____________________________________________________________________________
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, 2000
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 _X_ No ___
As of November 13, 2000, the registrant had 29,282,237 shares of common stock,
$.01 par value per share, issued and outstanding.
<PAGE>
CH2M HILL COMPANIES, LTD.
September 30, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Part I. Financial Information Page
Item 1. Consolidated Condensed Financial Statements:
Balance Sheets as of September 30, 2000 and
December 31, 1999.................................... 2
Statements of Income for the Three and Nine-Month
Periods Ended September 30, 2000 and 1999............ 3
Statements of Cash Flows for the Nine-Month Periods
Ended September 30, 2000 and 1999................... 4
Notes to Consolidated Condensed 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......................................... 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...................... 15
</TABLE>
1
<PAGE>
CH2M HILL COMPANIES, LTD
Consolidated Condensed Balance Sheets
(Dollars in thousands)
<TABLE>
September 30, December 31,
2000 1999
_____________ _____________
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents $37,110 $12,557
Receivables, net -
Client accounts 222,686 164,914
Unbilled revenue 102,469 96,610
Other 14,223 4,930
Prepaid expenses & other 6,895 7,912
_____________ _____________
Total current assets 383,383 286,923
PROPERTY, PLANT & EQUIPMENT, net 16,458 14,274
OTHER ASSETS, net 55,727 55,958
_____________ _____________
TOTAL ASSETS $455,568 $357,155
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt
& notes payable to former shareholders $4,375 $6,375
Accounts payable 76,226 60,107
Billings in excess of revenues 69,950 49,143
Accrued incentive compensation 18,443 11,490
Employee related liabilities 56,127 43,100
Other accrued liabilities 20,353 13,278
Current deferred income taxes 39,946 26,907
_____________ _____________
Total current liabilities 285,420 210,400
OTHER LONG-TERM LIABILITIES 38,998 34,742
LONG-TERM DEBT 313 313
NOTES PAYABLE TO FORMER SHAREHOLDERS 10,747 14,608
_____________ _____________
Total liabilities 335,478 260,063
_____________ _____________
COMMITMENTS AND CONTINGENCIES (See Notes)
TEMPORARY SHAREHOLDERS' EQUITY
Preferred stock, Class A $.02 par value,
50,000,000 shares authorized;
12,095,220 issued and outstanding at
December 31, 1999; redeemable for
$52,130 at December 31, 1999 - 242
Common stock, $.01 par value,
100,000,000 shares authorized;
17,234,170 issued and outstanding
at December 31, 1999; redeemable for
$74,279 at December 31, 1999 - 172
Additional paid-in capital - 29,234
Retained earnings - 69,774
Accumulated other comprehensive loss - (2,330)
_____________ ______________
Total temporary shareholders'
equity - 97,092
_____________ ______________
PERMANENT SHAREHOLDERS' EQUITY
Preferred stock, Class A $.02 par
value, 50,000,000 shares authorized;
no amounts issued and outstanding at
September 30, 2000
Common stock, $.01 par value,
100,000,000 shares authorized;
29,281,185 issued and outstanding at
September 30, 2000 292 -
Additional paid-in capital 36,951 -
Retained earnings 87,228 -
Accumulated other comprehensive loss (4,381) -
_____________ ______________
Total permanent shareholders'
equity 120,090 -
______________ ______________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $455,568 $357,155
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
<PAGE>
CH2M HILL COMPANIES, LTD.
