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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-27261

CH2M HILL Companies, Ltd.

(Exact name of registrant as specified in its charter)


Delaware		93-0549963
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


9191 South Jamaica Street,
Englewood, CO		80112-5946
(Address of principal executive offices)		(Zip Code)

(303) 771-0900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “small reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☒		Smaller reporting company ☐
(Do not check if a
smaller reporting company)		Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of August 3, 2017 was 24,591,691.

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CH2M HILL COMPANIES, LTD.

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	PART I. FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of June 30, 2017 and December 30, 2016 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and June 24, 2016 (unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and June 24, 2016 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and June 24, 2016 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
Item 4.	CONTROLS AND PROCEDURES	36
	PART II. OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	37
Item 1A.	RISK FACTORS	39
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40
Item 6.	EXHIBITS	41
SIGNATURES		42

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CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands)


	June 30,		December 30,
	2017		2016
ASSETS
Current assets:
Cash and cash equivalents	$	112,400	$	121,365
Receivables, net—
Client accounts		568,386		602,363
Unbilled revenue		573,162		529,779
Other		13,678		11,469
Income tax receivable		25,031		18,375
Prepaid expenses and other current assets		103,899		92,097
Current assets of discontinued operations		827		14,449
Total current assets		1,397,383		1,389,897
Investments in unconsolidated affiliates		73,626		66,329
Property, plant and equipment, net		233,536		246,596
Goodwill		499,221		477,752
Intangible assets, net		30,496		38,024
Deferred income taxes		348,446		363,251
Employee benefit plan assets and other		93,594		86,777
Long-term assets of discontinued operations		—		1,836
Total assets	$	2,676,302	$	2,670,462
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	2,231	$	2,242
Accounts payable and accrued subcontractor costs		369,515		394,934
Billings in excess of revenue		211,141		227,501
Accrued payroll and employee related liabilities		290,407		272,458
Other accrued liabilities		194,668		210,121
Current liabilities of discontinued operations		1,239		208,105
Total current liabilities		1,069,201		1,315,361
Long-term employee related liabilities		294,643		308,118
Long-term debt		520,234		495,632
Other long-term liabilities		102,216		105,813
Long-term liabilities of discontinued operations		77,920		—
Total liabilities		2,064,214		2,224,924
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized of which 10,000,000 are designated as Series A; 4,821,600 issued and outstanding at June 30, 2017 and as of December 30, 2016		48		48
Common stock, $0.01 par value, 100,000,000 shares authorized; 24,580,276 and 25,148,399 issued and outstanding at June 30, 2017 and December 30, 2016, respectively		246		251
Additional paid-in capital		144,197		169,573
Retained earnings		642,504		586,252
Accumulated other comprehensive loss		(171,234)		(209,408)
Total CH2M common stockholders’ equity		615,761		546,716
Noncontrolling interests of continuing operations		(3,673)		(8,643)
Noncontrolling interests of discontinued operations		—		(92,535)
Total stockholders' equity		612,088		445,538
Total liabilities and stockholders’ equity	$	2,676,302	$	2,670,462

The accompanying notes are an integral part of these consolidated financial statements.

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CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended				Six Months Ended
	June 30,		June 24,		June 30,		June 24
	2017		2016		2017		2016
Gross revenue	$	1,284,859	$	1,290,965	$	2,525,292	$	2,577,975
Equity in earnings of joint ventures and affiliated companies		15,378		8,717		22,739		17,770
Operating expenses:
Direct cost of services		(1,022,267)		(1,078,582)		(2,050,954)		(2,103,575)
Selling, general and administrative		(205,342)		(235,151)		(394,998)		(465,199)
Operating income (loss)		72,628		(14,051)		102,079		26,971
Other income (expense):
Interest income		108		110		208		170
Interest expense		(9,837)		(2,879)		(16,410)		(6,146)
Income (loss) from continuing operations before provision for income taxes		62,899		(16,820)		85,877		20,995
(Provision) benefit for income taxes from continuing operations		(15,739)		11,162		(20,951)		(2,808)
Net income (loss) from continuing operations		47,160		(5,658)		64,926		18,187
Net loss from discontinued operations		(531)		(148,532)		(141)		(148,653)
Net income (loss)		46,629		(154,190)		64,785		(130,466)
Less: income attributable to noncontrolling interests from continuing operations		(4,336)		(4,348)		(8,593)		(4,819)
Less: loss attributable to noncontrolling interests from discontinued operations		—		96,496		60		97,822
Net income (loss) attributable to CH2M	$	42,293	$	(62,042)	$	56,252	$	(37,463)

Net income (loss) attributable to CH2M per common share1:
Basic net income (loss) from continuing operations per common share	$	1.24	$	(0.41)	$	1.55	$	0.60
Basic net loss from discontinued operations per common share		(0.01)		(2.12)		—		(2.27)
Basic net income (loss) per common share	$	1.23	$	(2.53)	$	1.55	$	(1.67)

Diluted net income (loss) from continuing operations per common share	$	1.24	$	(0.41)	$	1.55	$	0.60
Diluted net loss from discontinued operations per common share		(0.01)		(2.12)		—		(2.27)
Diluted net income (loss) per common share	$	1.23	$	(2.53)	$	1.55	$	(1.67)

Basic weighted average number of common shares		24,663,914		25,993,448		24,809,814		26,064,581
Diluted weighted average number of common shares		24,666,714		25,993,448		24,814,363		26,064,581

1 Represents net income (loss) attributable to CH2M less (i) income allocated to preferred stockholders of $6,372 and $8,106 for the three and six months ended June 30, 2017, respectively, and $0 for the three and six months ended June 24, 2016, and (ii) accrued dividends attributable to preferred stockholders of $5,654 and $9,643 for the three and six months ended June 30, 2017, and $3,612 and $6,176 for the three and six months ended June 24, 2016.

The accompanying notes are an integral part of these consolidated financial statements.

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CH2M HILL COMPANIES, LTD.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Dollars in thousands)


	Three Months Ended				Six Months Ended
	June 30,		June 24,		June 30,		June 24
	2017		2016		2017		2016
Net income (loss)	$	46,629	$	(154,190)	$	64,785	$	(130,466)
Other comprehensive income:
Foreign currency translation adjustments		20,332		10,599		33,940		11,765
Benefit plan adjustments, net of tax		2,257		1,950		4,234		4,070
Other comprehensive income		22,589		12,549		38,174		15,835
Comprehensive income (loss)		69,218		(141,641)		102,959		(114,631)
Less: income attributable to noncontrolling interests from continuing operations		4,742		4,348		9,135		4,819
Less: loss attributable to noncontrolling interests from discontinued operations		—		(96,496)		(60)		(97,822)
Comprehensive income (loss) attributable to CH2M	$	64,476	$	(49,493)	$	93,884	$	(21,628)

The accompanying notes are an integral part of these consolidated financial statements.

