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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________
Form 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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)
Oregon 93-0549963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6060 South Willow Drive,
Greenwood Village, CO 80111-5142
(Address of principal executive offices) (Zip Code)
(303) 771-0900
(Registrant's telephone number, including area code)
_______________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___ No X
---
As of October 31, 1999, the registrant had 29,650,260 shares of common stock,
$.01 par value per share, issued and outstanding.
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CH2M HILL COMPANIES, LTD.
September 30, 1999
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Consolidated Condensed Financial Statements:
Balance Sheets as of December 31, 1998 and September 30,
1999........................................................... 2
Statements of Income for the three and nine months ended
September 30, 1998 and 1999...................................... 3
Statements of Cash Flows for the nine months ended
September 30, 1998 and 1999.................................... 4
Notes to Financial Statements.................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 18
1
CH2M HILL COMPANIES, LTD.
Consolidated Condensed Balance Sheets
(Dollars in thousands)
Pro Forma
December 31, September 30, September 30,
1998 1999 1999
------------ ------------- -------------
ASSETS (Unaudited) (Unaudited)
CURRENT ASSETS:
Cash & cash equivalents $ 16,595 $ 21,477
Receivables, net -
Client accounts 136,882 162,935
Unbilled revenue 87,635 113,652
Other 4,567 9,040
Prepaid expenses & other 8,059 8,926
------------ -------------
Total current assets 253,738 316,030
PROPERTY, PLANT & EQUIPMENT, net 13,990 13,664
OTHER ASSETS, net 30,597 35,231
------------ -------------
TOTAL ASSETS $ 298,325 $ 364,925
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt & notes payable to former shareholders 9,039 $ 7,462
Accounts payable 29,187 59,524
Billings in excess of revenues 30,556 57,625
Accrued incentive compensation 18,065 12,725
Employee related liabilities 42,013 42,620
Other accrued liabilities 27,725 17,920
Current deferred income taxes 23,855 31,665
------------ -------------
Total current liabilities 180,440 229,541
OTHER LONG-TERM LIABILITIES 24,404 27,053
LONG-TERM DEBT 2,286 251
NOTES PAYABLE TO FORMER SHAREHOLDERS 16,063 13,874
------------ -------------
Total liabilities 223,193 270,719
------------ -------------
COMMITMENTS AND CONTINGENCIES (See Notes)
TEMPORARY SHAREHOLDERS' EQUITY:
Preferred stock, Class A $.02 par value,
50,000,000 shares authorized; issued and outstanding - 12,112,900
at September 30, 1999 and 11,068,580 at December 31, 1998 221 242
Common stock, $.01 par value,100,000,000 shares authorized; issued
and outstanding - 17,584,460 at September 30, 1999 and 16,957,360
at December 31, 1998 170 176
Additional paid-in capital 20,283 29,255
Retained earnings 56,148 67,116
Accumulated other comprehensive loss (1,690)
PERMANENT SHAREHOLDERS' EQUITY:
Common stock, 29,697,360 issued and outstanding pro forma - $ 418
Additional paid-in capital, pro forma - 29,255
Retained earnings, pro forma - 67,116
Accumulated other comprehensive loss, pro forma - (2,583)
------------ ------------- -------------
Total shareholders' equity 75,132 94,206 $ 94,206
------------ ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 298,325 $ 364,925
============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
CH2M HILL COMPANIES, LTD.
Consolidated Condensed Statements of Income
(Dollars in thousands except per share)
Quarter Ended Year-to-Date
September 30, September 30,
-------------------------------- --------------------------------
1998 1999 1998 1999
------------ ----------- ------------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Gross revenue $ 235,559 $ 296,174 $ 685,642 $ 872,237
Equity in earnings of joint ventures and
affiliated companies 5,061 4,584 7,098 8,054
------------ ----------- ------------- -----------
Total revenues 240,620 300,758 692,740 880,291
Operating expenses:
Direct cost of services and overhead (161,715) (218,437) (464,596) (635,996)
General and administrative (74,061) (72,042) (215,374) (222,782)
------------ ----------- ------------- -----------
Operating income 4,844 10,279 12,770 21,513
Other income (expense):
Interest income 481 496 1,441 941
Interest expense (553) (164) (1,640) (1,033)
------------ ----------- ------------- -----------
Income before provision for income taxes 4,772 10,611 12,571 21,421
Provision for income taxes (2,844) (5,059) (7,492) (10,453)
------------ ----------- ------------- -----------
Net income $ 1,928 $ 5,552 $ 5,079 $ 10,968
============ =========== ============= ===========
Net income per common and preferred share:
Basic and Diluted $ 0.07 $ 0.18 $ 0.18 $ 0.37
Weighted average number of common and preferred shares:
Basic and Diluted 28,555,660 30,434,530 28,372,330 29,419,130
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
CH2M HILL COMPANIES, LTD.