Consolidated Condensed Statements of Income
(Unaudited)
(Dollars in thousands except per share)
<TABLE>
Three-Month Period Ended Nine-Month Period Ended
September 30 September 30
__________________________ ________________________
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Gross revenue $ 444,973 $ 296,174 $ 1,231,111 $ 872,237
Equity in earnings
of joint ventures
and affiliated
companies 2,690 4,584 11,206 8,054
________ __________ _________ __________
Total revenues 447,663 300,758 1,242,317 880,291
Operating expenses:
Direct cost of
services and
overhead (351,905) (218,437) (961,116) (635,996)
General and
administrative (81,289) (72,042) (247,008) (222,782)
_________ ___________ __________ __________
Operating income 14,469 10,279 34,193 21,513
Other income (expense):
Interest income 461 496 1,395 941
Interest expense (236) (164) (746) (1,033)
_________ ___________ __________ __________
Income before
provision for
income taxes 14,694 10,611 34,842 21,421
Provision for
income taxes (7,314) (5,059) (17,388) (10,453)
__________ ___________ __________ __________
Net income $ 7,380 $ 5,552 $ 17,454 $ 10,968
========== =========== ========== ==========
Net income per
common share:
Basic $ 0.25 $ 0.18 $ 0.59 $ 0.37
Diluted $ 0.25 $ 0.18 $ 0.58 $ 0.37
Weighted average
number of common shares:
Basic 29,353,427 30,434,530 29,512,168 29,419,130
Diluted 30,033,212 30,434,530 30,022,057 29,419,130
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
<PAGE>
CH2M HILL COMPANIES, LTD.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
Nine-Month Period Ended
September 30
____________________________
2000 1999
__________ __________
<S> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 47,723 $ 16,715
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets - 777
Capital expenditures (5,361) (3,376)
__________ __________
Net cash used in investing
activities (5,361) (2,599)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on long-term debt 98 94
Borrowing on line of credit 4,900 32,000
Principal payments on notes payable
to former shareholders (3,696) (4,290)
Principal payments on long-term debt (2,098) (3,272)
Principal payments on line of credit (4,900) (32,000)
Purchases and retirements of stock (12,749) (1,490)
___________ ___________
Net cash used in financing
activities (18,445) (8,958)
CASH EFFECT OF CUMULATIVE TRANSLATION
ADJUSTMENT 636 (276)
___________ ____________
INCREASE IN CASH AND CASH EQUIVALENTS 24,553 4,882
CASH AND CASH EQUIVALENTS,
beginning of period 12,557 16,595
___________ ____________
CASH AND CASH EQUIVALENTS,
end of period $ 37,110 $ 21,477
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
<PAGE>
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(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, 2000 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 and nine-month periods ended September
30, 2000 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.
Shareholders' Equity
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 were
effective January 1, 2000 and included, but were not limited to, adopting
amendments to the Restated Bylaws and Articles of Incorporation which provide
for the:
- 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.
As a result of the above changes, the temporary shareholders' equity is now
classified as permanent shareholders' equity. Common and preferred stock
amounts, equivalent share amounts and per share amounts have been adjusted
retroactively to give effect to the stock split.
5
<PAGE>
The significant changes in shareholders' equity for the nine-month period
ended September 30, 2000 is as follows:
<TABLE>
Shares Amount
_____________ ______________
<S> <C> <C>
Temporary Shareholders' Equity,
December 31, 1999 29,329,390 $ 97,092
Net Income - 17,454
Shares Issued 1,832,780 20,344
Shares Redeemed (1,880,985) (12,749)
Foreign Currency Translation
Adjustment - (2,051)
______________ _____________
Permanent Shareholders' Equity,
September 30, 2000 29,281,185 $120,090
============== =============
</TABLE>
New Accounting Standard
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. Management's initial assessment is that the
effect of adoption will not have a significant impact on its financial
position, results of operations, and cash flows since CH2M HILL generally does
not hold derivative type instruments.
(2) SEGMENT INFORMATION
Certain financial information relating to the three and nine-month periods
ended September 30, 2000 and 1999 for each segment is provided below:
<TABLE>
FINANCIAL
Three-month period ended STATEMENT
September 30, 2000 EE&I WATER INDUSTRIAL OTHER BALANCES
_________________________ _____ _____ __________ _____ _________
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ 236,381 $ 129,142 $ 79,450 $ - $ 444,973
Intersegment sales 12,493 5,906 104 (18,503) -
Equity in earnings of