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CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, Dollars in thousands)


	Six Months Ended
	June 30,		June 24,
	2017		2016
Cash flows from operating activities:
Net income (loss)	$	64,785	$	(130,466)
Adjustments to reconcile net income to net cash provided by (used in) continuing operating activities:
Net loss from discontinued operations		141		148,653
Depreciation and amortization		29,994		30,944
Stock-based employee compensation		17,302		18,277
Loss on disposal of property, plant and equipment		852		202
Amortization of debt issuance costs		289		—
Allowance for uncollectible accounts		2,366		347
Deferred income taxes		19,005		(82,022)
Undistributed earnings and gains from unconsolidated affiliates		(22,739)		(17,770)
Distributions of income from unconsolidated affiliates		29,061		27,203
Contributions to defined benefit pension plans		(12,781)		(19,026)
Excess tax benefits from stock-based compensation		1,368		2,502
Change in assets and liabilities of continuing operations:
Receivables and unbilled revenue		934		28,518
Prepaid expenses and other		(16,112)		(11,778)
Accounts payable and accrued subcontractor costs		(31,027)		(47,696)
Billings in excess of revenue		(19,326)		37,625
Accrued payroll and employee related liabilities		17,936		(18,095)
Other accrued liabilities		(19,830)		(17,336)
Income tax receivable		(6,723)		20,606
Long-term employee related liabilities and other		(8,265)		30,559
Net cash provided by operating activities from continuing operations		47,230		1,247
Net cash used in operating activities from discontinued operations		(14,215)		(113,692)
Net cash provided by (used in) operating activities		33,015		(112,445)
Cash flows from investing activities:
Capital expenditures		(9,006)		(67,357)
Acquisition related payments		(213)		(15,788)
Investments in unconsolidated affiliates		(13,866)		(12,315)
Distributions of capital from unconsolidated affiliates		875		6,663
Proceeds from sale of operating assets		1,485		815
Net cash used in investing activities from continuing operations		(20,725)		(87,982)
Net cash used in investing activities from discontinued operations		(8,109)		(169)
Net cash used in investing activities		(28,834)		(88,151)
Cash flows from financing activities:
Borrowings on long-term debt		1,118,126		1,235,328
Payments on long-term debt		(1,093,833)		(1,142,074)
Repurchases and retirements of common stock		(42,683)		(76,387)
Proceeds from the issuance of preferred stock, net of issuance costs		—		99,800
Settlement of tax-withholding obligation on stock-based compensation		(2,407)		(2,607)
Net distributions to noncontrolling interests for continuing operations		(2,847)		(2,860)
Net cash (used in) provided by financing activities from continuing operations		(23,644)		111,200
Net cash provided by financing activities from discontinued operations		4,635		48,739
Net cash (used in) provided by financing activities		(19,009)		159,939
Effect of deconsolidation of a joint venture partnership on cash		(13,011)		—
Effect of exchange rate changes on cash		9,210		1,019
Decrease in cash and cash equivalents	$	(18,629)	$	(39,638)

Cash and cash equivalents from continuing operations, beginning of period	$	121,365	$	148,979
Cash and cash equivalents from discontinued operations, beginning of period		9,664		48,042
Cash and cash equivalents, beginning of period	$	131,029	$	197,021

Cash and cash equivalents from continuing operations, end of period	$	112,400	$	149,737
Cash and cash equivalents from discontinued operations, end of period		—		7,646
Cash and cash equivalents, end of period	$	112,400	$	157,383
Supplemental disclosures:
Cash paid for interest	$	13,658	$	5,860
Cash paid for income taxes	$	4,686	$	10,347

The accompanying notes are an integral part of these consolidated financial statements.

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CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

(1) Summary of Business and Significant Accounting Policies

Summary of Business

CH2M HILL Companies, Ltd. and subsidiaries (“We”, “Our”, “CH2M” or the “Company”) is a large employee-controlled professional engineering services firm, founded in 1946, providing engineering, construction, consulting, design, design‑build, procurement, engineering‑procurement‑construction (“EPC”), operations and maintenance, program management and technical services to United States (“U.S.”) federal, state, municipal and local government agencies, national governments, as well as private industry and utilities, around the world. A substantial portion of our professional fees are derived from projects that are funded directly or indirectly by government entities.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and according to instructions to Form 10-Q and the provisions of Article 10 of Regulation S-X that are applicable to interim financial statements. Accordingly, these statements do not include all of the information required by GAAP or the Securities and Exchange Commission (“SEC”) rules and regulations for annual audited financial statements. The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions have been prepared on the basis of the most current and best available information. Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 30, 2016.

Revenue Recognition

We earn revenue from different types of services performed under various types of contracts, including cost-plus, fixed-price and time-and-materials. We evaluate contractual arrangements to determine how to recognize revenue. We primarily perform engineering and construction related services and recognize revenue for these contracts on the percentage-of-completion method where progress towards completion is measured by relating the actual cost of work performed to date to the current estimated total cost of the respective contract. In making such estimates, judgments are required to evaluate potential variances in schedule, the cost of materials and labor, productivity, subcontractor costs, liability claims, contract disputes, and achievement of contract performance standards. We record the cumulative effect of changes in contract revenue and cost at completion in the period in which the changed estimates are determined to be reliably estimable.

Below is a description of the four basic types of contracts from which we may earn revenue:

Cost-Plus Contracts. Cost-plus contracts can be cost plus a fixed fee or rate, or cost plus an award fee. Under these types of contracts, we charge our clients for our costs, including both direct and indirect costs, plus a fixed fee or an award fee. We generally recognize revenue based on the labor and non-labor costs we incur, plus the portion of the fixed fee or award fee we have earned to date.

Included in the total contract value for cost-plus fee arrangements is the portion of the fee for which receipt is determined to be probable. Award fees are influenced by the achievement of contract milestones, cost savings and other factors.

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Fixed-Price Contracts. Under fixed-price contracts, our clients pay us an agreed amount negotiated in advance for a specified scope of work. For engineering and construction contracts, we recognize revenue on fixed-price contracts using the percentage-of-completion method where direct costs incurred to date are compared to total projected direct costs at contract completion. Prior to completion, our recognized profit margins on any fixed-price contract depend on the accuracy of our estimates and will increase to the extent that our actual costs are below the original estimated amounts. Conversely, if our costs exceed these estimates, our profit margins will decrease, and we may realize a loss on a project. The significance of these estimates varies with the complexity of the underlying project, with our large, fixed-price EPC projects being most significant.

Time-and-Materials Contracts. Under our time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we expend on a project. In addition, clients reimburse us for our actual out of pocket costs of materials and other direct expenditures that we incur in connection with our performance under the contract. Our profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs that we directly charge or allocate to contracts compared with the negotiated billing rate and markup on other direct costs. Some of our time-and-materials contracts are subject to maximum contract values, and accordingly, revenue under these contracts is recognized under the percentage-of-completion method where costs incurred to date are compared to total projected costs at contract completion. Revenue on contracts that is not subject to maximum contract values is recognized based on the actual number of hours we spend on the projects plus any actual out of pocket costs of materials and other direct expenditures that we incur on the projects.

Operations and Maintenance Contracts. A portion of our contracts are operations and maintenance type contracts. Revenue is recognized on operations and maintenance contracts on a straight-line basis over the life of the contract once we have an arrangement, service has begun, the price is fixed or determinable and collectability is reasonably assured.

For all contract types noted above, change orders are included in total estimated contract revenue when it is probable that the change order will result in an addition to contract value and when the change order can be estimated. Management evaluates when a change order is probable based upon its experience in negotiating change orders, the customer’s written approval of such changes or separate documentation of change order costs that are identifiable. Additional contract revenue related to claims is included in total estimated contract revenue when the amount can be reliably estimated, which is typically evidenced by a contract or other evidence providing a legal basis for the claim.

Losses on construction and engineering contracts in process are recognized in their entirety when the loss becomes evident and the amount of loss can be reasonably estimated.

Accounts Receivable

We reduce accounts receivable by estimating an allowance for amounts that may become uncollectible in the future. Management determines the estimated allowance for uncollectible amounts based on their judgments in evaluating the aging of the receivables and the financial condition of our clients, which may be dependent on the type of client and the client’s current financial condition.

Unbilled Revenue and Billings in Excess of Revenue

Unbilled revenue represents the excess of contract revenue recognized over billings to date on contracts in process. These amounts become billable according to the contract terms, which usually consider the passage of time, achievement of certain milestones or completion of the project.

Billings in excess of revenue represent the excess of billings to date, per the contract terms, over work performed and revenue recognized on contracts in process using the percentage-of-completion method.

