900 | ) | (8,230 | ) |
| | | | | |
Cash and cash equivalents, beginning of period | | 66,494 | | 55,885 | |
| | | | | |
Cash and cash equivalents, end of period | | $ | 36,594 | | $ | 47,655 | |
| | | | | |
Supplemental disclosures: | | | | | |
Cash paid for interest | | $ | 829 | | $ | 253 | |
Cash paid for income taxes | | $ | 34,828 | | $ | 5,472 | |
The accompanying notes are an integral part of these consolidated financial statements.
5
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim financial information has been prepared in accordance with the interim reporting rules and regulations of the U.S. Securities and Exchange Commission and therefore does not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). 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 and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ from those estimates. Certain amounts in the prior period have been reclassified to conform to current period presentation.
In the opinion of CH2M HILL Companies, Ltd.’s (CH2M HILL) management, the accompanying unaudited consolidated financial statements of the interim periods presented contain all adjustments necessary to present fairly the financial position of CH2M HILL as of March 31, 2006 and the results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three-month period ended March 31, 2006 are not necessarily indicative of the results that may be achieved for a full year and cannot be used to indicate financial performance for the entire year. These financial statements should be read in conjunction with the notes to the consolidated financial statements contained in CH2M HILL’s Annual Report on Form 10-K for the year ended December 31, 2005.
Shareholders’ Equity
The significant changes in shareholders’ equity for the three-month period ended March 31, 2006 are as follows:
| | Shares | | Amount | |
| | | | | |
Shareholders’ Equity, December 31, 2005 | | 31,892,048 | | $ | 319,980 | |
Net income | | — | | 3,106 | |
Shares issued in connection with stock-based compensation and employee benefit plans | | 1,296,880 | | 4,349 | |
Shares purchased and retired | | (422,991 | ) | (7,860 | ) |
Other comprehensive loss | | — | | (1,860 | ) |
Shareholders’ Equity, March 31, 2006 | | 32,765,937 | | $ | 317,715 | |
Stock-Based Compensation Plans
During the first quarter of 2006, CH2M HILL adopted the provisions of, and accounted for stock-based compensation in accordance with, Statement of Financial Accounting Standard (“SFAS”) No. 123—revised 2004 (“SFAS 123(R)”), “Share-Based Payment,” which replaced SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. CH2M HILL is utilizing the prospective method of adoption under which prior periods are not revised for comparative purposes. Under the prospective method of adoption under SFAS 123(R), the valuation provisions apply only to new grants and not to outstanding grants as of the effective date, January 1, 2006. Accordingly, the adoption of SFAS 123(R) did not have a material impact on CH2M HILL’s financial statements. SFAS 123(R) was not applied to CH2M HILL’s Payroll Deduction Stock Purchase Plan (“PDSPP”) as the plan is available
6
to all shareholders and incorporates no option features such as a look back period. Accordingly, no compensation cost is recognized in the financial statements for the PDSPP.
CH2M HILL has a Restricted Stock Plan which provides eligible individuals with added incentives to continue in the long-term service of the Company. The awards are made for no consideration and vest over various periods, but are considered outstanding at the time of issuance, as the shareholders are entitled to voting rights.
Prior to the adoption of SFAS 123(R), CH2M HILL recognized compensation costs of restricted stock over the vesting term. The compensation costs are based on the fair value of CH2M HILL’s common stock on the date of grant. CH2M HILL will continue to recognize compensation costs, net of estimated forfeitures, over the vesting term. Compensation expense recognized in the first quarter of 2006 relating to restricted stock was $948. In determining the amount of compensation expense, CH2M HILL has estimated that forfeitures of restricted stock shares will be less than 1% of total restricted stock shares outstanding based upon the prior experience. As of March 31, 2006, there was $5,270 of unrecognized compensation costs related to non-vested restricted stock grants. The impact of applying SFAS 123(R) during the first quarter of 2006 for all other stock-based payments did not have a material impact on CH2M HILL’s consolidated financial position, results of operations or cash flows.
The following table summarizes the restricted stock activity for the quarter ended March 31, 2006:
Restricted Stock | | Non-vested
Shares | | Weighted Average
Grant Date
Fair Value | |
Beginning of period – December 31, 2005 | | 167,769 | | $ | 12.44 | |
Awarded | | 251,937 | | 17.93 | |
Vested | | (17,651 | ) | 12.98 | |
Forfeited | | (4,128 | ) | 12.11 | |
End of period – March 31, 2006 | | 397,927 | | 15.64 | |
| | | | | | |
New Accounting Standards
In February 2006, the FASB issued SFAS No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. CH2M HILL does not expect the adoption of SFAS 155 to have a material impact on its consolidated financial position, results of operations or cash flows.
7
(2) SEGMENT INFORMATION
Certain financial information relating to the three-month periods ended March 31, 2006 and 2005 for each segment is provided below.