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
Nine-Month Period Nine-Month Period
Ended September 30, Ended September 30,
1998 1999
------------------- -------------------
(unaudited) (unaudited)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (8,943) $ 16,715
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,596) (3,376)
Other 35 777
------------------- -------------------
Net cash used in investing activities (3,561) (2,599)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on long-term debt 109 94
Principal payments on notes payable to former shareholders (4,306) (4,290)
Principal payments on long-term debt (3,838) (3,272)
Purchases and retirements of stock (1,399) (1,490)
------------------- -------------------
Net cash used in financing activities (9,434) (8,958)
CASH EFFECT OF CUMULATIVE TRANSLATION ADJUSTMENT 467 (276)
------------------- -------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (21,471) 4,882
CASH AND CASH EQUIVALENTS, beginning of year 48,696 16,595
------------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ 27,225 $ 21,477
=================== ===================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial information has been prepared in accordance with the
interim reporting rules and regulations of the Securities and Exchange
Commission, and therefore does not necessarily include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. The preparation of financial statements, in conformity with
generally accepted accounting principles, 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.
In the opinion of CH2M HILL's management, the accompanying unaudited
consolidated condensed financial statements of the interim period contain all
adjustments necessary to present fairly the financial position of CH2M HILL as
of September 30, 1999 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 nine-month period ended September 30, 1999 are not
necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate financial performance for the entire year.
Unaudited Pro Forma Information
On November 6, 1998, the Board of Directors approved a new ownership
program for CH2M HILL and certain resolutions that were subsequently ratified by
a vote of the shareholders on December 18, 1998. Such resolutions included, but
were not limited to, adopting amendments to the Restated Bylaws and Articles of
Incorporation which provide for the:
. termination of the existing Key Employee Policy and Agreement,
. authorization to convert all outstanding Class A preferred stock into
shares of common stock on a one-for-one basis,
. increase in the authorized shares of common stock to 100,000,000, par
value $.01 per share, and Class A preferred stock to 50,000,000, par
value $.02 per share,
. authorization of a ten-for-one stock split on CH2M HILL's common stock
and Class A preferred stock,
. imposition of certain restrictions on the stock including, but not
limited to, the right but not the obligation to repurchase shares upon
termination of employment or affiliation, the right of first refusal,
and ownership limits.
The effective date of the above resolutions will be January 1, 2000.
Common and preferred stock amounts, equivalent share amounts and per share
amounts have been adjusted retroactively to give effect to the stock split. The
conversion of outstanding Class A preferred stock to common stock has been
reflected in the unaudited pro forma balance sheet at September 30, 1999.
New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes fair value
accounting and reporting standards for derivative instruments and hedging
activities. The effective date of SFAS No. 133 was deferred until January 1,
2001 by the issuance of SFAS No. 137. CH2M HILL will adopt SFAS No. 133 in the
first quarter of fiscal 2001.
5
CH2M HILL is currently assessing the effect of adoption, if any, on its
financial position, results of operations, and cash flows.
(2) SEGMENT INFORMATION
Certain financial information relating to the three-month and nine-month periods
ended September 30, 1998 and 1999 for each segment is provided below:
FINANCIAL
Three-month period ended STATEMENT
September 30, 1998 EE&I WATER INDUSTRIAL OTHER BALANCES
- ------------------------------------- ------ ------- ---------- ------- ----------
Revenues from external customers $103,364 $ 86,591 $ 45,604 $ - $ 235,559
Intersegment sales 8,513 2,529 47 (11,089) -
Equity in earnings of investees
Accounted for by the equity method 4,643 356 62 - 5,061
Segment profit 3,793 1,929 634 (1,584) 4,772
FINANCIAL
Three-month period ended STATEMENT
September 30, 1999 EE&I WATER INDUSTRIAL OTHER BALANCES
- ------------------------------------- ------ ------- ---------- ------- ----------
Revenues from external customers $114,842 $108,178 $ 73,154 $ - $ 296,174
Intersegment sales 8,369 2,184 443 (10,996) -
Equity in earnings of investees
Accounted for by the equity method 4,134 238 212 - 4,584
Segment profit 6,872 5,116 53 (1,430) 10,611
FINANCIAL
Nine-month period ended STATEMENT
September 30, 1998 EE&I WATER INDUSTRIAL OTHER BALANCES
- ------------------------------------- ------ ------- ---------- ------- ----------
Revenues from external customers $287,425 $250,633 $147,584 $ - $ 685,642
Intersegment sales 21,691 7,302 280 (29,273) -
Equity in earnings of investees