Fair Value Measurements

Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities are valued based upon observable and non-observable inputs. Valuations using Level 1 inputs are based on unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. Level 2 inputs utilize significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly; and valuations using Level 3 inputs are based on significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. There were no significant transfers between levels during any period presented.

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Restructuring and Related Charges

An exit activity includes but is not limited to a restructuring, such as a sale or termination of a line of business, the closure of business activities in a particular location, the relocation of business activities from one location to another, changes in management structure, and a fundamental reorganization that affects the nature and focus of operations. The Company recognizes a current and long-term liability, within other accrued liabilities and other long term liabilities, respectively, and the related expense, within selling, general and administrative expense, for restructuring costs when the liability is incurred and can be measured. Restructuring accruals are based upon management estimates at the time they are recorded and can change depending upon changes in facts and circumstances subsequent to the date the original liability was recorded. Nonretirement postemployment benefits offered as special termination benefits to employees, such as a voluntary early retirement program, are recognized as a liability and a loss when the employee accepts the offer and the amount can be reasonably estimated.

Goodwill

Goodwill represents the excess of costs over fair value of the assets of businesses we have acquired. Goodwill acquired in a purchase business combination is not amortized, but instead, is tested for impairment at least annually. Our annual goodwill impairment test is conducted as of the first day of the fourth quarter of each year, however, upon the occurrence of certain triggering events, we are also required to test for impairment at dates other than the annual impairment testing date. In performing the impairment test, we evaluate our goodwill at the reporting unit level. We have the option to assess either quantitative or qualitative factors to determine whether it is more likely than not that the fair values of our reporting units are less than their carrying amounts. If after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair values of our reporting units are less than their carrying amounts, then the next step of the impairment test is unnecessary. If we conclude otherwise, then we are required to test goodwill for impairment by comparing the estimated fair value of each reporting unit to the unit’s carrying value, including goodwill. If the carrying value of a reporting unit does not exceed its fair value, the goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, we would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

We determine the fair value of our reporting units using a combination of the income approach, the market approach, and the cost approach. The income approach calculates the present value of future cash flows based on assumptions and estimates derived from a review of our expected revenue growth rates, profit margins, business plans, cost of capital and tax rates for the reporting units. Our market based valuation method estimates the fair value of our reporting units by the application of a multiple to our estimate of a cash flow metric for each business unit. The cost approach estimates the fair value of a reporting unit as the net replacement cost using current market quotes.

Intangible Assets

We may acquire other intangible assets in business combinations. Intangible assets are stated at fair value as of the date they are acquired in a business combination. We amortize intangible assets with finite lives on a straight-line basis over their expected useful lives, currently up to ten years. We test our intangible assets for impairment in the period in which a triggering event or change in circumstance indicates that the carrying amount of the intangible asset may not be recoverable. If the carrying amount of the intangible asset exceeds the fair value, an impairment loss will be recognized in the amount of the excess. We determine the fair value of the intangible assets using a discounted cash flow approach.

Derivative Instruments

We primarily enter into derivative financial instruments to mitigate exposures to changing foreign currency exchange rates on our earnings and cash flows. We are primarily subject to this risk on long-term projects whereby the currency being paid by our client differs from the currency in which we incurred our costs, as well as intercompany trade balances among entities with differing currencies. We do not enter into derivative transactions for speculative or trading purposes. All derivatives are carried at fair value on the consolidated balance sheets in other receivables or other accrued liabilities as applicable. The periodic change in the fair value of the derivative instruments related to our business group operations is recognized in earnings within direct costs. The periodic change in the fair value of the derivative instruments related to our general corporate foreign currency exposure is recognized within selling, general and administrative expense.

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Retirement and Tax-Deferred Savings Plan

The Retirement and Tax Deferred Savings Plan is a retirement plan that includes a cash or deferred arrangement that is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code and provides benefits to eligible employees upon retirement. The 401(k) Plan allows for matching contributions up to 58.33% of the first 6% of elective deferrals up to 3.5% of the employee’s quarterly base compensation, although specific subsidiaries may have different limits on employer matching. The matching contributions may be made in both cash and/or stock. Expenses related to matching contributions made in common stock for the 401(k) Plan for the three and six months ended June 30, 2017 were $8.6 million and $11.2 million, respectively, as compared to $7.4 million and $12.9 million for the three and six months ended June 24, 2016, respectively.

Recently Adopted Accounting Standards

In May 2017, the FASB issued Accounting Standards Update ("ASU") 2017-09, Compensation- Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This ASU is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods, and early adoption is permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. Once effective, we will apply this guidance to future changes to terms or conditions of our stock-based payment awards to determine if it triggers modification accounting, but we do not believe this ASU will materially change how we currently evaluate similar occurrences.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this ASU require that an employer disaggregate the service cost component from the other components of net benefit cost and report the service cost component in the same statement of income line item as other compensation costs for the relevant employees. Additionally, only the service cost component of net benefit cost would be eligible for capitalization. The ASU requires that the other components of net benefit cost be presented outside of income or loss from operations on the statement of income, separate from the service cost component. The amendments in this update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic benefit cost and net periodic postretirement benefit in assets. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, and early adoption is permitted. Currently, the net periodic pension expense or income related to our defined pension benefit plans in the U.S. and internationally is presented within selling, general and administrative expense. Therefore, we anticipate the adoption of this ASU to impact the presentation of our statement of operations, including the subtotal of income or loss from operations. Refer to Note 13 – Defined Benefit Plans and Other Postretirement Benefits for detail of our net periodic pension expense or income by component.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment. This ASU was issued with the objective of simplifying the subsequent measurement of goodwill for public business entities and not-for-profit entities by eliminating the second step of the goodwill impairment test. As a result, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. During the three months ended March 31, 2017, we early adopted this standard which will be effective for our annual goodwill impairment test to be conducted as of the first day of the fourth quarter of 2017. We do not believe this ASU will have a material impact on our financial statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. This standard amends the guidance issued with ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis in order to make it less likely that a single decision maker would individually meet the characteristics to be the primary beneficiary of a Variable Interest Entity ("VIE"). When a decision maker or service provider considers indirect interests held through related parties under common control, they perform two steps. The second step was amended with this ASU to say that the decision maker should consider interests held by these related parties on a proportionate basis when determining the primary beneficiary of the VIE rather than in their entirety as was called for in the previous guidance. The adoption of this standard in the current reporting period did not have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU was issued with the objective to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new standard will require companies to recognize the income tax consequences of an intra-entity transfer of non-inventory assets when the transfer occurs. This ASU will be effective for fiscal years beginning after