Three-Month Period Ended
March 31, 2006 | | Federal | | Civil
Infrastructure | | Industrial | | Other | | Financial
Statement
Balances | |
Revenues from external customers | | $ | 438,356 | | $ | 299,882 | | $ | 246,218 | | $ | — | | $ | 984,456 | |
Inter-segment sales | | 2,892 | | 5,258 | | 7,960 | | (16,110 | ) | — | |
Equity in earnings of joint ventures and affiliated companies | | 4,115 | | 1,542 | | 71 | | — | | 5,728 | |
Segment profit (loss) | | 26,681 | | 8,537 | | (23,253 | ) | (6,823 | ) | 5,142 | |
| | | | | | | | | | | | | | | | |
Three-Month Period Ended
March 31, 2005 | | Federal | | Civil
Infrastructure | | Industrial | | Other | | Financial
Statement
Balances | |
Revenues from external customers | | $ | 266,991 | | $ | 229,447 | | $ | 181,177 | | $ | — | | $ | 677,615 | |
Inter-segment sales | | 2,249 | | 4,511 | | 5,011 | | (11,771 | ) | — | |
Equity in earnings of joint ventures and affiliated companies | | 5,920 | | 2,876 | | (92 | ) | — | | 8,704 | |
Segment profit (loss) | | 7,332 | | 9,713 | | (2,177 | ) | (4,230 | ) | 10,638 | |
| | | | | | | | | | | | | | | | |
8
During the first quarter of 2006, CH2M HILL recognized a reduction in earnings related to a manufacturing facility project in its Industrial segment which accounted for the majority of the loss in the segment. This reduction of earnings was a result of a change in the total estimated costs for the project due to events and circumstances that occurred in the first quarter. While management believes that the current estimated costs at completion are reasonable, uncertainties exist until the project is complete.
(3) COMPREHENSIVE INCOME
Comprehensive income includes unrealized gains and losses on equity investments and foreign currency translation gains or losses that have been reflected as a component of shareholders’ equity and have not impacted net income. The following table summarizes the components of comprehensive income for the three-month periods ended March 31, 2006 and 2005:
| | Three-Month Period
Ended March 31, | |
| | 2006 | | 2005 | |
Net income | | $ | 3,106 | | $ | 6,330 | |
Change in unrealized gains (losses) on equity investments | | (1,122 | ) | 142 | |
Change in foreign currency translation gains (losses) | | (738 | ) | 230 | |
Comprehensive income | | $ | 1,246 | | $ | 6,702 | |
(4) EARNINGS PER SHARE
Basic earnings per share (“EPS”) excludes the dilutive effect of common stock equivalents and is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted EPS includes the dilutive effect of common stock equivalents, which consist of stock options, and is computed using the weighted-average number of shares and common stock equivalents outstanding during the period.
A reconciliation of basic and diluted EPS for the three-month periods ended March 31 follows:
| | Three-Month Period Ended
March 31, | |
| | 2006 | | 2005 | |
Numerator: | | | | | |
Net Income | | $ | 3,106 | | $ | 6,330 | |
| | | | | |
Denominator: | | | | | |
Basic income per share- weighted-average shares outstanding | | 32,350 | | 31,628 | |
Dilutive effect of common stock equivalents | | 680 | | 580 | |
Diluted income per share- adjusted weighted-average shares outstanding, assuming conversion of common stock equivalents | | 33,030 | | 32,208 | |
| | | | | |
Basic net income per share | | $ | 0.10 | | $ | 0.20 | |
Diluted net income per share | | $ | 0.09 | | $ | 0.20 | |
9
(5) INVESTMENTS IN AFFILIATES
CH2M HILL routinely enters into joint ventures to service the needs of its clients. 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. Such arrangements are customary in the engineering and construction industry and generally are project specific. CH2M HILL’s 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 CH2M HILL’s partner(s).
CH2M HILL’s interests in certain joint ventures are considered variable interest entities under FASB issued Interpretation No. 46(R) (“FIN 46(R)”), “Consolidation of Variable Interest Entities.” CH2M HILL has classified entities identified as variable interest entities (“VIE”) into two groups, the first of which includes those entities that CH2M HILL has consolidated under the guidance of FIN 46(R), as CH2M HILL is considered the primary beneficiary, and the second group which includes those entities which CH2M HILL was not required to consolidate. At March 31, 2006, the assets and liabilities of the identified VIE’s that were not consolidated are $70,457 and $66,551, respectively.