Accounted for by the equity method 6,687 210 201 - 7,098
Segment profit 8,717 3,718 4,291 (4,155) 12,571
FINANCIAL
Nine-month period ended STATEMENT
September 30, 1999 EE&I WATER INDUSTRIAL OTHER BALANCES
- ------------------------------------- ------ ------- ---------- ------- ----------
Revenues from external customers $355,245 $319,013 $197,979 $ - $ 872,237
Intersegment sales 24,063 7,014 2,090 (33,167) -
Equity in earnings of investees
Accounted for by the equity method 6,749 1,108 197 - 8,054
Segment profit 14,480 11,520 96 (4,675) 21,421
6
(3) COMPREHENSIVE INCOME
Quarter Ended Year-to-Date
September 30, September 30,
--------------------------------- --------------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
Net income $ 1,928 $ 5,552 $ 5,079 $ 10,968
Foreign currency
translation adjustment 1,098 (184) 2,334 (893)
---------- ---------- ---------- ----------
Comprehensive income $ 3,026 $ 5,368 $ 7,413 $ 10,075
========== ========== ========== ==========
(4) EARNINGS PER SHARE
The computation of basic income per share is based on the weighted average
number of common and preferred shares outstanding during the period. The
outstanding preferred shares are included in the basic income per share
calculation since the preferred shares do not have any preferences over common
shares, other than in liquidation, and CH2M HILL anticipates conversion to
common shares on a one-for-one basis as of January 1, 2000. Diluted income per
share is based on the weighted average number of common and preferred shares
outstanding during the period and, to the extent dilutive, common stock
equivalents consisting of stock options, stock awards subject to restrictions
and stock appreciation rights. At September 30, 1998 and 1999, CH2M HILL did
not have dilutive securities.
(5) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
CH2M HILL has investments in affiliated companies that are 50% or less owned,
which are accounted for under the equity method. These investments consist
primarily of a 50% ownership interest in Kaiser-Hill Company, LLC and MK/IDC
(PSI), which are domestic organizations, a 49% ownership interest in CH2M Gore
and Storrie Limited, a 50% ownership interest in CH2M HILL BECA, Ltd., and
CH2M/CSA, which are foreign organizations. As of September 30, 1998 and 1999,
the total investments in these material unconsolidated affiliates were
approximately $3,437 and $3,697, respectively, and are included in other assets
in the accompanying consolidated condensed balance sheets.
Summarized financial information for the three and nine month periods ended
September 30, 1998 and 1999, for these affiliates is as follows:
Quarter Ended Year-to-Date
September 30, September 30,
--------------------------------- --------------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
RESULTS OF OPERATIONS:
Revenues $ 283,170 $ 252,004 $ 687,324 $ 585,272
Direct costs 267,877 234,524 655,658 550,924
General and
administrative expenses 3,914 7,851 15,113 19,037
---------- ---------- ---------- ----------
Operating income 11,379 9,629 16,553 15,311
Other income (expense) (6) (333) 97 (127)
---------- ---------- ---------- ----------
Net income $ 11,373 $ 9,296 $ 16,650 $ 15,184
========== ========== ========== ==========
7
(6) CONTINGENCIES
CH2M HILL is party to various legal actions arising in the normal course of its
business, some of which involve claims for substantial sums. Damages assessed
in connection with and the cost of defending any such actions could be
substantial. CH2M HILL's management believes that the levels of insurance
coverage (after retentions and deductibles) are generally adequate to cover CH2M
HILL's liabilities, if any, with regard to such claims. Any amounts that are
probable of payment by CH2M HILL related to retentions and deductibles are
accrued when such amounts are estimable.
8
CH2M HILL COMPANIES, LTD.
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 for CH2M HILL as a
whole and each of our operating segments including:
. Factors affecting our business
. Our revenues and profits
. Where our revenues and profits came from
. Why those revenues and profits were different from period to period
. Where our cash came from and how it was used
. How these factors affect our overall financial condition
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results anticipated in the forward-
looking statements.
As you read this section, you should also refer to our consolidated condensed
financial statements and the accompanying notes. These consolidated condensed
financial statements provide additional information regarding our financial
activities and condition.
This analysis may be important to you in making decisions about your investments
in CH2M HILL.
Introduction
The engineering and construction industry has been undergoing 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, design, construction, operation,
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 for facility operations. These larger,
longer contracts require us to have substantially greater financial capital to
remain competitive.
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 capital
strength. We believe that we are well positioned geographically, technically
and financially to compete worldwide in the markets we have elected to pursue
and clients we serve.