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December 15, 2017, and early adoption is permitted. We are currently evaluating the impact of the adoption of this ASU on our financial position and results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance for eight specific changes with respect to how certain cash receipts and cash payments are classified within the statement of cash flows in order to reduce existing diversity in practice. This ASU will be effective for fiscal years beginning after December 15, 2017, and early adoption is permitted, and it should be applied using a retroactive transition method to each period presented. We are currently evaluating the impacts the adoption of this standard will have on our consolidated statements of cash flows, focusing on the impact our cash flows related to distributions received from equity method investees and contingent consideration payments made subsequent to business combinations. We anticipate that approximately $0.2 million and $15.8 million of acquisition related payments within our investing cash flows for the six months ended June 30, 2017 and June 24, 2016, respectively, will be reclassified to financing cash flows as a result of adopting this ASU.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payments Accounting. During the three months ended September 30, 2016, the Company elected to early adopt ASU 2016-09 with an effective date of December 26, 2015. As a result, the Company recognized the excess tax benefit of $1.4 million within income tax benefit on the consolidated statements of income for the six months ended June 30, 2017, and, upon adoption, previously unrecognized excess tax benefits of $11.1 million resulted in a cumulative-effect adjustment to retained earnings for the year ended December 30, 2016. The adoption did not impact the existing classification of awards. Excess tax benefits from stock-based compensation of $2.5 million for the six months ended June 24, 2016 were restated into cash flows from operating activities from cash flows from financing activity. Additionally, adopted retrospectively, the Company reclassified $2.4 million and $2.6 million of employee withholding taxes paid from operating activities into financing activities for the six months ended June 30, 2017 and June 24, 2016, respectively. Following the adoption of the standard, the Company elected to continue estimating the number of awards expected to be forfeited and adjust its estimate on an ongoing basis.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new leases standard that was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We continue to assess the impact of adopting ASU 2016-02, but expect to record a significant amount of right-of-use assets and corresponding liabilities. Based upon our operating leases as of December 30, 2016, we expect to have in excess of $500.0 million of undiscounted future minimum lease payments upon adoption of this standard.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments issued with this ASU require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. An entity’s equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this update. This ASU will be effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods, with early adoption permitted. We believe this standard’s impact on CH2M will be limited to equity securities currently accounted for under the cost method of accounting, which as of June 30, 2017 are valued at $3.5 million within investments in unconsolidated affiliates on the consolidated balance sheet. We do not expect the adoption of this standard to have a material impact on our consolidated statements of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers and subsequently modified with various amendments and clarifications. This ASU is a comprehensive new revenue recognition model that is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU also requires additional quantitative and qualitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU, as amended, is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. CH2M is currently evaluating the impact of this ASU, the subsequently issued amendments, and the transition alternatives on its financial position and results of operations. Currently, we have identified various revenue streams by contract billing type, client type, and type of contracted services. We are in the process of reviewing our contracts in the various revenue streams in order to isolate those that will be significantly impacted as well as to identify the relevant revenue streams for disaggregated disclosure. From our initial assessment, we do not anticipate the new revenue recognition standard to, in substance, change our current process of recognizing revenue on a substantial portion of our portfolio of contracts. For example, we currently estimate variable consideration in relation to total contract revenue in a manner consistent with the new model, and our initial

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evaluation of performance obligations coincides with our current contract segmentation policies. After our assessment is complete, we can begin estimating the potential financial impacts of the new standard as well as identify necessary controls, processes and information system changes.

(2) Changes in Project-Related Estimates

We have a fixed-price Transportation contract to design and construct roadway improvements on an expressway in the southwestern United States. The project is approximately 85% complete as of June 30, 2017. In the three and six months ended June 24, 2016, we experienced cost growth resulting in total changes in estimated costs of approximately $60.0 million. This cost growth was primarily a result of survey engineering and design challenges, rework of previously installed work and client-caused delays, including limited daytime access to portions of the site, greater than expected subcontractor costs, subcontracting work previously planned to be self-performed, the sum of which resulted in increased material quantities and work and delivery schedule extensions. We also had severe weather including record rainfall, and production shortfalls resulting from differing site conditions and engineering rework.

In the first quarter of 2017, the project team increased the overall estimated costs for labor and materials by a total of $23.5 million. The cost growth was predominately related to unanticipated field conditions and labor resource restraints, some of which costs are being included in claims submitted to the client. We did not incur additional cost growth during the three months ended June 30, 2017. While the project team believes that the increase in costs during the six months ended June 30, 2017 is sufficient to cover known issues, additional design, fabrication, construction or labor resource issues could be encountered resulting in further cost growth. Certain of these additional costs are believed to be the result of noise barrier fabrication errors incurred by a subcontractor, sound wall design issues, as well as specifications provided by the client that were determined to be incorrect.

We expect to seek resolution of these first quarter 2017 issues from the fabrication/installation subcontractor in addition to seeking resolution of the outstanding change orders and claims through a combination of submissions to the Disputes Board under the terms of the contract and direct negotiations with the client. Change orders and claims totaling approximately $110.0 million have been submitted to the client. We have received favorable, non-binding recommendations from the Disputes Board on some of the claims. We are in the process of trying to reach a mutual resolution with the client on these claims and the other submitted change orders. CH2M will continue to aggressively pursue its entitlements based on claims and change orders, including litigation if it cannot reach resolution with the client. Accordingly, we cannot currently estimate the timing or amounts of recoveries or costs that may be achieved or incurred through these resolution processes, and as such, we have not included any recoveries from these change orders and claims in our current estimated project loss.

While management believes that it has recorded an appropriate provision to complete the project, we may incur additional costs and losses if our cost estimation processes identify new costs not previously included in our total estimated loss. These possible cost increases include extensions of the schedule to complete the job, lower than expected productivity levels, and performance issues with our subcontractors. These potential changes in estimates could be materially adverse to the Company’s results of operations, cash flow or liquidity.

All reserves for project related losses for projects related to our continuing operations are included in other accrued liabilities and totaled $47.6 million and $71.2 million as of June 30, 2017 and December 30, 2016, respectively. Refer to Note 14 – Discontinued Operations for additional details regarding projects reported within discontinued operations.

(3) Segment Information

In the first quarter of 2017, we implemented a new organizational structure to more fully align global operations with the Company’s client-centric strategy, resulting in three sectors: National Governments, Private, and State & Local Governments. Each of these sectors has been identified as a reportable operating segment.

Costs for corporate selling, general and administrative expenses, restructuring costs and amortization expense related to intangible assets have been allocated to each segment based on the estimated benefits provided by corporate functions. This allocation is primarily based upon metrics that reflect the proportionate volume of project-related activity and employee labor costs within each segment.

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Certain financial information relating to the three and six months ended June 30, 2017 and June 24, 2016 for each segment is provided below. Prior year amounts have been revised to conform to the current year presentation.


	Three Months Ended June 30, 2017						Three Months Ended June 24, 2016
	Gross		Equity in		Operating		Gross		Equity in		Operating
($ in thousands)	Revenue		Earnings		Income		Revenue		Earnings		Income (Loss)
National Governments	$	481,484	$	11,153	$	14,903	$	482,186	$	4,931	$	7,011
Private		302,923		454		10,150		330,441		307		12,883
State & Local Governments		500,452		3,771		47,575		478,338		3,479		(33,945)
Total	$	1,284,859	$	15,378	$	72,628	$	1,290,965	$	8,717	$	(14,051)


	Six Months Ended June 30, 2017						Six Months Ended June 24, 2016
	Gross		Equity in		Operating		Gross		Equity in		Operating
($ in thousands)	Revenue		Earnings		Income		Revenue		Earnings		Income (Loss)
National Governments	$	957,163	$	15,646	$	25,569	$	928,909	$	11,240	$	7,774
Private		592,203		324		19,420		678,539		594		27,380
State & Local Governments		975,926		6,769		57,090		970,527		5,936		(8,183)
Total	$	2,525,292	$	22,739	$	102,079	$	2,577,975	$	17,770	$	26,971

(4) Stockholders’ Equity

The changes in stockholders’ equity for the six months ended June 30, 2017 are as follows:


	Common	Preferred
(in thousands)	Shares	Shares	Amount
Stockholders’ equity, December 30, 2016	25,148	4,822	$	445,538
Shares purchased and retired	(880)	—		(42,683)
Shares issued in connection with stock-based compensation and employee benefit plans	312	—		17,302
Net income attributable to CH2M	—	—		56,252
Other comprehensive income, net of tax	—	—		38,174
Other comprehensive income attributable to noncontrolling interest, net of tax				(542)
Deconsolidation of a subsidiary's noncontrolling interest	—	—		87,838
Income attributable to noncontrolling interests from continuing operations	—	—		8,593
Loss attributable to noncontrolling interests from discontinued operations				(60)
Investment in affiliates, net	—	—		1,676
Stockholders’ equity, June 30, 2017	24,580	4,822	$	612,088

Preferred Stock

As of June 30, 2017, the Company had 50,000,000 shares of preferred stock, $0.01 par value, authorized. On June 22, 2015, the Company designated 10,000,000 shares as Series A Preferred Stock with an original issue price of $62.22 under the Certificate of Designation. On June 24, 2015, the Company sold and issued an aggregate of 3,214,400 shares of Series A Preferred Stock for an aggregate purchase price of $200.0 million in a private placement to a subsidiary owned by investment funds affiliated with Apollo Global Management, LLC (together with its subsidiaries, “Apollo”). Total proceeds from the preferred stock offering were $191.7 million, net of issuance costs of $8.3 million. The sale occurred in connection with the initial closing pursuant to the Subscription Agreement entered into by the Company and Apollo on May 27, 2015 (“Subscription Agreement”). On April 11, 2016, Apollo purchased an additional 1,607,200 shares of Series A Preferred Stock for an aggregate purchase price of approximately $100.0 million in a second closing subject to the conditions within the Subscription Agreement. Total proceeds from the preferred stock offering were $99.8 million, net of issuance costs of $0.2 million.