investees accounted for
by the equity method 751 1,878 61 - 2,690
Segment profit 7,681 6,153 2,842 (1,982) 14,694
FINANCIAL
Three-month period ended STATEMENT
September 30, 1999 EE&I WATER INDUSTRIAL OTHER BALANCES
_________________________ _____ _____ __________ _____ _________
Revenues from external
customers $ 115,782 $ 107,238 $ 73,154 $ - $ 296,174
Intersegment sales 8,369 2,184 443 (10,996) -
Equity in earnings of
investees accounted for
by the equity method 3,424 948 212 - 4,584
Segment profit 6,872 5,116 53 (1,430) 10,611
</TABLE>
6
<PAGE>
<TABLE>
FINANCIAL
Nine-month period ended STATEMENT
September 30, 2000 EE&I WATER INDUSTRIAL OTHER BALANCES
_________________________ _____ _____ __________ _____ _________
<S> <C> <C> <C> <C> <C>
Revenues from external
customers $ 653,764 $ 366,370 $210,977 $ - $ 1,231,111
Intersegment sales 33,712 14,685 743 (49,140) -
Equity in earnings of
investees accounted for
by the equity method 8,012 2,985 209 - 11,206
Segment profit 21,795 13,536 5,786 (6,275) 34,842
FINANCIAL
Nine-month period ended STATEMENT
September 30, 1999 EE&I WATER INDUSTRIAL OTHER BALANCES
_________________________ _____ _____ __________ _____ _________
Revenues from external
customers $ 356,415 $ 317,843 $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 5,809 2,048 197 - 8,054
Segment profit 14,480 11,520 96 (4,675) 21,421
</TABLE>
(3) COMPREHENSIVE INCOME
Comprehensive income for the three and nine-month periods ended September 30,
2000 and 1999 is as follows:
<TABLE>
Three-Month Period Ended Nine-Month Period Ended
September 30 September 30
________________________ _______________________
2000 1999 2000 1999
__________ _________ ________ _________
<S> <C> <C> <C> <C>
Net income $ 7,380 $ 5,552 $ 17,454 $ 10,968
Foreign currency
translation
adjustment (1,506) (184) (2,051) (893)
__________ ___________ _________ _________
Comprehensive income $ 5,874 $ 5,368 $ 15,403 $ 10,075
========== =========== ========= =========
</TABLE>
(4) EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted average
number of common shares outstanding during the period. Diluted income per
share is based on the weighted average number of common shares outstanding
during the period and, to the extent dilutive, common stock equivalents
consisting of stock options. The difference between the basic and diluted
shares at September 30, 2000 is attributable to the dilutive effect of stock
options outstanding at the end of the period. At September 30, 1999, CH2M
HILL did not have any dilutive securities outstanding.
(5) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
CH2M HILL has the following investments in affiliated companies that are 50%
or less owned, which are accounted for under the equity method:
% of Ownership
Domestic:
Kaiser-Hill Company, LLC ("Kaiser-Hill") 50%
MK/IDC (PSI) 50%
Foreign:
CH2M Gore and Storrie Limited 49%
7
<PAGE>
CH2M HILL/CSA 50%
Sembawang-IDC 25%
CH2M HILL BECA, Ltd. 50%
TDC International of Israel 50%
As of September 30, 2000 and December 31, 1999, the total investments in
these material unconsolidated affiliates were approximately $7,059 and $5,763,
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, 2000 and 1999, for these affiliates is as follows:
<TABLE>
Three-Month Period Ended Nine-Month Period Ended
September 30 September 30
________________________ _______________________
2000 1999 2000 1999
__________ _________ ________ _________
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues $ 258,698 $ 252,004 $ 588,321 $ 585,272
Direct costs 248,848 234,524 554,116 550,924
General and
administrative
expenses 4,108 7,851 13,259 19,037
__________ _________ __________ _________
Operating income 5,742 9,629 20,946 15,311
Other expense (780) (333) (1,590) (127)
__________ __________ __________ __________
Net income $ 4,962 $ 9,296 $ 19,356 $ 15,184
========== ========== ========== ==========
</TABLE>
(6) CONTINGENCIES
CH2M HILL is party to various legal actions arising in the normal course of
its business, some of which may involve claims for substantial sums. Damages
assessed in connection with and the cost of defending 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
<PAGE>
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
This report contains "forward-looking statements," as that term is defined in
Federal securities laws, including information related to our anticipated
future results of operations, business strategies, financing plans,
competitive position, growth opportunities, and potential effects of future
regulations. Although CH2M HILL's management believes that its expectations
are based on reasonable assumptions, these assumptions are subject to a wide
range of business and technical risks explained in detail in CH2M HILL's
Prospectus that may cause actual results to differ materially from those
stated or implied by these forward-looking statements.