For VIE’s where CH2M HILL is not the primary beneficiary and those entites which are not VIE’s, CH2M HILL accounts for its investments in affiliated unconsolidated companies using the equity method of accounting. CH2M HILL’s proportionate share of net income or loss is included as equity in earnings of joint ventures and affiliated companies on the accompanying consolidated statements of income. As of March 31, 2006, CH2M HILL had the following significant investments in affiliated unconsolidated companies accounted for under the equity method of accounting:
| | % Ownership | |
Domestic: | | | |
ATKINSON/CH2M HILL, Joint Venture | | 30.0% | |
AGVIQ-CH2M HILL Joint Venture | | 49.0% | |
BPC Airport Partners Joint Venture | | 34.5% | |
CH2M HILL/TILDON COIL Joint Venture | | 50.0% | |
CH2M HILL/ VT Griffin | | 49.0% | |
CH2M – WG Idaho, LLC | | 50.5% | |
Coastal Estuary Services | | 49.9% | |
Golden Crossing Constructors, Joint Venture | | 33.3% | |
IAP–Hill | | 25.0% | |
Kaiser-Hill Company, LLC | | 50.0% | |
Kakivik Asset Management | | 33.3% | |
Milwaukee Transportation Partners, LLC | | 50.0% | |
OMI/Thames Water Stockton, Inc. | | 50.0% | |
Parsons CH2M HILL Program Management Consultants | | 45.0% | |
Pizzagalli/CCI Joint Venture | | 50.0% | |
Stockton D/B Joint Venture | | 50.0% | |
Washington Closure, LLC | | 30.0% | |
Washington-IDC | | 24.0% | |
Foreign: | | | |
BTC Group | | 33.3% | |
CH2M HILL BECA, Ltd. | | 50.0% | |
CH2M HILL/ Parsons, a Joint Venture | | 50.0% | |
CH2M PB JV, Pte | | 50.0% | |
CHDE Water | | 50.0% | |
CHBM Water Joint Venture | | 50.0% | |
Maroochy Alliance Joint Venture | | 40.0% | |
As of March 31, 2006 and December 31, 2005, the investments in unconsolidated affiliates were $46,473 and $114,679, respectively. On October 13, 2005, Kaiser-Hill Company, LLC (Kaiser-Hill) declared physical completion of the activities at the site. During the first quarter of 2006, Kaiser-Hill distributed earnings of $80,000. CH2M HILL’s remaining investment in Kaiser-Hill as of March 31, 2006 was $7,309 compared to $87,295, as of December 31, 2005.
10
In the first quarter of 2005, CH2M HILL and Washington Group International formed a joint venture (CH2M-WG Idaho) of which CH2M HILL owns 50.5%. The contract is for the U.S. Department of Energy’s (DOE) cleanup and closure of a federal nuclear facility located in Idaho. CH2M-WG Idaho began physical closure operations in the third quarter of 2005. During the three-month period ended March 31, 2006, CH2M HILL recognized earnings from CH2M-WG Idaho of $3,078 and received $5,303 of distributed earnings. CH2M HILL’s investment in CH2M-WG Idaho as of March 31, 2006 was $16,380 compared to $5,979 as of December 31, 2005.
Summarized unaudited financial information for CH2M HILL’s unconsolidated affiliates for the three-month periods ended March 31, 2006 and 2005 is as follows:
| | Three-Month Period Ended
March 31, | |
| | 2006 | | 2005 | |
RESULTS OF OPERATIONS: | | | | | |
Revenues | | $ | 258,184 | | $ | 249,127 | |
Direct costs | | (244,344 | ) | (227,649 | ) |
Gross margin | | 13,840 | | 21,478 | |
General and administrative expenses | | (2,822 | ) | (3,019 | ) |
Operating income | | 11,018 | | 18,459 | |
Other expense, net | | 579 | | 14 | |
Net income | | $ | 11,597 | | $ | 18,473 | |
(6) GOODWILL AND INTANGIBLE ASSETS
Intangible assets with finite lives consist of the following:
| | Cost | | Accumulated
Amortization | | Net finite-lived
intangible
assets | |
March 31, 2006 | | | | | | | |
| | | | | | | |
Contracts-in-place | | $ | 23,759 | | $ | (21,111 | ) | $ | 2,648 | |
Patents and trademarks | | 5,219 | | (5,206 | ) | 13 | |
Contracted backlog | | 2,230 | | (1,312 | ) | 918 | |
Non-compete agreements and other | | 807 | | (230 | ) | 577 | |
Total finite-lived intangible assets | | $ | 32,015 | | $ | (27,859 | ) | $ | 4,156 | |
| | | | | | | |
December 31, 2005 | | | | | | | |
| | | | | | | |
Contracts-in-place | | $ | 23,759 | | $ | (20,049 | ) | $ | 3,710 | |
Patents and trademarks | | 5,219 | | (5,206 | ) | 13 | |
Contracted backlog | | 2,230 | | (734 | ) | 1,496 | |
Non-compete agreements and other | | 807 | | (184 | ) | 623 | |
Total finite-lived intangible assets | | $ | 32,015 | | $ | (26,173 | ) | $ | 5,842 | |
The contracts-in-place are amortized on a straight-line basis over the total life of the contracts up to seven years. The other intangible assets are being amortized over their expected lives up to six years. The amortization expense reflected in the accompanying consolidated statements of income totaled $1,686 and $1,995 for the three-month periods ended March 31, 2006 and 2005, respectively.
11
Indefinite-lived intangible assets consist of the following:
| | March 31,
2006 | | December 31,
2005 | |
Goodwill | | $ | 41,992 | | $ | 40,730 | |
Tradename | | 20,326 | | 20,326 | |
Total indefinite-lived intangible assets | | $ | 62,318 | | $ | 61,056 | |
In 2006, CH2M HILL paid $1,262 to the former owners of MicroSource, Inc. as a result of earn-out targets being achieved. This amount was recorded as additional goodwill and allocated to the Industrial operating segment.