Overall
Net income after tax for the nine-month period ending September 30, 1999 was
$11.0 million compared with $5.1 million in the same period of 1998. Our
earnings per share in 1999 was $0.37, compared with $0.18 in 1998. For the
three-month period ending September 30, 1999, net income after tax was $5.6
million compared with $1.9 million in the same period of 1998. Revenues and
pre-tax profit for the nine-month periods ending September 30, 1999 and 1998 by
operating segment were as follows:
9
----------------------------------------------------------------
For the nine-month period For the nine-month period
ending September 30, 1999 ending September 30, 1998
----------------------------------------------------------------
Pre-Tax Pre-Tax
(in millions) Revenues Profit Revenues Profit
----------------------------------------------------------------
EE&I $ 355.2 41% $14.5 $287.4 42% $ 8.7
Water 319.0 37% 11.5 250.6 37% 3.7
Industrial 198.0 22% - 147.6 21% 4.3
Corporate - - (4.6) - - (4.1)
----------------------------------------------------------------
Total $872.2 100% $21.4 $685.6 100% $12.6
----------------------------------------------------------------
Results of Operations for the Nine-Month Period Ending September 30, 1999
Compared to the Same Period of 1998
Revenues for the nine-month period ending September 30, 1999 were $872.2 million
compared to $685.6 million for the same period in 1998. The increase of $186.6
million or 27.2% is comprised of improvements in the Environmental, Energy &
Infrastructure ("EE&I") segment of $67.8 million, the Water segment of $68.4
million, and the Industrial segment of $50.4 million.
Pre-tax profit for the nine-month period ended September 30, 1999 was $21.4
million compared to $12.6 million in the same period of 1998. The increase of
$8.8 million was comprised of increases in the EE&I segment of $5.8 million and
the Water segment of $7.8 million, offset by a decline in the Industrial segment
of $4.3 million. Corporate expenses increased by $0.5 million.
Environmental, Energy and Infrastructure
Revenues in the EE&I segment for the nine-month period ended September 30, 1999
were $355.2 million compared to $287.4 million for the same period in 1998.
This increase of $67.8 million was primarily attributable to growth of $16.5
million in the telecommunications markets, growth of $18.5 million in the
construction services market, and $25.2 million in the transportation markets.
The growth in the telecommunications markets has occurred domestically and
internationally. Clients are building new infrastructure or upgrading existing
infrastructure to keep pace with the advancements in information technology.
The growth in revenues from construction services is indicative of our
commitment to diversify our business. Construction services revenues generated
in the nine-month period ended September 30, 1999 were primarily from remedial
action contracts with the U.S. Navy. The increase in the transportation markets
is primarily the result of the Transportation Equity Act for the 21st Century
(TEA-21) which was adopted by Congress in 1998. TEA-21 provides federal funding
to the various states for transportation infrastructure improvement projects for
highways, highway safety, and transit for the six-year period from 1998 to 2003.
Pre-tax profit for the EE&I segment was $14.5 million for the nine-month period
ended September 30, 1999 compared to $8.7 million in the same period of 1998.
Profit as a percent of revenue for the same period in 1999 was 4.1% compared to
3.0% for 1998. The increase in pre-tax profit of $5.8 million was primarily
generated by increased project margins of $4.2 million from the
telecommunications markets offset by an increase in indirect costs of $2.5
million. The remaining increase of $4.1 million was achieved in the
construction services and transportation markets due to the increase in volume
of contracts.
Water
The Water segment reported revenues of $319.0 million for the nine-month period
ended September 30, 1999 compared to revenues of $250.6 million in the same
period of 1998. This increase of $68.4
10
million was due to significant growth in several market areas. In general, the
increase in Water segment revenues is a result of prior business development
efforts, especially in the design/build markets, and obtaining new business from
existing clients as a result of the strong domestic economy. Revenues from
design/build projects increased by $22.0 million, as a result of our ongoing
efforts to provide a full array of services to our customers. Revenues from
operations and maintenance services increased by $9.1 million due to the
addition of new infrastructure support contracts, primarily with municipalities.
The Water segment reported $11.5 million of pre-tax profit for the nine-month
period ending September 30, 1999 compared to $3.7 million of pre-tax profit for
the same period of 1998. Pre-tax profit as a percent of revenues was 3.6%
compared to 1.5% in the same period of 1998. The increase in profit is
primarily due to the increase in the volume of new service contracts, as we have
been able to leverage our costs and increase efficiencies. Although we realized
an increase in revenues from the design/build markets, our direct costs also
increased due to the pass-through of construction costs. We also increased
indirect costs in order to expand our internal infrastructure to support the
long-term opportunities expected in the design/build markets.
