CH2M HILL Companies, Ltd. (“CH2M HILL” or the “Company”) filed a Form 12b-25 with the Securities and Exchange Commission (the “SEC”) on November 10, 2014, to report that it will not timely file its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (the “Third Quarter Form 10-Q”). The Form 12b-25 included the following narrative:
“As a result of the ongoing review by CH2M HILL’s management and Audit Committee of the impact of the potential accounting errors described in Part III, CH2M HILL is currently unable to complete the financial statements for the three- and nine-month periods ended September 30, 2014, or to determine whether any changes will be required in our reported results of operations for the full year ended December 31, 2013, or any interim periods within 2013 and 2014.
The financial results described in this Part IV are preliminary and subject to adjustment. Because CH2M HILL’s management and Audit Committee have not completed their respective reviews of the potential accounting errors described in Part III, there can be no assurance that CH2M HILL will not revise any of the preliminary financial results, expectations, or estimates described in this Part IV or otherwise provided. In addition, CH2M HILL will not be in a position to conclude on the effectiveness of its disclosure controls and procedures until its review is complete.
For the three- and nine-month periods ended September 30, 2014, CH2M HILL expects to report a decrease in revenues and net income compared to the same periods in the prior year. Total revenues are expected to decrease by slightly less than 10 percent primarily due to decreases in our Energy market that occurred after the quarter ended September 30, 2013, as a result of the completion of three domestic design-build power plant projects and several Canadian construction projects that are primarily gas processing and pipeline projects. Our Facilities and Urban Environments market also experienced a decrease in revenues caused by lower demand for new projects in the electronics and manufacturing industries in our domestic regions and a decline in Middle Eastern planning support services for U.S. armed forces. Revenues from our remaining markets have increased slightly and partially offset the decreases in the Energy and Facilities and Urban Environments markets.
For the three and nine months ended September 30, 2014, CH2M HILL expects to report a net loss for both periods in excess of $125.0 million. This is substantially lower than the net income reported for the corresponding periods in 2013. In addition to the impact that lower revenue volumes had on our earnings during 2014, the 2014 net loss was also impacted by significant project losses recorded during the three and nine months ended September 30, 2014. These project losses include:
CH2M HILL is involved in a power project in Australia through a consolidated 50/50 joint venture partnership with an Australian construction contractor. Due to a variety of project and client issues, we expect to record an estimated project loss that will negatively impact our net income by approximately $85.0 million for the three and nine months ended September 30, 2014.
CH2M HILL has experienced significant additional costs on a Transportation fixed-price contract to design and construct roadway improvements in the southern United States. As a result of changes in our initial cost estimates, operating income was reduced by approximately $40.0 million for the three and nine months ended September 30, 2014.
During the first quarter of 2014, CH2M HILL experienced significant additional costs on a fixed-price contract within our Energy market to design and construct a new power generation facility in the northeastern United States. These additional costs included costs related to a substantial decline in union labor productivity, poor subcontractor performance, the impacts of related schedule delays, and severe weather in the northeastern United States. These costs resulted in a decrease of gross margin of $52.5 million in the first quarter of 2014, and an additional loss of approximately $10.0 million recorded during the third quarter of 2014.
CH2M HILL experienced cost growth on a project in the Facilities and Urban Environments market in our Europe region primarily due to productivity issues. These changes in estimates negatively impacted our results of operations by $17.8 million for the nine months ended September 30, 2014.
In addition, in the three-month period ended September 30, 2014, CH2M HILL began to implement certain restructuring activities, including the rationalization of certain lines of business and involuntary employee terminations. Management has determined that these restructuring activities constitute a triggering event that requires us to test goodwill for impairment. Accordingly, we initiated an impairment test in the three-month period ended September 30, 2014. These restructuring activities also caused us to evaluate the recoverability of our intangible assets. Based upon preliminary results, we expect to record a goodwill and intangible assets impairment charge totaling approximately $73.0 million related to our Power reporting unit within the Energy market and our Industrial and Advanced Technology and Urban Programs reporting units within our Facilities and Urban Environments market.”
Item 2.05 Costs Associated with Exit or Disposal Activities
As previously reported on September 9, 2014, CH2M HILL’s management has committed to a cost-reduction initiative that includes a number of elements designed to help CH2M HILL reduce costs and achieve important business objectives, including enhancing client service, improving efficiency, reducing risk, creating more opportunity for profitable growth, and providing more long-term value for its stockholders. These restructuring activities include such items as a voluntary retirement program, workforce reductions, facilities consolidations, and evaluation of certain lines of business. On November 12, 2014, CH2M HILL issued a statement announcing that it intends to explore strategic alternatives for the portion of its oil, gas, and chemicals business that is located in and serves the Alaska and Sakhalin Island, Russia, markets.
During the quarter ended September 30, 2014, CH2M HILL incurred $3.1 million for restructuring activities related primarily to severance costs. We expect these activities to continue into the fourth quarter of 2014 and into 2015 and therefore expect to incur additional material restructuring costs over this period. Once all restructuring activities are completed, we expect the activities to have aggregated costs of approximately $120 million and to result in annualized cost savings of $100 to $120 million.
Additionally, as discussed above, in the third quarter of 2014, we began to implement certain restructuring activities, which include the rationalization of certain lines of business and involuntary employee terminations. CH2M HILL management has determined that this restructuring is a triggering event for purposes of requiring us to test goodwill for impairment; and, as a result, we initiated an impairment test in the third quarter of 2014. We have completed step one of the impairment test for each reporting unit and have determined that it was more likely than not that the carrying value of certain operating units was above their fair values. Accordingly, we have performed a preliminary assessment of step two in the process to determine the amount of the potential goodwill impairment. Based upon these preliminary results, CH2M HILL recorded a non-cash, goodwill impairment loss of $64.2 million, of which $36.4 million related to our Power reporting unit within the Energy market and $27.8 million related to our Industrial and Advanced Technology and Urban Programs reporting units within our Facilities and Urban Environments market. Additionally, we identified an impairment in our trade name intangibles of $9.1 million, related to our Power reporting unit within the Energy market. In the fourth quarter of 2014, we will perform step two of the impairment test for the Energy, Industrial and Advanced Technology, and Urban Programs markets, which could result in additional adjustments to the goodwill impairment loss included in the Consolidated Statements of Operations.”