(7) LINE OF CREDIT
CH2M HILL has a credit facility with a maximum borrowing capacity of $160,000 which expires in July 2009. The credit facility may be used for general corporate purposes, permitted acquisitions and to support letters of credit. At the option of CH2M HILL, the credit facility bears interest at a rate equal to either the London InterBank Offered Rate plus 1.00% to 1.75%, or the lender’s applicable base rate plus margin of 0.0% to 0.25% based on CH2M HILL’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined. A commitment fee of approximately 0.20% to 0.35% per year on the unused portion of the line of credit is payable based on CH2M HILL’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined. During the first quarter of 2006, CH2M HILL borrowed an average of $15,973 under this credit facility for general corporate purposes. At March 31, 2006, $30,400 was outstanding under the facility. No amounts were outstanding at December 31, 2005.
The agreement requires CH2M HILL to, among other factors, maintain minimum levels of net worth, a minimum coverage ratio of certain fixed charges, and a minimum leverage ratio. As of March 31, 2006, CH2M HILL was in compliance with the covenants required by the agreement.
The agreement also allows CH2M HILL to issue letters of credit to support various trade activities. Issued letters of credit are reserved against the borrowing base of the line of credit. At March 31, 2006 and December 31, 2005, there were $27,338 and $25,663 issued and outstanding letters of credit, respectively.
(8) COMMITMENTS AND CONTINGENCIES
CH2M HILL maintains a variety of commitments that are generally made available to provide support for various provisions in its 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. CH2M HILL also posts surety bonds, which are contractual agreements issued by a surety, for the purpose of guaranteeing our performance on contracts. Bid bonds are also issued by a surety to protect owners and are subject to full or partial forfeiture for failure to perform obligations arising from a successful bid.
CH2M HILL is party to various contractual guarantees and legal actions arising in the normal course of business. From time to time, agencies of the U.S. government investigate whether CH2M HILL’s operations are being conducted in accordance with applicable regulatory requirements. Because a large portion of CH2M HILL’s business comes from federal, state and municipal sources, CH2M HILL’s procurement practices at times are also subject to review and occasional investigations by U.S. 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.
Damages assessed in connection with and the cost of defending any such actions could be substantial. While the outcome of pending proceedings are often difficult to predict, as of March 31, 2006 management believes that no ongoing litigation or investigation is likely to result in a material adverse impact on CH2M HILL’s consolidated financial statements.
12
In January 2006, a subsidiary entered into a Deferred Prosecution Agreement (DPA) with the office of the United States Attorney for the District of Connecticut. The DPA relates to an investigation of a Clean Water Act (CWA) violation at two wastewater treatment facilities in Connecticut. Pursuant to the DPA, the subsidiary contributed $2,000 to community projects and is taking other agreed upon steps to enhance our CWA compliance procedures at the two wastewater treatment facilities in Connecticut. Provided CH2M HILL complies with its obligations under the DPA, the U.S. District Attorney for the District of Connecticut will recommend dismissal of all actions against the subsidiary in connection with this matter. The violation related to failure to comply with sampling and reporting requirements of the CWA and there is no evidence the violation resulted in harm to human health or the environment.
CH2M HILL has presented a claim to the Internal Revenue Service (IRS) relating to the research and experimentation tax credit for the years 1996-2003. Although CH2M HILL is seeking resolution with the IRS, CH2M HILL only recognizes tax benefits related to these credits for financial statement purposes when it is probable that such benefits will be realized. The amount of the tax credit claimed is significant, however, the ultimate amount to be realized and the timing of the recognition of the tax credit will depend upon the final resolution with the IRS.
13
CH2M HILL COMPANIES, LTD.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis explains our general financial condition, changes in financial condition and results of operations as a whole and for each of our operating segments including:
• Factors affecting our business
• Our revenues and profits
• The source of our revenues and profits
• Variations of revenues and profits from year to year
• Cash sources and utilizations
• The impact of the above on our overall financial condition
The following discussion and information contains, in addition to historical information, forward-looking statements, including without limitation, statements containing the words “believes,” “anticipates,” “expects” and words of similar import and statements regarding our strategy, financial performance and operations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described under item 1A “Risk Factors” (which is expressly incorporated herein by reference) of our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission (SEC) on February 27, 2006. You should review this section in conjunction with our financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2005.
Our reports are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC. Our website address is www.ch2m.com. Our SEC filings, which include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such filings, are located in the About Us/Employee Ownership section of our website.
Introduction
We are one of the largest engineering services firms worldwide and are employee-owned. Our business provides engineering, construction, operation, major project management and related technical services to municipal, state, federal and private sector clients worldwide. Founded in 1946, we operate in more than 110 countries and have nearly 16,000 employees worldwide.
We believe we provide our clients with innovative project delivery using cost-effective approaches and advanced technologies. We continuously monitor acquisition and investment opportunities that will expand our portfolio of services, add value to the projects undertaken for clients, or enhance our capital strength. We believe that we are well positioned geographically, technically and financially to compete worldwide in the key markets we have elected to pursue and the clients we serve.