Industrial
The Industrial segment reported revenues of $198.0 million for the nine-month
period ended September 30, 1999, of which $136.0 million or 68.7% was generated
from the microelectronics industry. The revenues for the same period of 1998
were $147.6 million, of which $95.5 million or 64.7% was generated from the
microelectronics industry. The increase of $50.4 million was comprised of a
$40.5 million increase in revenues from the microelectronics industry and an
increase in revenues of $9.9 million from other industries, including food,
biopharmaceutical, fine chemical, and facility services. The mix of the revenues
between construction costs versus services for engineering and construction
management also changed significantly from 1999 versus 1998. The construction
cost component of revenues increased from $33.8 million, which was 22.9% of 1998
year-to-date revenues, to $129.8 million, which was 65.6% of 1999 year-to-date
revenues. This increase in construction revenues of $96.0 million offset the
decrease in revenues from services of $113.8 million in 1998, to $68.2 million
in 1999. The construction revenue increase was due to two construction projects
that were started in first quarter 1999.
The Industrial segment reported virtually no pre-tax profit through the nine-
month period ended September 30, 1999 compared to $4.3 million in the same
period of 1998. Profit as a percent of revenues for 1998 was 2.9%. The most
significant factor causing this profit decline was the decrease in volume of
services sold during the first nine months of 1999. In addition to the impact
of reduced volume, reduced project margins also reduced profitability. Direct
project costs, as a percentage of revenues, increased 18.0% in 1999 versus 1998.
This increase in direct project costs is the pass-through of construction-
related costs directly associated with the increase in construction revenues.
This results in a decline in project margins due primarily to the change in mix
of revenues where the construction revenue component increased considerably over
the services revenue component during the first nine months of 1999. Indirect
labor expenses, which are made up of salaries and benefits of all administrative
personnel, plus salaries and benefits of technical personnel for hours not
working on billable client services, increased. Indirect labor costs increased,
as a percent of the services portion of gross revenues, 3.3% from 1999 versus
1998. This increase is due to the significant decline in the number and size of
projects performed for the microelectronics industry. Other overhead, general
and administrative costs decreased, as a percentage of the services portion of
revenues, 5.9% from 1999 versus 1998.
11
For the three-month period ending For the three-month period ending
September 30, 1999 September 30, 1998
--------------------------------------------------------------------------------------
Pre-Tax Pre-Tax
(In millions) Revenues Profit Revenues Profit
--------------------------------------------------------------------------------------
E&I $114.8 39% $ 6.8 $103.4 44% $ 3.8
Water 108.2 37% 5.1 86.6 37% 1.9
Industrial 73.2 24% 0.1 45.6 19% 0.6
Corporate - - (1.4) - - (1.5)
--------------------------------------------------------------------------------------
Total $296.2 100% $10.6 $235.6 100% $ 4.8
--------------------------------------------------------------------------------------
Results of Operations for the Three-Month Period Ended September 30, 1999
Compared to the Same Period in 1998
Revenues for the quarter ending September 30, 1999 were $296.2 million compared
to $235.6 million for the same period in 1998. The increase of $60.6 million or
25.7% is comprised of improvements in the Environmental, Energy & Infrastructure
("EE&I") segment of $11.4 million, the Water segment of $21.6 million, and the
Industrial segment of $27.6 million.
Pre-tax profit for the quarter ended September 30, 1999 was $10.6 million
compared to $4.8 million in the same period of 1998. The increase of $5.8
million was comprised of an increase in the EE&I segment of $3.0 million in
addition to an improvement in the Water segment of $3.2 million, offset by a
decline in the Industrial segment of $0.5 million. Corporate expenses decreased
by $0.1 million.
Environmental, Energy and Infrastructure
Revenues in the EE&I segment for the quarter ended September 30, 1999 were
$114.8 million compared to $103.4 million for the same period in 1998. This
increase of $11.4 million was primarily attributable to growth of $3.3 million
in the telecommunications markets, growth of $2.1 million in the construction
services market, and $4.9 million in the transportation markets. The revenue
growth in the telecommunications markets is due to clients building new
infrastructure or upgrading existing infrastructure to accommodate the
technological advances in high-speed data transmission. The growth in revenues
from construction services is indicative of our commitment to diversify our
business. Construction services revenues generated in the quarter ended
September 30, 1999 were primarily from remedial action contracts with the U.S.
Navy. The increase in the transportation markets is primarily the result of
TEA-21.