In connection with the issuance of the Second Lien Notes and the Fourth Amendment to our Amended and Restated Credit Agreement on April 28, 2017, as discussed in Note 10 – Long-Term Debt, we obtained consent from our Series A Preferred Stockholder with respect to the incurrence of the notes and filed a Certificate of Amendment to the Certificate of Designation of Series A Preferred Stock which increases the annual rate at which dividends accrue on the Series A Preferred Stock from 5% to 7% beginning April 1, 2017. Dividends on the Series A Preferred Stock are cumulative and accrue quarterly in arrears on the sum of the original issue price of $62.22 per share plus all accumulated and unpaid accruing dividends, regardless of whether or not declared by

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the Board. The other terms and conditions of the Series A Preferred Stock set forth in the Certificate of Designation, as summarized in our Annual Report on Form 10-K for the year ended December 30, 2016, remain unchanged.

Under our agreement with Apollo, the maximum consolidated leverage ratio is 4.00x for 2017 and beyond, consistent with the Fourth Amendment to our Amended and Restated Credit Agreement. As of June 30, 2017, we were in compliance with this covenant. Management continually assesses its potential future compliance with the consolidated leverage ratio covenant based on estimates of future earnings and cash flows. If there is an expected possibility of non-compliance, we will discuss possibilities with Apollo to modify the covenant consistent with discussions with the Company’s lenders or utilize other means of capitalizing the Company to anticipate or remedy any non-compliance.

(5) Earnings Per Share

Basic earnings per share (“EPS”) is calculated using the weighted-average number of common shares outstanding during the period and income available to common stockholders, which is calculated by deducting the dividends accumulated for the period on cumulative preferred stock (whether or not earned) and income allocated to preferred stockholders as calculated under the two-class method. In the event the Company has a net loss, the net loss is not allocated to preferred stockholders as the holders do not have a contractual obligation to share in the Company’s losses. The Company considers all of the Series A Preferred Stock to be participating securities as the holders of the preferred stock are entitled contractually to receive a cumulative dividend.

Diluted EPS under the two-class method is computed by giving effect to all potential shares of common stock including common stock issuable upon conversion of the convertible preferred stock, the related convertible dividends for the aggregate five year contractual obligation, and stock options. The denominator is calculated by using the weighted-average number of common shares and common stock equivalents outstanding during the period, assuming conversion at the beginning of the period or at the time of issuance if later. Additionally, when calculating diluted EPS, the Company analyzes the potential dilutive effect of the outstanding preferred stock under the if-converted method, in which it is assumed that the outstanding preferred stock convert to common stock at the beginning of the period. In the event that the if-converted method is more dilutive than the two-class method, the if-converted diluted EPS will be reflected in our financial statements. Common stock equivalents are only included in the diluted EPS calculation when their effect is dilutive.

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The table below presents the reconciliations of basic and diluted EPS for the three and six months ended June 30, 2017 and June 24, 2016:


	Three Months Ended				Six Months Ended
	June 30,		June 24,		June 30,		June 24,
(in thousands, except per share amounts)	2017		2016		2017		2016
Numerator - basic and diluted:
Net income (loss) from continuing operations	$	47,160	$	(5,658)	$	64,926	$	18,187
Net loss from discontinued operations		(531)		(148,532)		(141)		(148,653)
Net income (loss)		46,629		(154,190)		64,785		(130,466)
Less: income attributable to noncontrolling interests from continuing operations		(4,336)		(4,348)		(8,593)		(4,819)
Less: loss attributable to noncontrolling interests from discontinued operations		—		96,496		60		97,822
Net income (loss) attributable to CH2M		42,293		(62,042)		56,252		(37,463)
Less: accrued dividends attributable to preferred stockholders		5,654		3,612		9,643		6,176
Less: income allocated to preferred stockholders - basic		6,372		—		8,106		—
Income (loss) available to common stockholders - basic and diluted	$	30,267	$	(65,654)	$	38,503	$	(43,639)

Denominators:
Weighted-average common shares outstanding - basic		24,664		25,993		24,810		26,065
Dilutive effect of common stock equivalents		3		—		5		—
Diluted adjusted weighted-average common shares outstanding, assuming conversion of common stock equivalents		24,667		25,993		24,815		26,065

Basic net income (loss) from continuing operations per common share	$	1.24	$	(0.41)	$	1.55	$	0.60
Basic net loss from discontinued operations per common share		(0.01)		(2.12)		—		(2.27)
Basic net income (loss) per common share	$	1.23	$	(2.53)	$	1.55	$	(1.67)

Diluted net income (loss) from continuing operations per common share	$	1.24	$	(0.41)	$	1.55	$	0.60
Diluted net loss from discontinued operations per common share		(0.01)		(2.12)		—		(2.27)
Diluted net income (loss) per common share	$	1.23	$	(2.53)	$	1.55	$	(1.67)

For the three and six months ended June 30, 2017, options to purchase 1.8 million shares of common stock and 5.2 million shares of preferred stock and accumulated preferred stock dividends were excluded from the dilutive EPS calculation because including them would have been antidilutive. Due to the existence of net losses for the three and six months ended June 24, 2016, basic and diluted EPS were the same as the effect of potentially dilutive common stock equivalents, including options to purchase 2.6 million shares of common stock and 5.0 million shares of preferred stock and accumulated preferred stock dividends, would have been antidilutive.

(6) Variable Interest Entities and Equity Method Investments

We routinely enter into teaming arrangements, in the form of joint ventures, to perform projects for our clients. Such arrangements are customary in the engineering and construction industry and generally are project specific. The arrangements facilitate the completion of projects that are jointly contracted with our partners. These arrangements are formed to leverage the skills of the respective partners and include consulting, construction, design, design-build, program management and operations and maintenance contracts. The assets of a joint venture are restricted for use only for the particular joint venture and are not available for general operations of the Company. Our risk of loss on these arrangements is usually shared with our partners. The liability of each partner is usually joint and several, which means that each partner may become liable for the entire risk of loss on the project. Furthermore, on some of our projects, CH2M has granted guarantees which may encumber both our contracting subsidiary company and CH2M for the entire risk of loss on the project.