The engineering and construction industry continues to undergo substantial change as public and private clients privatize and outsource many of the services that were formerly provided internally. Numerous mergers and acquisitions in the industry have resulted in a group of larger firms that offer a full complement of single-source services including studies, designs, construction, operations, maintenance and in some instances, facility ownership. Included in the current trend is the movement towards longer-term contracts for the expanded array of services, e.g., 5 to 20 year contracts. These larger, longer, more full-service contracts require us to have substantially greater financial capital than has historically been necessary to remain competitive.
14
We provide services to our clients through three operating segments — Federal, Civil Infrastructure and Industrial — which are aligned with the types of clients we serve. The structure provides for better decision making on an enterprise-wide basis. For example, while our Federal segment generally provides a comprehensive range of services to the U.S. Federal government, it also provides services to international governments. Our Civil Infrastructure segment generally provides a comprehensive range of services to various state and local governments. Our Industrial segment generally provides a comprehensive range of services to various private sector clients.
Results of Operations for the Three-Month Period Ended March 31, 2006 Compared to the Same Period of 2005
Revenues and pre-tax profit or loss for the three-month period ended March 31, 2006 and 2005 by operating segment were as follows:
Three-Month Period Ended March 31,
(in millions)
| | Revenues | | Pre-Tax Profit (Loss) | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Federal | | $ | 438.4 | | 44.5 | % | $ | 267.0 | | 39.4 | % | $ | 26.7 | | $ | 7.3 | |
Civil Infrastructure | | 299.9 | | 30.5 | % | 229.4 | | 33.9 | % | 8.5 | | 9.7 | |
Industrial | | 246.2 | | 25.0 | % | 181.2 | | 26.7 | % | (23.3 | ) | (2.2 | ) |
Corporate | | — | | — | | — | | — | | (6.8 | ) | (4.2 | ) |
Total | | $ | 984.5 | | 100.0 | % | $ | 677.6 | | 100.0 | % | $ | 5.1 | | $ | 10.6 | |
Federal
Revenues increased for the three-month period ended March 31, 2006, compared to the same period in the prior year by $171.4 million or 64.2%. Our government facilities and infrastructure and environmental services businesses reported a significant increase in revenue for the three-month period ended March 31, 2006 versus prior year due primarily to work associated with the Hurricane Katrina relief and cleanup efforts. Partially offsetting these favorable results was a decline in our nuclear business as revenues decreased for the first quarter of 2006 versus the same period in 2005, due to reduced spending on our contract with the U.S. Department of Energy (DOE) at the Hanford River Protection Project.
Pre-tax profit increased for the three-month period ended March 31, 2006 compared to the same period last year to $26.7 million from $7.3 million. The increase in pre-tax profits is primarily associated with the above discussed revenue growth in the government facilities and infrastructure business group and, in general, improved project performance. This increase is partially offset by lower pre-tax profits at the Mound project as it is in the final stages of completion and lower equity in earnings of joint ventures from the substantially complete Kaiser-Hill project.
Civil Infrastructure
Revenues increased for the three-month period ended March 31, 2006, compared to the same period in 2005 by $70.5 million or 30.7%. Each of the three businesses comprising the Civil Infrastructure operating segment reported a significant increase in revenues. The largest increase was attributable to continued growth in our transportation business from successful pursuits in transportation design/build projects and a slight increase in transportation consulting. These new projects included significant highway contracts in Colorado, Washington, Florida and Western Canada. Our water business reported increased revenues compared to the same period of last year related primarily to several projects in North America. Our operations and maintenance business (O&M) reported a significant improvement in revenues compared to the same period last year due to a new municipal operations project and an existing contract amendment.
15
Pre-tax profit decreased by $1.2 million, or 12.4%, for the three-month period ended March 31, 2006. For the quarter ended March 31, 2006 compared to the same period last year, both our transportation and water businesses experienced a decrease in pre-tax profit primarily as a result of project delivery issues on certain projects in the U.S. and abroad, lower equity earnings on international joint venture projects, and increased business development costs. Partially offsetting these negative results was our O&M business, which produced significant improvements in pre-tax profits for the three-month period compared to prior year primarily attributable to the revenue growth and continued improvement in project controls, risk management processes and controlled overhead spending.
Industrial
Revenues increased for the three-month period ended March 31, 2006, compared to the same period last year by $65.0 million or 35.9%. The increase in revenues is primarily due to significant new business in our power, energy and industrial systems, communications solutions and electronics businesses. For the three-month period ended March 31, 2006 versus the same period last year, we experienced significant growth in our power business driven primarily from two new contracts with major utility companies. The energy and industrial systems business revenue growth for the current quarter was associated with operations and maintenance support services at a petroleum facility. Our communications business has had signs of renewed spending by clients particularly in the wireless sectors worldwide which has increased revenues. Lastly, our electronics sector has experienced strong performance as the overall economic market conditions have improved, particularly in the clean room installation area. These increases were partially offset from declines in our manufacturing and bio-pharma businesses which continue to experience delays in customer awards of large, full-service projects.