Pre-tax profit for the EE&I segment was $6.8 million for the quarter ended
September 30, 1999 compared to $3.8 million in the same period of 1998. Profit
as a percent of revenue for the same period in 1999 was 5.9% compared to 3.7%
for 1998. The increase in pre-tax profit of $3.0 million was primarily generated
by increased project margins of $1.7 million from the telecommunications markets
offset by an increase in indirect costs of $0.4 million. The remaining increase
of $1.7 million was achieved in the construction services and transportation
markets.
Water
The Water segment reported revenues of $108.2 million for the quarter ended
September 30, 1999 compared to revenues of $86.6 million in the same period of
1998. This increase of $21.6 million was due to significant growth in several
market areas. In general, the Water segment is capitalizing on prior business
development efforts, especially in the design/build markets, and obtaining new
12
business from existing clients as a result of the strong domestic economy.
Revenues from design/build projects increased by $6.2 million, as a result of
our ongoing efforts to provide a full array of services to our customers.
Revenues from operations and maintenance services increased by $0.6 million due
to the addition of new infrastructure support contracts, primarily with
municipalities. Services from other domestic water operations increased by $14.8
million in the same period attributable to domestic growth in traditional
engineering consulting markets.
The Water segment reported $5.1 million of pre-tax profit in the quarter ended
September 30, 1999 compared to $1.9 million of pre-tax profit for the same
period of 1998. Pre-tax profit as a percent of revenues was 4.7% in 1999
compared to 2.2% in the same period of 1998. The increase in profit is primarily
due to the increase in the volume of new service contracts, as we have been able
to leverage our costs and increase efficiencies. Although we realized an
increase in revenues from the design/build markets our direct costs also
increased due to the pass-through of construction costs. We also increased
indirect costs in order to expand our internal infrastructure to support the
long-term opportunities expected in the design/build markets.
Industrial
The Industrial segment reported revenues of $73.2 million for the quarter ended
September 30, 1999, of which $54.2 million or 74.0% was generated from the
microelectronics industry. The revenues for the same period of 1998 were $45.6
million, of which $25.0 million or 54.8% was generated from the microelectronics
industry. The increase of $27.6 million was comprised of a $29.2 million
increase in revenues from the microelectronics industry and a decrease in
revenues of $1.6 million from other industries, including food,
biopharmaceutical, fine chemical, and facility services. The mix of the revenues
between construction costs versus services for engineering and construction
management also changed significantly from 1999 versus 1998. The construction
cost component of revenues increased from $11.5 million, which was 25.2% of 1998
third quarter revenues, to $49.6 million, which was 67.8% of 1999 third quarter
revenues. This increase in construction revenues of $38.1 million offset the
decrease in revenues from services of $34.0 million in 1998, to $23.5 million in
1999. The construction revenue increase was due to two construction projects
that were started in first quarter 1999.
The Industrial segment reported pre-tax profit for the quarter ended September
30, 1999 of $0.1 million compared to $0.6 million in the same quarter of 1998.
Profit as a percent of revenues for 1999 was 1.3% . The most significant factor
causing this profit decline was the decrease in volume of services sold during
the quarter ended September 30, 1999 versus 1998. In addition to the impact of
reduced volume, reduced project margins also reduced profitability. Direct
project costs, as a percentage of revenues, increased 17.0% in 1999 versus 1998.
This increase in direct project costs is the pass-through of construction-
related costs directly associated with the increase in construction revenues.
This results in a decline in project margins due primarily to the change in mix
of revenues where the construction revenue component increased considerably over
the services revenue component during the quarter ended September 30, 1999.
Indirect labor expenses, which are made up of salaries and benefits of all
administrative personnel, plus salaries and benefits of technical personnel for
hours not worked on billable client services, was approximately the same, as a
percentage of service revenues, in the quarter ended September 30, 1999 versus
1998. Other overhead, general and administrative costs decreased, as a
percentage of the services portion of revenues, 8.8% from 1999 versus 1998.
Joint Ventures
We routinely enter into joint venture arrangements in order to service the needs
of our clients. Such arrangements are customary in the engineering and
construction industry and generally are established to manage a specific
project. Our largest joint venture is Kaiser-Hill Company, LLC ("Kaiser-Hill"),
a joint venture in which we own a 50% interest. This joint venture is
attributable to
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our EE&I operating segment. The earnings from this joint venture are reported as
equity in earnings of investees accounted for under the equity method, along
with other joint ventures that are individually insignificant.
For the nine-month period ended September 30, 1999, we reported equity in
earnings of investees accounted for under the equity method of $8.1 million
compared to $7.1 million in the same period of 1998. The earnings from the
Kaiser-Hill joint venture for the same period of 1999 were $6.0 million compared
to $8.1 million for 1998. For the three-month period ended September 30, 1999,
we reported equity in earnings of investees accounted for under the equity
method of $4.6 million compared to $5.1 million in the same period of 1998. The
earnings from the Kaiser-Hill joint venture for the same period of 1999 were
$3.2 million compared to $5.4 million for 1998.