Our financial statements include the accounts of our joint ventures when the joint ventures are variable interest entities (“VIE”) and we are the primary beneficiary or those joint ventures that are not VIEs yet we have a controlling interest. We perform a qualitative assessment to determine whether our company is the primary beneficiary once an entity is identified as a VIE. A

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qualitative assessment begins with an understanding of the nature of the risks associated with the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and how they were marketed, and the parties involved in the design of the entity. All of the variable interests held by parties involved with the VIE are identified and a determination is made of which activities are most significant to the economic performance of the entity and which variable interest holder has the power to direct those activities. In determining whether we have a controlling interest in a joint venture that is not a VIE and the requirement to consolidate the accounts of the entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partnership/members. Most of the VIEs with which our Company is involved have relatively few variable interests and are primarily related to our equity investments, subordinated financial support, and subcontracting arrangements. We consolidate those VIEs in which we have both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive the benefits from the VIE that could potentially be significant to the VIE. As of June 30, 2017 and December 30, 2016, total assets of VIEs that were consolidated were $319.8 million and $220.3 million, respectively, and liabilities were $293.7 million and $385.9 million, respectively. As of December 30, 2016, $19.0 million of the consolidated assets and $203.9 million of consolidated liabilities were related to an Australian fixed-price Power EPC joint venture which was deconsolidated upon termination of the underlying contract on January 24, 2017. Refer to Note 14 - Discontinued Operations for additional details. Additionally, on July 3, 2017, because of the closing of the SNC-Lavalin Group Inc. acquisition of WS Atkins plc., both of whom were partners with CH2M in a joint venture through which we are executing a large Canadian nuclear project, we determined that we no longer were the primary beneficiary of a joint venture and deconsolidated the partnership from our consolidated financial statements. Refer to Note 16 – Subsequent Events for additional details.

We held investments in unconsolidated VIEs and equity method investments related to continuing operations of $73.6 million and $66.3 million at June 30, 2017 and December 30, 2016, respectively. As of June 30, 2017, as a result of deconsolidating the Australian joint venture during the first quarter of 2017 as discussed above, we held a negative investment in unconsolidated VIE related to discontinued operations of $77.9 million. Our proportionate share of net income or loss is included as equity in earnings of joint ventures and affiliated companies in the consolidated statements of operations. In general, the equity investment in our unconsolidated affiliates is equal to our current equity investment plus our portion of the entities’ undistributed earnings. We provide certain services, including engineering, construction management and computer and telecommunications support, to these unconsolidated entities. These services are billed to the joint ventures in accordance with the provisions of the agreements.

As of June 30, 2017 and December 30, 2016, the total assets of VIEs related to continuing operations that were not consolidated were $433.6 million and $479.2 million, respectively, and total liabilities were $340.9 million and $304.9 million, respectively. As of June 30, 2017, total assets and liabilities of the unconsolidated VIE related to the Australian fixed-price Power EPC joint venture included in discontinued operations were $8.3 million and $175.2 million, respectively. These assets and liabilities consist almost entirely of working capital accounts associated with the performance of single contracts. The maximum exposure to losses is limited to the funding of any future losses incurred by those entities under their respective contracts with the project company.

(7) Goodwill and Intangible Assets

The following table presents the changes in goodwill by segment during the six months ended June 30, 2017:


($ in thousands)	National Governments		Private		State & Local Governments		Consolidated Total
Balance as of December 30, 2016	$	12,753	$	146,913	$	318,086	$	477,752
Foreign currency translation		773		2,623		18,073		21,469
Balance as of June 30, 2017	$	13,526	$	149,536	$	336,159	$	499,221

The following table presents the changes in intangible assets by segment during the six months ended June 30, 2017:


($ in thousands)	National Governments		Private		State & Local Governments		Consolidated Total
Balance as of December 30, 2016	$	433	$	23,988	$	13,603	$	38,024
Amortization		(261)		(1,958)		(6,687)		(8,906)
Foreign currency translation		18		887		473		1,378
Balance as of June 30, 2017	$	190	$	22,917	$	7,389	$	30,496

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Intangible assets with finite lives consist of the following:


			Accumulated		Net finite-lived
($ in thousands)	Cost		Amortization		intangible assets
June 30, 2017
Customer relationships	$	178,462	$	(147,966)	$	30,496
Total finite-lived intangible assets	$	178,462	$	(147,966)	$	30,496
December 30, 2016
Customer relationships	$	172,880	$	(134,856)	$	38,024
Total finite-lived intangible assets	$	172,880	$	(134,856)	$	38,024

All intangible assets are being amortized over their expected lives of between two years and ten years. The amortization expense reflected in the consolidated statements of operations totaled $4.7 million and $4.7 million for the three months ended June 30, 2017 and June 24, 2016, respectively, and $8.9 million and $9.5 million for the six months ended June 30, 2017 and June 24, 2016, respectively. All intangible assets are expected to be fully amortized in 2024.

As of June 30, 2017, the future estimated amortization expense related to these intangible assets was:


	Amortization
($ in thousands)	Expense
2017 (six months remaining)	$	7,176
2018		4,332
2019		3,599
2020		3,599
2021		3,599
2022		3,599
Thereafter		4,592
	$	30,496

(8) Property, Plant and Equipment

Property, plant and equipment consists of the following:


	June 30,		December 30,
($ in thousands)	2017		2016
Land	$	5,021	$	5,021
Building and land improvements		105,817		107,140
Furniture and fixtures		25,044		26,009
Computer and office equipment		160,257		157,542
Field equipment		127,378		130,681
Leasehold improvements		77,283		75,492
		500,800		501,885
Less: Accumulated depreciation		(267,264)		(255,289)
Net property, plant and equipment	$	233,536	$	246,596

Depreciation expense from continuing operations reflected in the consolidated statements of operations was $10.3 million and $10.7 million for the three months ended June 30, 2017 and June 24, 2016, respectively, and $21.1 million and $21.5 million for the six months ended June 30, 2017 and June 24, 2016, respectively.

(9) Fair Value of Financial Instruments

Cash and cash equivalents, client accounts receivable, unbilled revenue, accounts payable and accrued subcontractor costs and billings in excess of revenue are carried at cost, which approximates fair value due to their short maturities. Fair value of long‑term debt, including the current portion, is estimated based on Level 2 inputs, except the amount outstanding on the revolving credit facility for which the carrying value approximates fair value. Fair value is determined by discounting future cash flows using interest

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rates available for issues with similar terms and average maturities. The estimated fair values of our financial instruments where carrying values do not approximate fair value are as follows:


	June 30, 2017				December 30, 2016
	Carrying		Fair		Carrying		Fair
($ in thousands)	Amount		Value		Amount		Value
Second Lien Notes	$	200,000	$	151,451	$	—	$	—
Equipment financing		7,105		6,737		8,152		7,662
Note payable by consolidated joint venture	$	2,486	$	2,329	$	2,483	$	2,284

We primarily enter into derivative financial instruments to mitigate exposures to changing foreign currency exchange rates. These currency derivative instruments are carried on the balance sheet at fair value and are typically based upon Level 2 inputs including third-party quotes. As of June 30, 2017, we had forward foreign exchange contracts on major world currencies with varying durations, none of which extend beyond one year. As of June 30, 2017 and December 30, 2016, we had $2.0 million and $1.2 million of derivative liabilities, respectively.

The unrealized and realized gains and losses due to changes in derivative fair values included in selling, general and administrative expense are as follows:


	Three Months Ended				Six Months Ended
	June 30,		June 24,		June 30,		June 24,
(in thousands)	2017		2016		2017		2016
Unrealized (loss) gain from changes in derivative fair values	$	(1,259)	$	(775)	$	(865)	$	177
Realized gain (loss) from changes in derivative fair values	$	854	$	(2,001)	$	(852)	$	(2,775)

(10) Long-Term Debt

Our nonrecourse and other long-term debt consist of the following:


	June 30,		December 30,
($ in thousands)	2017		2016
Revolving Credit Facility, average rate of interest of 4.33%	$	317,609	$	487,009
Second Lien Notes, net of $4.9 million of debt issuance costs. These notes bear interest of 10% due May 1 and November 1 annually		195,089		—
Equipment financing, due in monthly installments to September 2021, secured by equipment. These notes bear interest ranging from 0.22% to 3.29%		7,105		8,152
Note payable by consolidated joint venture, due July 2019. This note bears interest at 6-month LIBOR plus 2.5%		2,486		2,483
Other notes payable		176		230
Total debt		522,465		497,874
Less: current portion of debt		2,231		2,242
Total long-term portion of debt	$	520,234	$	495,632

As of June 30, 2017 and December 30, 2016, company-wide issued and outstanding letters of credit and bank guarantee facilities were $129.0 million and $134.2 million, respectively.