Pre-tax loss increased for the three-month period ended March 31, 2006, compared to the same period of 2005 by $21.1 million. The loss for the quarter ended March 31, 2006 is primarily due to significant cost overruns on a project to construct a manufacturing facility. This project was bid under fixed price commercial terms where the risk of certain variances remains with the company. The project has experienced increased costs due to project delivery issues and increased commodity prices. In addition, the clean up efforts required from Hurricane Katrina have caused significant shortages in experienced craft laborers in the area and thus have materially increased wage rates and reduced overall productivity. The project is scheduled for completion in the third quarter of 2006. While management believes that the current estimated costs at completion are reasonable, uncertainties exist until the project is complete.
Joint Ventures
For the quarters ended March 31, 2006 and 2005, we reported total equity in earnings of joint ventures and affiliated companies of $5.7 million and $8.7 million, respectively. The decrease is primarily due to the physical completion in October 2005 of the site clean-up effort on the Kaiser-Hill project. During the three-month period ended March 31, 2006, we recognized no earnings from Kaiser-Hill compared to $5.1 million in earnings for the quarter ended March 31, 2005. The DOE continues to review our submitted costs and perform normal cost audit activities associated with any governmental contract. We expect that these activities will continue throughout 2006 and beyond and any findings will not have a material effect on our earnings. During the first quarter of 2006, Kaiser-Hill distributed earnings of $80.0 million. Our remaining investment in Kaiser-Hill as of March 31, 2006 was $7.3 million compared to $87.3 million at December 31, 2005.
Partially offsetting the decease in earnings from Kaiser-Hill was the results of operations from our newly formed joint venture with Washington Group International. This joint venture, CH2M-WG Idaho LLC, is completing a U.S. Department of Energy contract for the cleanup and closure of a nuclear facility located in Idaho. We own 50.5% of CH2M–WG Idaho. Closure operations began in the third quarter of 2005 and are expected to last approximately seven years. During the three-month period ended March 31, 2006, CH2M HILL recognized earnings from CH2M–WG Idaho of $3.1 million and had recognized no earnings related to the joint venture in the quarter ended March 31, 2005. Our investment in CH2M–WG Idaho as of March 31, 2006 was $16.4 million compared to $6.0 million as of December 31, 2005.
16
Corporate Expenses
Corporate expenses represent centralized management costs that are not allocable to individual operating segments and primarily include expenses associated with administrative functions such as executive management, legal, treasury, accounting and tax. Corporate expenses for the quarter ended March 31, 2006 were $6.8 million compared to $4.2 million for the same period in 2005. The increase in expense for the three-month period ended March 31, 2006 compared to the same period in 2005 was due primarily to increased payroll costs and increased long-term incentive compensation costs.
Income Taxes
Our effective tax rate for the three-month period ended March 31, 2006 was 39.6% compared to 40.5% for the same period last year. The decrease in the effective tax rate for the three-month period ended March 31, 2006 compared to the prior period, is primarily due to a decrease in non-deductible royalty expense and a decrease in the net operating loss of an unconsolidated subsidiary which were not deductible for tax purposes. Our effective tax rate continues to be higher than the U.S. statutory income tax rate of 35.0% due to the effect of state income taxes, non-deductible foreign net operating losses and disallowed portions of meals and entertainment expenses.
We have presented a claim to the Internal Revenue Service (IRS) relating to the research and experimentation tax credit for the years 1996-2003. Although we are seeking resolution with the IRS, we only recognize tax benefits related to these credits for financial statement purposes when it is probable that such benefits will be realized. The amount of the tax credit claimed is significant. However, the ultimate amount to be realized and the timing of the recognition of the tax credit will depend upon the final resolution with the IRS.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and borrowings under our revolving line of credit. Our primary uses of cash are to fund our working capital, acquisitions, capital expenditures and purchases of stock presented on our internal market. During the three months ended March 31, 2006, our operating cash flows decreased approximately $34.3 million compared to the same period in the prior year. This decrease was primarily due to an increase in unbilled revenues that were primarily associated with work we performed for the Hurricane Katrina cleanup effort, an increase in the payment of accounts payable and income tax payments in 2006. These decreases in operating cash flow were partially offset from the receipt of funds from our joint ventures.
Billings and collections on accounts receivable can impact our operating cash flows. We continuously monitor collection efforts and assess the allowance for doubtful accounts. Based on this assessment at March 31, 2006, we have deemed the allowance for doubtful accounts to be adequate; however, future economic conditions may adversely impact some of our clients’ ability to pay our bills or the timeliness of their payments. Consequently, it may also impact our timing of cash receipts necessary to meet our operating needs.
We are a professional services organization and, therefore, we do not require significant outflows of cash for capital expenditures. Our capital expenditures are primarily for office equipment and leasehold improvements. Capital expenditures during the three-month period ended March 31, 2006 and the three- month period ended March 31, 2005 were $2.4 million and $1.4 million, respectively. We have a formal operating lease program under which most of our computers and related equipment is procured on an ongoing basis.