Kaiser-Hill's fees are determined under a Performance Based Management contract,
which means that fees are earned based upon specified negotiated performance
incentives which are heavily weighted to the U.S. Government's fiscal year end
of September 30. Due to the timing of specific work scopes and the completion of
these activities, earnings may not be comparable from period to period.
Corporate Expenses
Corporate expenses for the nine-month period ended September 30, 1999 were $4.6
million compared to $4.1 million for the same period of 1998. The increase of
$0.5 million is related to costs incurred for the registration of our stock with
the Securities and Exchange Commission.
Income Taxes
The income tax provision for the nine-month period ended September 30, 1999 was
$10.5 million, or an effective tax rate of 48.8%, compared to $7.5 million, or
an effective tax rate of 59.6%, for the same period of 1998. The decrease in the
effective tax rate is primarily due to the reduction of non-deductible foreign
net operating losses as we have been able to improve the financial performance
of our international operations. Our effective tax rate continues to be higher
than the U.S. statutory income tax rate of 35.0% due to disallowed portions of
meals and entertainment expenses and non-deductible foreign net operating
losses.
Liquidity and Capital Resources
Cash Flows from Operating Activities
For the nine-month period ended September 30, 1999, operations provided $16.7
million of cash and used $8.9 million of cash in the same period of 1998. During
the nine-month period ended September 30, 1999, our receivables and payables
increased due to the pass-through of revenues and expenses related to new, large
construction projects. Offsetting this net increase was the reduction of accrued
incentive compensation and the settlement of accrued liabilities.
Cash Flows from Financing Activities
At September 30, 1999, there were no amounts outstanding on our $100.0 million
revolving line of credit. We also have not incurred any debt under our $25.0
million commercial paper facility. Under our unsecured loan agreement, we had an
outstanding term loan for $3.0 million, of which $1.0 million will be paid in
the fourth quarter of 1999. The interest on the loan is 7.1% and payments are
made quarterly.
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Derivatives and Financial Instruments
We occasionally enter into forward contracts in order to hedge our foreign
currency risks and not for speculative purposes. At September 30, 1999 and 1998,
there were no significant forward contracts outstanding. Generally, we do not
hold derivative type instruments.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and
interest rates. We manage our market risk by matching projected cash inflows
from operations, financing activities and investing activities with projected
cash outflows to fund debt payments, capital expenditures and other cash
requirements. We may utilize debt or equity financing for general corporate
purposes and acquisitions. Historically, we have used short-term variable rate
borrowings under our unsecured revolving credit agreement although we do have
$3.0 million currently outstanding on a term note to be repaid by June 30, 2000.
Our earnings and cash flows are affected by changes in interest rates affecting
our variable rate borrowings under our bank credit facility. However, at
September 30, 1999, there were no amounts outstanding on the bank credit
facility and for the nine-month period ended September 30, 1999, the average
daily borrowing was $0.6 million. The interest rates on CH2M HILL's short-term
and long-term borrowings approximate fair value.
New Accounting Standards Not Yet Adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," establishes fair value accounting and
reporting standards for derivative instruments and hedging activities. The
effective date of SFAS No. 133 was deferred until January 1, 2001 by the
issuance of SFAS No. 137. We will adopt SFAS No. 133 in the first quarter of
2001. We are currently assessing the effect of adoption, if any, on our
financial position, results of operations, and cash flows.
Year 2000 Compliance
General
The upcoming turn of the century poses many challenges to companies worldwide
that rely on computers and/or programmed control devices to operate their
businesses or are suppliers or providers of time-sensitive software or automated
technology devices. The problems stem from the practice of software writers,
software vendors and equipment suppliers of using only two digits to designate
calendar year (e.g., 98 versus 1998) in automated applications. That practice
does not provide for proper recognition of the Year 2000 because computers and
other automated equipment may interpret the two-digit date "00" as, for example,
1900, rather than 2000. Consequently, computers and other automated systems may
cease operation or operate incorrectly. This effect is commonly referred to as
the "year 2000 problem."