Revolving Credit Facility

On April 28, 2017, we entered into a Fourth Amendment to our Amended and Restated Credit Agreement (“Credit Agreement”). The Fourth Amendment allowed for the issuance and sale of the Second Lien Notes, as discussed below, and lowered our maximum revolving credit facility to $875.0 million from $925.0 million. The credit facility matures on March 28, 2019 and includes a subfacility for the issuance of standby letters of credit up to $450.0 million, a subfacility of up to $300.0 million for multicurrency borrowings, and a subfacility of up to $50.0 million for swingline loans. Other technical and operating changes to the Credit Agreement specifically achieved the following:

Increased the maximum consolidated leverage ratio to 4.00x from 3.00x;

Modified the definition of adjusted EBITDA as used in the financial covenant calculation;

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Required CH2M to maintain, on a consolidated basis, a maximum consolidated first lien leverage ratio no greater than 3.00x;

Required CH2M to maintain a minimum consolidated fixed charge coverage ratio no less than 1.50x;

Restricts CH2M’s ability to repurchase its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock, and requires compliance with the terms of the Second Lien Indenture, which also limits certain restricted payment and participation in the employee stock ownership program as described below.

The Credit Agreement contains customary representations, warranties and conditions to borrowing including customary affirmative and negative covenants, which include covenants that limit or restrict our ability to incur indebtedness and other obligations, grant liens to secure their obligations, make investments, merge or consolidate, and dispose of assets, in each case subject to customary exceptions for credit facilities of this size and type. Additionally, the obligations of CH2M and its subsidiaries that are either borrowers or guarantors under the Credit Facility are secured by first-priority security interests in substantially all of the domestic assets of CH2M and such subsidiaries.

As of June 30, 2017, we were in compliance with the covenants required by the Credit Agreement. Management continually assesses its potential future compliance with the Credit Agreement covenants based upon estimates of future earnings and cash flows. If there is an expected possibility of non-compliance, we will discuss possibilities with the Company’s lenders or utilize other means of capitalizing the Company to waive or remedy any non-compliance.

Second Lien Indenture

On April 28, 2017, we entered into a Second Lien Indenture through which we issued Senior Second Lien Notes with an aggregate principal amount of $200.0 million at an annual interest rate of 10% (the “Second Lien Notes”). The Second Lien Notes mature on April 28, 2020, and interest is payable on May 1 and November 1 of each year, commencing on November 1, 2017. The net proceeds of the Second Lien Notes were used to repay a portion of the outstanding revolving credit loans under our credit facility. The Second Lien Notes are unsubordinated, senior obligations of CH2M and are secured by second-priority liens on substantially all of CH2M’s and certain CH2M subsidiaries’ domestic assets.

The Second Lien Indenture contains financial covenants that require CH2M to maintain a consolidated leverage ratio no greater than 4.50x and restricts CH2M’s ability to repurchase its common or preferred stock, pay cash dividends on or make certain other distributions on its common or preferred stock. Specifically, while the Second Lien Notes are outstanding, the amount CH2M may spend to repurchase its common stock in connection with its employee stock ownership program, other than legally required repurchases of common stock held in benefit plans, which are not restricted, will be limited to an aggregate of $75.0 million during the term of the Second Lien Notes plus a cumulative amount equal to 50% of CH2M’s consolidated net income, or minus 100% of any net loss, from April 1, 2017 to the date on which any such repurchase is to be made. The amount available to make repurchases of our common stock shall also be reduced to the extent that CH2M makes legally required repurchases of common stock held in benefit plans in excess of $50.0 million in any period of four consecutive quarters and that CH2M makes certain payments on subordinated indebtedness in accordance with the terms of the Second Lien Indenture.

The Second Lien Indenture contains affirmative and negative covenants and other terms that are customary for obligations similar to the Second Lien Notes, which include covenants that limit or restrict our ability to incur additional indebtedness, grant liens to secure their obligations, make certain kinds of investments, dispose of assets outside the ordinary course of business, create contractual restrictions on the ability to pay dividends or make certain other payments, merge or consolidate, sell all or substantially all of our assets, and enter into certain transactions with affiliates unless the transaction is comparable to an arm’s length transaction with a non-affiliate.

CH2M may, at its option, redeem the Second Lien Notes in whole at any time or from time to time in part, upon notice at a premium on the principal amount plus any accrued and unpaid interest to the date of redemption as shown below:



Redemption Period	Redemption Price
From April 28, 2017 (issue date) through April 28, 2018	110.0	%
From April 29, 2018 through April 28, 2019	103.0	%
From April 29, 2019 through October 28, 2019	101.5	%
From October 29, 2019 through April 28, 2020 (maturity date)	100.0	%

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Upon the occurrence of a change of control, any holder of Second Lien Notes will have the right to require CH2M to repurchase all or any portion of the holder’s Second Lien Notes at a purchase price in cash equal to 101% of the outstanding principal and accrued and unpaid interest, if any, through the date of repurchase.

The Second Lien Indenture also contains customary events of default. If an event of default occurs, the holders of the Second Lien Notes may declare any outstanding principal, accrued and unpaid interest, and premium to be immediately due and payable. Additionally, certain events of bankruptcy or insolvency are events of default which shall result in the Second Lien Notes being due and payable immediately upon the occurrence of such events of default.

Furthermore, on April 28, 2017, we entered into an Intercreditor Agreement with the agents of the Second Lien Notes and the lenders of the Fourth Amendment to our Credit Agreement that states that the liens on common collateral securing the claims of the Credit Agreement have priority over, and are senior to, the liens on the common collateral securing Second Lien Notes. The senior claims are defined in the Intercreditor Agreement to include, among other things, the principal amount of all indebtedness incurred under the Fourth Amendment to our Credit Agreement and certain additional senior indebtedness permitted under the Intercreditor Agreement.

(11) Income Taxes

After adjusting for the impact of income attributable to noncontrolling interests, the effective tax rate related to continuing operations on the income attributable to CH2M for the three months ended June 30, 2017 was 26.9% compared to 52.7% on the loss for the same period in the prior year, and the effective tax rate related to continuing operations on the income attributable to CH2M for the six months ended June 30, 2017 was 27.1% compared to 16.0% on the loss for the same period in the prior year. The effective tax rate attributable to CH2M for the three months ended June 30, 2017 was lower compared to the same period in the prior year and higher for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to large losses in the prior period and the favorable impacts associated with the release of valuation allowances due to transfer pricing in the prior year period. In addition, the lower rate is partially attributable to the current year’s favorable impacts associated with increased foreign earnings and favorable investment results related to key employee life assets. Recent discussions regarding tax reform may result in changes to long-standing tax principles which could adversely affect our effective tax rate or result in higher cash tax liabilities. These discussions include a reduced corporate tax rate, repatriation of foreign earnings, cash, and cash equivalents, and cross border adjustability. Additionally, our effective tax rate continues to be negatively impacted by the effect of disallowed portions of meals and entertainment expenses.

As of June 30, 2017 and December 30, 2016, we had $6.1 million and $8.0 million, respectively, recorded as a liability for uncertain tax positions, included in which was approximately $1.7 million and $2.6 million, respectively, of interest and penalties. We recognize interest and penalties related to unrecognized tax benefits in income tax expense or benefit.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, United Kingdom and Canada. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities in major tax jurisdictions.