As you read this section, you should also refer to our consolidated condensed
financial statements and the accompanying notes as well as the note regarding
forward-looking information in the CH2M HILL Form 10-K for the year ended
December 31, 1999. 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 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, 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, than has historically been necessary,
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 for the three-month period ended September 30, 2000 was $7.4
million compared with $5.6 million in the same period of 1999. For the nine
month period ended September 30, 2000, net income was $17.5 million compared
to $11.0 million in the same period of 1999. Our diluted earnings per share
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<PAGE>
for the third quarter in 2000 was $0.25, compared with $0.18 in 1999. For the
nine-month period ended September 30, 2000 diluted earnings per share was
$0.58, compared with $0.37 in 1999. Revenues and pre-tax profit for the three
and nine month periods ended September 30, 2000 and 1999 by operating segment
were as follows:
<TABLE>
Three Month Period Ended September 30
Revenues Pre-Tax Profit
_________________________ _____________________
(in millions) 2000 1999 2000 1999
___________ _____________ ________ ________
<S> <C> <C> <C> <C> <C> <C>
EE&I $237.1 53% $ 119.2 40% $7.7 $ 6.8
Water 131.1 29% 108.2 36% 6.2 5.1
Industrial 79.5 18% 73.4 24% 2.8 0.1
Corporate - - - - (2.0) (1.4)
____________ ___________ ________ ________
Total $447.7 100% $ 300.8 100% $14.7 $ 10.6
Nine Month Period Ended September 30
Revenues Pre-Tax Profit
_________________________ _____________________
(in millions) 2000 1999 2000 1999
___________ _____________ ________ ________
EE&I $661.8 53% $ 362.2 41% $21.8 $ 14.5
Water 369.3 30% 319.9 36% 13.5 11.5
Industrial 211.2 17% 198.2 23% 5.8 -
Corporate - - - - (6.3) (4.6)
____________ _____________ ________ _______
Total $1,242.3 100% $ 880.3 100% $34.8 $ 21.4
</TABLE>
Results of Operations for the Three and Nine Month Periods Ended September 30,
2000 Compared to the Same Periods of 1999
Revenues for the three-month period ended September 30, 2000 were $447.7
million compared to $300.8 million for the same period in 1999. For the nine-
month period ended September 30, 2000, revenues were $1,242.3 million compared
to $880.3 million in 1999. For the third quarter of 2000, the increase of
$146.9 million or 48.8% is comprised of improvements in all of the operating
segments. The Environmental, Energy & Infrastructure ("EE&I") segment
reported increased revenues of $117.9 million, which includes revenues
generated by CH2M HILL Hanford Group, Inc. of $86.9 million (this is the
company formerly known as Lockheed Martin Hanford Corporation which was
acquired by CH2M HILL in December 1999.) On a comparable basis, EE&I reported
increased revenues of $31.0 million or 26.0%. For the same period, the Water
segment reported increased revenues of $22.9 million or 21.2%, and the
Industrial segment reported increased revenues of $6.1 million or 8.3%.
Pre-tax profit for the three-month period ended September 30, 2000 was $14.7
million compared to $10.6 million in the same period of 1999. For the nine-
month period ended September 30, 2000, pre-tax profit was $34.8 million versus
$21.4 million in 1999. The increase for the third quarter of 2000 of $4.1
million was comprised of increases in the EE&I segment of $0.9 million, the
Water segment of $1.1 million, and the Industrial segment of $2.7 million.
Corporate expenses increased by $0.6 million.
Environmental, Energy and Infrastructure
Revenues in the EE&I segment for the three-month period ended September 30,
2000 were $237.1 million compared to $119.2 million for the same period in
1999. This increase of $117.9 million was primarily attributable to $86.9
10
<PAGE>
million of revenues from CH2M HILL Hanford Group, Inc., which aligns with the
nuclear business. This entity provides engineering, design and technical
services to support decontamination, decommissioning and remedial activities
at the U.S. Department of Energy's Hanford Reservation in Richland,
Washington. Revenues from our environmental business increased $20.2 million
in the federal and industrial sectors primarily in the southeast and southwest
regions of the United States. This growth continues to be attributable to the
strong domestic economy and our ability to leverage off of our existing
projects. The transportation business has increased revenues by $4.2 million
from the same quarter in 1999. This strong performance results from
extraordinarily strong markets fueled by national legislation from TEA-21 and
AIR-21, matching state funding now beginning to take effect, and the rising
demand for design-build projects in the transportation sector. Our
telecommunications business also reported increased revenues of $5.6 million
and continues to grow. This growth is expected to continue as we provide
network architecture and operating system design for clients who are building
or upgrading infrastructure to keep pace with advances in technology in the
United States and abroad.
Pre-tax profit for the EE&I segment was $7.7 million for the three-month
period ended September 30, 2000 compared to $6.8 million in the same period of
1999. Pre-tax profit as a percent of revenue for the same period in 2000 was
3.2% compared to 5.7% for 1999. While most of the pre-tax profit improvement
relates to volume growth in the environmental business, transportation also
had a slight improvement in pre-tax profit due to incentive fees gained on two
large programs. The decrease in pre-tax profit as a percent of revenue is
primarily related to the nuclear business, in which profits can fluctuate
significantly from quarter to quarter depending upon achievement of certain
contractual milestones.