Several years ago, we recognized that the year 2000 problem could have a
significant adverse impact on our operations. We have, therefore, been actively
working to mitigate potential impacts on our internal operations as well as
working with our vendors and clients to identify and remediate potential year
2000 problems. Since 1997, we have been evaluating and taking steps to remedy
year 2000 problems in the following major areas of information technology and
other systems:
. Software: internal software and operating systems, including
financial/management software, communications systems, facilities
controls, design and other technical software
. Hardware: desktop computers and network servers
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. Communications: local area networks, wide area networks and
telecommunications systems
. Non-Information Technology Systems: power plant operating and control
systems and facilities
Readiness
In order to assess our readiness, we identified four major phases of our year
2000 compliance program. They are as follows:
- --------------------------------------------------------------------------------------------------------------
Phase Status
- --------------------------------------------------------------------------------------------------------------
1. Inventory Phase Complete
. Identify functions that rely on computer systems that accept, create or manipulate
calendar-related data
. Survey all significant vendors and facilities owners
. Identify all computer and communications hardware and software
- --------------------------------------------------------------------------------------------------------------
2. Assessment Phase Complete
. Prioritize systems and functions that are critical to all lines of business, including
management and human resource information systems, facilities, procurement, project
delivery and billing systems
. Prioritize functions performed by each system and the level of susceptibility to
date-sensitive information
- --------------------------------------------------------------------------------------------------------------
3. Remediation Phase Complete
. Make necessary repairs, replacements or implement contingency plans for the most
critical systems
. Install third party application software upgrades
- --------------------------------------------------------------------------------------------------------------
4. Testing/Implementation Phase 98%
Complete
. Test systems to verify they are year 2000 compliant
. Place compliant systems into production
- --------------------------------------------------------------------------------------------------------------
External Vendors
We have contacted supply and service vendors with whom we have material business
to confirm the year 2000 compliance of their applications, services and products
that we rely on for operations. Approximately 75% of major vendors responded by
the end of 1998 and the remaining 25% were followed up on in 1999. Mission
critical vendors such as our primary bank and payroll services and landlords
have responded adequately on the year 2000 compliance issue in their services or
products.
Clients of CH2M HILL
Because we are a service organization providing design and operating services
for a wide range of clients, we have actively notified clients during the last
half of 1998 of the need to be aware of potential year 2000 problems in their
operations. While we do not generally provide year 2000
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problem identification and remediation services to our clients, we have
suggested in the notifications that the clients recognize that problems could
exist and an identification/remediation program in their operations should be
undertaken immediately if not already done. We also made available to each
client a list of year 2000 service firms via direct personal delivery or
reference to a worldwide web site we established for this purpose.
Worst Case Year 2000 Scenarios
The worst case scenario that could affect our business is the failure of
electric power and communications. We are dependent on data and voice
communication for delivery of our services, and on electric power to conduct
operations. Each of our regional offices and project sites is vulnerable to
business disruption from a local loss of power or telecommunications. The most
sensitive areas are our payroll system and our water and wastewater treatment
systems. We have contacted our critical infrastructure suppliers regarding their
preparedness and they have asserted to us that they are year 2000 compliant.
Although it does not appear that a failure of electric power is likely based on
assertions made to us, we have developed the following contingency plans:
. Mobilize teams to our two communication hubs and data centers to
constantly monitor critical infrastructure components as the date rolls
over. This means having staff onsite during the entire holiday period and
for as long afterwards as proves necessary to respond to needs on a
priority basis
. Adjust payroll and accounting system schedules to complete processing
prior to December 31, 1999 for the last pay period of the year
. Install a redundant link (with another supplier) to the Internet for
enhanced messaging protection
. Install a diesel auxiliary power source at our main location in Denver,
Colorado that can support the data center and telephone system for a
minimum of 36 hours
With respect to the water and wastewater treatment facilities that we operate in
accordance with contractual service agreements, some of these facilities have
back up generators or duplicate power sources. If the power supply is severed,
the water treatment plants could not pump water and customers would be without
water for a period of time. As a contingency plan, we are encouraging clients to
fill above-ground water towers prior to December 31, 1999, and assisting in the
preparation of water conservation plans.
It is also possible that the water and wastewater treatment plants will have
power but the computerized control systems fail. This could cause "automatic"
equipment to turn on or off and otherwise act in a manner that upsets the
chemical, mechanical, and biologic processes in the plants. To mitigate this
event, all facilities will be manned on December 31, 1999, and operated in a
manual mode if necessary.
Cost Estimates for Compliance Efforts
The total estimated costs for our year 2000 remediation efforts was between $3.5
to $4.0 million as of December 31, 1998, of which we had spent approximately
$3.1 million as of September 30, 1999. Of the total estimated cost,
approximately $1.8 to $2.0 million represents the effort to migrate our current
systems to year 2000 compliant versions. All costs of year 2000 activities have
been, and will in the future be, charged to current operations as the costs are
incurred.
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CH2M Hill Companies, Ltd.
Date: November 12, 1999 /s/ Samuel H. Iapalucci
------------------ -------------------------
Samuel H. Iapalucci
Vice President and Chief Financial Officer
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