We used $10.1 million in cash for purchases of stock presented on our internal market during the three-month period ended March 31, 2006, compared to $11.9 million for the same period of 2005.
17
We have a credit facility with a maximum borrowing capacity of $160.0 million which expires in July 2009. The credit facility may be used for general corporate purposes, permitted acquisitions and to support letters of credit. At our option, the credit facility bears interest at a rate equal to either the London InterBank Offered Rate plus 1.00% to 1.75%, or the lender’s applicable base rate plus margin of 0.0% to 0.25% based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined. A commitment fee of approximately 0.20% to 0.35% per year on the unused portion of the line of credit is payable based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined. During the three-month period ended March 31, 2006, our average daily borrowing was $16.0 million under our credit facility for general corporate purposes. It is likely, but uncertain, that we will continue to utilize our credit facility periodically during the remainder of 2006 depending on the timing of cash receipts and disbursements. There was $30.4 million outstanding under our line of credit at March 31, 2006 and no amount outstanding at December 31, 2005.
The agreement requires us to, among other factors, maintain minimum levels of net worth, a minimum coverage ratio of certain fixed charges, and a minimum leverage ratio. As of March 31, 2006, we were in compliance with the covenants required by the agreement.
The agreement also allows us to issue letters of credit to support various trade activities. Issued letters of credit are reserved against the borrowing base of the line of credit. At March 31, 2006 and December 31, 2005, there were $27.3 million and $25.7 million issued and outstanding letters of credit, respectively.
Based on our total cash and credit capacity at March 31, 2006 of $169.3 million, we believe we have sufficient resources to fund our operations, anticipated capital expenditure requirements, as well as purchases of stock presented on our internal market, should we choose to do so, for the next 12 months and beyond.
Cash on hand | | | | $ | 36.6 | |
Line of credit capacity | | 160.0 | | | |
Issued letters of credit | | (27.3 | ) | | |
Net credit capacity available | | | | 132.7 | |
Total capacity | | | | $ | 169.3 | |
Off-Balance Sheet Arrangements
We are party to two lease agreements related to our corporate headquarters and two adjacent buildings. These lease agreements were recently restructured and the new lessors are not variable interest entities (VIE’s) as the lessors are considered a business per the definition of revised Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 46 (FIN 46R), “Consolidation of Variable Interest Entities.” These leases remain operating leases. One of the lease agreements calls for monthly lease payments of approximately $0.4 million through March 3, 2013 and requires that we guarantee a residual value of the facilities for approximately $42.0 million. Upon completion of the lease term, we have the option to purchase the facilities for $53.0 million. The other lease agreement calls for monthly lease payments at a variable interest rate, estimated to be approximately $0.1 million per month, based on current interest rates. The lease agreement requires that we guarantee a residual value of this building of approximately $17.6 million. Upon completion of the lease term, we have the option to purchase the additional building from the lessor for $20.8 million. The lease matures on September 28, 2008 and provides for five one year renewal options.
On October 19, 2005, we closed on an operating lease facility which will be used for the construction of a fourth corporate headquarters building in Colorado. The building is expected to be completed in 2007 and the lease term will be approximately sixty-nine months. Yearly payments on the lease are estimated to be approximately $1.1 million and the lease requires us to guarantee a residual value of the facility equal to an amount not greater than 85% of the total facility costs. The total facilities costs are estimated to be approximately $23.0 million.
18
Aggregate Commercial Commitments
We maintain a variety of commercial commitments that are generally made available to provide support for various provisions in engineering and construction contracts. Letters of credit are available 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 also post surety bonds, which are contractual agreements issued by a surety, for the purpose of guaranteeing our performance on contracts. Bid bonds are also issued by a surety to protect owners and are subject to full or partial forfeiture for failure to perform obligations arising from a successful bid.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect both the results of operations as well as the carrying values of our assets and liabilities. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as of the date of the financial statements that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The accounting policies that we believe are most critical to your understanding of our financial results and condition and require complex management judgment are summarized below. Further detail and information regarding our critical accounting policies and estimates are included in our 2005 Form 10-K.
Revenue Recognition
We earn our revenues from different types of services under a variety of different types of contracts, including cost-plus, firm fixed-price and time-and-materials. In recognizing revenue, we evaluate each contractual arrangement to determine the appropriate authoritative literature to apply. We recognize revenue and profit for a majority of our 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 contracts. In making such estimates, judgments are required to evaluate potential variances in schedule, the cost of materials and labor, productivity, liability claims, contract disputes, and achievement of contract performance standards.
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 can be reliably estimated. 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.
We have a history of making reasonable estimates of the extent of progress towards completion, total contract revenue and total contract costs on our engineering and construction contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual total contract revenue and completion costs may vary from estimates.
A portion of our contracts are operations and management type contracts. Typically, these contracts may include fixed and variable components along with incentive fees. Revenue is recognized on operations and management contracts on a straight line basis over the life of the contract once we have an arrangement, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured.