Water
The Water segment reported revenues of $131.1 million for the three-month
period ended September 30, 2000 compared to revenues of $108.2 million in the
same period of 1999. This increase of $22.9 million or 21.2% was attributable
to growth in the water and wastewater business as well as the operations and
maintenance business. Revenues from traditional engineering consulting
services were $15.3 million higher than the third quarter of 1999, propelled
by prior business development investment in the U.S. and Canada as well as the
strong domestic economy. Of the $15.3 million growth, $8.3 million was
achieved from design/build projects as we continue to grow this area of our
operations in order to meet market demands. Additionally, revenues from
operations and maintenance services increased by $7.6 million primarily due to
new contracts, scope increases and shorter term consulting services on
existing contracts. These new contracts are for durations of up to 20 years
and contribute over $279.0 million in backlog.
The Water segment reported $6.2 million of pre-tax profit for the three-month
period ended September 30, 2000 compared to $5.1 million of pre-tax profit for
the same period of 1999. Pre-tax profit as a percent of revenues held
constant at 4.7%. The Water segment experienced an improvement in pre-tax
profit within domestic traditional engineering and design build businesses
primarily in the southeast and southwest domestic regions.
Industrial
The Industrial segment reported revenues of $79.5 million for the three-month
period ended September 30, 2000, of which $46.9 million was generated from the
microelectronics industry. The revenues for the same period of 1999 were $73.4
million, of which $51.0 million was generated from the microelectronics
industry. The increase of $6.1 million was comprised of a $4.1 million
decrease in revenues from the microelectronics industry and an increase in
revenues of $10.2 million from other industries, including food,
pharmaceuticals, and facility services. While the microelectronics industry
is recovering from a cyclical downturn in the prior year primarily in the
communications sectors and in the Asia-Pacific region, the Industrial segment
is also continuing to realize revenues from prior business development efforts
11
<PAGE>
in the other industries. The mix of the revenues between construction costs
versus services for engineering and construction management also changed
significantly from 2000 versus 1999. The construction cost component of
revenues decreased from $49.5 million, which was 67.4% of 1999 revenues, to
$32.5 million, which was 40.9% of 2000 revenues. The construction revenue
decrease was due to two significant construction projects that were started in
1999 but were near completion prior to the third quarter of 2000. This
decrease in construction revenues of $17.0 million was offset by an increase
of $23.1 million in revenues from services, which increased from $24.3 million
in 1999, to $47.4 million in 2000. The services revenue increase was due to
significant increases in business in the microelectronics industry.
The Industrial segment reported pre-tax profit of $2.8 million for the three-
month period ended September 30, 2000 versus $0.1 million for the same period
in 1999. Profit as a percent of revenues for 2000 was 3.5%. The most
significant factor causing this profit increase was the 95.1% increase in
volume of services sold during 2000. Direct project costs, as a percentage of
revenues, decreased 16.1% in 2000 versus 1999. This decrease is due to a
reduction in construction related costs directly associated with the decrease
in construction revenues. This results in higher project margins due to the
change in mix of revenues, where the construction revenue component decreased
considerably over the services revenue component during 2000. Indirect labor
costs, 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, decreased as a percent of the services
portion of gross revenues, 18.0% from 2000 versus 1999. This decrease is due
to the significant increase 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 , by
12.0% in 2000 versus 1999.
Joint Ventures
We routinely enter into joint ventures to service the needs of our clients.
Such arrangements are customary in the engineering and construction industry
and generally are project specific. Our largest joint venture is Kaiser-Hill
Company, LLC ("Kaiser-Hill"), in which we own a 50% interest. This joint
venture is in 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 three-month period ended September 30, 2000, we reported equity in
earnings of investees accounted for under the equity method of $2.7 million
compared to $4.6 million in the same period of 1999. For the nine-month
period ended September 30, 2000, we reported earnings of $11.2 million
compared to $8.1 million for the same period of 1999. The fluctuations in our
equity in earnings result primarily from the Kaiser-Hill joint venture, which
were $1.7 million for the three-month period ended September 30, 2000 versus
$3.4 million in the same period in 1999. For the nine-month period ended
September 30, 2000, our equity in earnings from Kaiser-Hill were $8.6 million
compared to $5.8 million for the same period in 1999. These fluctuations are
primarily attributable to performance fees earned under the old contract,
which expired on January 31, 2000, for achieving significant contract
milestones such as the demolition of a significant building at the Rocky Flats
site. The year-to-date results also include fees under the new contract,
which was effective February 1, 2000.