(12) Restructuring and Related Charges

2016 Restructuring Plan. During the third quarter of 2016, the Company began a process to review the structure and resources within its business segments and formulate a restructuring plan to more fully align global operations with the Company’s client-centric strategy, including a simplified organization structure and streamlined delivery model to achieve higher levels of profitable growth (“2016 Restructuring Plan”). The restructuring activities primarily included workforce reductions and facilities consolidations. For the six months ended June 30, 2017, we incurred $13.1 million of costs for restructuring activities related to the 2016 Restructuring Plan, which have been included in selling, general and administrative expense on the consolidated statements of operations. The restructuring activities under the 2016 Restructuring Plan were substantially complete in the first quarter of 2017, and, as such, no restructuring costs were incurred during the three months ended June 30, 2017. Overall, as of June 30, 2017, we incurred aggregate costs of $55.3 million in total restructuring charges under the 2016 Restructuring Plan, and we expect aggregate annual cost savings of approximately $100.0 million.

2014 Restructuring Plan. In September 2014, the Company commenced certain restructuring activities in order to achieve important business objectives, including reducing overhead costs, improving efficiency, and reducing risk (“2014 Restructuring Plan”). These restructuring activities, which continued into 2015, included such items as a voluntary retirement program, workforce reductions, facilities consolidations and closures, and evaluation of certain lines of business. The restructuring activities under the

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2014 Restructuring Plan were substantially complete as of December 25, 2015, and as such no restructuring costs were incurred during the three and six months ended June 24, 2016.

The changes in the provision for the restructuring activities for the six months ended June 30, 2017 are as follows:


	2014 Restructuring Plan				2016 Restructuring Plan
($ in thousands)	Employee Severance		Facilities Cost		Employee Severance		Facilities Cost		Other		Consolidated Total
Balance, December 30, 2016	$	1,015	$	13,995	$	6,041	$	15,090	$	30	$	36,171
Provision		—		—		4,353		8,401		382		13,136
Cash payments		—		(1,958)		(9,482)		(4,262)		(412)		(16,114)
Non-cash settlements		—		—		—		(453)		—		(453)
Balance, June 30, 2017	$	1,015	$	12,037	$	912	$	18,776	$	—	$	32,740

The remaining provisions for employee severance and termination benefits will be paid before year-end, and accruals for facilities costs will be paid over the remaining term of the exited leases which extend through 2032.

(13) Defined Benefit Plans and Other Postretirement Benefits

We sponsor several defined benefit pension plans primarily in the U.S. and the United Kingdom (“U.K.”). In the U.S., we have three noncontributory defined benefit pension plans. Plan benefits are generally based on years of service and compensation during the span of employment. Benefits in two of the plans are frozen while one plan remains active, the CH2M HILL OMI Retirement Plan (“OMI Plan”). During the year ended December 30, 2016, the Company adopted an amendment to freeze future pay and benefit service accruals beginning in 2017 for non-union participants within the OMI Plan.

In the U.K., we assumed several defined benefit plans as part of our acquisition of Halcrow on November 10, 2011, of which the largest is the Halcrow Pension Scheme. These Halcrow defined benefit plans have been closed to new entrants for many years. The information related to these plans is presented in the Non‑U.S. Pension Plans columns of the tables below. During the year ended December 30, 2016, a subsidiary of CH2M, effected a transaction to restructure the benefits provided to members of the Halcrow Pension Scheme which significantly reduced the Company’s projected benefit obligation under the scheme as well as improved our net periodic benefit through the recognition of prior service credits.

The components of the net periodic pension expense (income) for the three and six months ended June 30, 2017 and June 24, 2016 are detailed below:


	Three Months Ended
	June 30, 2017				June 24, 2016
	U.S.		Non-U.S.		U.S.		Non-U.S.
($ in thousands)	Pension Plans		Pension Plans		Pension Plans		Pension Plans
Service cost	$	88	$	1,079	$	671	$	1,378
Interest cost		2,734		6,236		2,954		10,487
Expected return on plan assets		(3,016)		(9,807)		(2,921)		(8,822)
Amortization of prior service credits		(14)		(2,555)		(188)		—
Recognized net actuarial loss		1,907		2,676		1,629		693
Net expense (income) included in current income	$	1,699	$	(2,371)	$	2,145	$	3,736


	Six Months Ended
	June 30, 2017				June 24, 2016
	U.S.		Non-U.S.		U.S.		Non-U.S.
($ in thousands)	Pension Plans		Pension Plans		Pension Plans		Pension Plans
Service cost	$	177	$	2,153	$	1,342	$	2,755
Interest cost		5,467		12,295		5,908		20,964
Expected return on plan assets		(6,033)		(19,322)		(5,842)		(17,636)
Amortization of prior service credits		(27)		(5,034)		(376)		—
Recognized net actuarial loss		3,815		5,270		3,258		1,386
Net expense (income) included in current income	$	3,399	$	(4,638)	$	4,290	$	7,469

We sponsor a medical benefit plan for retired employees of certain subsidiaries. The plan is contributory, and retiree premiums are based on years of service at retirement. The benefits contain limitations and a cap on future cost increases. We fund

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postretirement medical benefits on a pay‑as‑you‑go basis. Additionally, we have a frozen non-qualified pension plan that provides additional retirement benefits to certain senior executives who remained employed and retired from CH2M on or after age 65.

The components of the non-qualified pension benefit expense and postretirement benefit expense for the three and six months ended June 30, 2017 and June 24, 2016 are detailed below:


	Three Months Ended
	June 30, 2017				June 24, 2016
	Non-Qualified		Postretirement		Non-Qualified		Postretirement
($ in thousands)	Pension Plan		Benefit Plans		Pension Plan		Benefit Plans
Service cost	$	—	$	162	$	—	$	206
Interest cost		9		406		13		497
Amortization of prior service credits		—		(95)		—		(96)
Recognized net actuarial gain		—		(72)		—		(3)
Net expense included in current income	$	9	$	401	$	13	$	604


	Six Months Ended
	June 30, 2017				June 24, 2016
	Non-Qualified		Postretirement		Non-Qualified		Postretirement
($ in thousands)	Pension Plan		Benefit Plans		Pension Plan		Benefit Plans
Service cost	$	—	$	325	$	—	$	413
Interest cost		19		811		27		994
Amortization of prior service credits		—		(191)		—		(192)
Recognized net actuarial gain		—		(143)		—		(6)
Net expense included in current income	$	19	$	802	$	27	$	1,209

(14) Discontinued Operations

In connection with our 2014 Restructuring Plan, we elected to exit the fixed-price Power EPC business, which was a stand-alone operating segment. We intended to complete our remaining contracted fixed-price Power EPC contracts, the largest of which was a project in Australia through a consolidated joint venture partnership with an Australian construction contractor and a major U.S.-based gas power technology manufacturer (the “Consortium”) to engineer, procure, construct and start-up a combined cycle power plant that will supply power to a large liquefied natural gas facility in Australia. On January 24, 2017, the Consortium terminated its contract with its client, JKC Australia LNG Pty (the “Contractor”) on the grounds that the Contractor had by its actions repudiated the contract. As a result of the termination of the contract, we substantially completed all of our operations in the fixed-price Power EPC business, and, therefore, have presented the results of operations, financial position, cash flows and disclosures related to the fixed-price Power EPC business as discontinued operations in our consolidated financial statements. The majority of the financial information presented in our discontinued operations in the consolidated financial statements for the three and six months ended June 30, 2017 and June 24, 2016 relate to the Australian fixed-price Power EPC contract.

Additionally, because the substantive engineering and construction operations ceased on January 24, 2017 as a result of the contract termination, we determined that we were no longer the primary beneficiary of the joint venture and deconsolidated the partnership from our consolidated financial statements. The negative book value of our 50% retained interest in the noncontrolling investment in the joint venture partnership as of January 24, 2017 was approximately

CH2M HILL COMPANIES LTD 10-Q