Income Taxes
In determining net income for financial statement purposes, we must make estimates and judgments in the calculation of tax assets and liabilities and in the determination of the recoverability of the deferred tax assets. The tax assets and liabilities arise from temporary differences between the tax return and the financial statement recognition of revenues and expenses.
19
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our tax provision by recording a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable.
In addition, the calculation of our tax assets and liabilities involves dealing with uncertainties in the application of complex tax regulations. We may recognize a tax asset or adjust taxes payable for anticipated state or federal tax credits, such as those relating to the research and experimentation tax credit.
Pension Benefits
We have two frozen and one active noncontributory defined benefit pension plans. Our earnings and shareholders’ equity may be impacted by these qualified defined benefit plans because FASB Statement of Financial Accounting Standard (SFAS) No. 87, “Employers’ Accounting for Pensions,” requires that the amounts we record be computed using actuarial valuations. These valuations include many assumptions, but the two most critical assumptions are the discount rate and the expected long-term rate of return on plan assets. We use judgment in selecting these assumptions each year because we have to consider not only current market conditions, but also make judgments about future market trends, changes in the interest rates and equity market performance. We also have to consider factors like the timing and amounts of expected contributions to the plans and benefit payments to plan participants.
New Accounting Standards
In February 2006, the FASB issued SFAS No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. We do not expect the adoption of SFAS 155 to have a material impact on our consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (Revised) “Share-Based Payments,” (SFAS 123(R)), which replaces SFAS No. 123 and supersedes APB No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) is effective for us beginning in 2006 and requires that the costs resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) generally applies to all awards granted after the effective date and does not apply to awards granted in periods before the required effective date, except if prior awards are modified, repurchased or cancelled after the effective date. We adopted SFAS 123(R) on January 1, 2006 and utilized the prospective basis for applying the provisions of SFAS 123(R). The impact of applying SFAS 123(R) during the first quarter of 2006 did not have a material effect on our consolidated financial position, results of operations or cash flows.
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 flow.
Foreign currency exchange rates. We are exposed to foreign currency exchange risks in the normal course of our international business operations. Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. We may engage in forward foreign exchange contracts to reduce our economic exposure to changes in exchange rates. Generally, forward contracts are entered into to hedge specific commitments and anticipated transactions but not for speculative or trading purposes.
20
Interest rates. Our interest rate exposure is generally limited to our unsecured revolving credit agreement and a building lease agreement that calls for monthly lease payments at a variable interest rate. Historically, we have used short-term variable rate borrowings under the unsecured revolving credit agreement on a limited basis. There was $30.4 million outstanding under the unsecured revolving credit agreement at March 31, 2006. Our variable lease payments on the building lease agreement are estimated to be approximately $0.1 million per month, based on current interest rates. We have assessed the market risk exposure on these financial instruments and determined that any significant changes to the fair value of these instruments would not have a material impact on our consolidated results of operations, financial position or cash flows. Additionally, management believes that a change of 100 basis points in interest rates would not have a material impact on our consolidated results of operations.
Item 4. Controls and Procedures
We carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to various contractual guarantees and legal actions arising in the normal course of our business. From time-to-time, agencies of the U.S. government investigate whether we conduct our operations in accordance with applicable regulatory requirements. Because a large portion of our business comes from federal, state, and municipal sources, our procurement practices at times also are subject to review and occasional investigations by U.S. 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. These investigations often take years to complete and many result in no adverse action. Damages assessed in connection with and the cost of defending any such actions could be substantial. While the outcome of pending proceedings are often difficult to predict, as of the date of this filing, our management believes that no ongoing litigation or investigation is likely to result in a material adverse impact on our consolidated financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table covers the purchases of our securities by CH2M HILL during the period covered by this report.
Period | | Total Number of
Shares Purchased | | Average Price Paid
per Share | | Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs | | Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs | |
January (a) | | 8,694 | | $ | 16.73 | | — | | — | |
February (a) | | — | | — | | — | | — | |
March (b) | | 414,296 | | $ | 18.72 | | — | | — | |
Total | | 422,990 | | $ | 18.68 | | — | | — | |
(a) Shares purchased by CH2M HILL from terminated employees.
(b) Shares purchased by CH2M HILL in the Internal Market.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
22
Item 6. Exhibits
Exhibits
* 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1 Certification of Chief Executive Officer pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)
*32.2 Certification of Chief Financial Officer pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)
*33.1 Amendment No. 1 to CH2M HILL Stock Alumni Program dated February 10, 2006
*Filed herewith
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CH2M HILL Companies, Ltd. |
| |
| |
Date: May 4, 2006 | /c/ Samuel H. Iapalucci | |
| Samuel H. Iapalucci |
| Executive Vice President and Chief Financial Officer |
| |
| |
| /c/ JoAnn Shea | |
| JoAnn Shea |
| Vice President and Chief Accounting Officer |
| | | |
24
Index of Exhibits
* 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1 Certification of Chief Executive Officer pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)
*32.2 Certification of Chief Financial Officer pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)
*33.1 Amendment No. 1 to CH2M HILL Stock Alumni Program dated February 10, 2006
*Filed herewith
25