Effective February 1, 2000, the U.S. Department of Energy extended Kaiser-
Hill's Rocky Flats contract. Although the new contract is a closure contract
and does not have a defined term, we anticipate closure of the site in 2006.
Under the new contract, Kaiser-Hill is compensated through a base fee
affected, up or down, by its performance against the agreed site target
closure costs. Outside of a negotiated range, for every dollar that the U.S.
Department of Energy saves with earlier cleanup, Kaiser-Hill receives a 30
cent increase in fee. At the same time, for every dollar the cleanup is over
budget, the fee is reduced by 30 cents down to an agreed minimum. The
ultimate fee will also be impacted by the schedule to achieve site closure and
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the safety of our performance. Until the results of the performance measures
become more estimable, earnings are expected to be comparable from quarter to
quarter.
Corporate Expenses
Corporate expenses for the three-month period ended September 30, 2000 were
$2.0 million compared to $1.4 million for the same period of 1999. For the
nine-month period ended September 30, 2000, corporate expenses were $6.3
million compared to $4.6 million in the same period of 1999. During 2000, we
incurred expenses to buy out a supplemental retirement plan associated with
the old key employee program and to accrete the value of certain equity
instruments related to our compensation plans to the current stock price.
Corporate expenses represent centralized management costs that are not
allocable to individual operating segments and primarily include expenses
associated with administrative compliance functions such as legal, treasury,
accounting, tax and general business development efforts.
Income Taxes
The income tax provision for the three and nine month periods ended September
30, 2000 was $7.3 million and $17.4 million, respectively, or an effective tax
rate of 49.9%. This compares to $5.1 million and $10.5 million for the same
periods of 1999, respectively, or an effective tax rate of 48.9%. 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, 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, 2000, operations provided $47.7
million of cash primarily due to growth in our operations. Working capital
changes included an increase of $76.8 million in accounts receivable and work-
in-process offset by an increase of $37.3 million in accounts payable and
billings in excess of revenues all as a result of growth in operations,
providing a net decrease in cash of $39.5 million. The remaining net decrease
in cash from working capital of $31.8 million is primarily due to the increase
in employee related and other accrued liabilities due to the growth in
operations and due to the accrual of payroll and related benefit expenses.
Offsetting the net decrease in working capital of $7.7 million was earnings of
$17.5 million as well as an increase in other non-cash items of $37.9 million.
Non-cash items primarily include $19.7 million for stock-based compensation
and $13.0 million for deferred income taxes.
During the comparable period of 1999, operations provided $16.7 million of
cash. During this period, payables and billings in excess of revenues
increased $57.4 million offset by an increase in receivables and work-in-
process of $56.5 million primarily due to the pass-through of revenues and
expenses related to new, large construction projects. The remaining increase
of $15.8 million resulted from an increase in earnings of $11.0 million and
non-cash items of stock-based compensation and deferred income taxes.
Cash Flows from Financing Activities
For the nine-month period ended September 30, 2000, we used $18.4 million of
cash in financing activities, of which $12.7 million was used to purchase
stock presented on the internal market. CH2M HILL purchased $3.3 million of
stock on the internal market to fund its Employee Stock Plan and exercised its
right to purchase the remaining $9.4 million in order to provide liquidity to
its employees by clearing the internal market. These transactions were funded
by cash flows from operations. The remaining decrease of $5.7 million was
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used to pay down the notes to former shareholders and long-term debt.
During the same period of 1999, we used $9.0 million of cash in financing
activities, of which $1.5 million was used to repurchase stock from retirees
and $7.5 million was used to pay down the notes to former shareholders and
long-term debt.
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, 2000 and
1999, 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. Our earnings
and cash flows are affected by changes in interest rates affecting our
variable rate borrowings under our bank credit facility. During the nine
month period ended September 30, 2000 there were no significant amounts
outstanding on the bank credit facility. 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. Management's initial assessment is that the effect of
adoption will not have a significant impact on its financial position, results
of operations, and cash flows since CH2M HILL generally does not hold
derivative type instruments.
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Financial Data Schedule
Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CH2M HILL Companies, Ltd.
Date: November 13, 2000 /s/ Samuel H. Iapalucci
______________________________
Samuel H. Iapalucci
Vice President and Chief Financial Officer
