CH2M HILL COMPANIES LTD, 10-Q filed on 5/4/2017
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2017
Apr. 27, 2017
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
CH2M HILL COMPANIES LTD 
 
Entity Central Index Key
0000777491 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-29 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
24,769,261 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2017
Dec. 30, 2016
Current assets:
 
 
Cash and cash equivalents
$ 94,560 
$ 121,365 
Receivables, net-
 
 
Client accounts
550,024 
602,363 
Unbilled revenue
562,317 
529,779 
Other
9,713 
11,469 
Income tax receivable
22,526 
18,375 
Prepaid expenses and other current assets
86,454 
92,097 
Current assets of discontinued operations
1,244 
14,449 
Total current assets
1,326,838 
1,389,897 
Investments in unconsolidated affiliates
65,666 
66,329 
Property, plant and equipment, net
239,569 
246,596 
Goodwill
484,161 
477,752 
Intangible assets, net
34,369 
38,024 
Deferred income taxes
362,328 
363,251 
Employee benefit plan assets and other
85,730 
86,777 
Long-term assets of discontinued operations
 
1,836 
Total assets
2,598,661 
2,670,462 
Current liabilities:
 
 
Current portion of long-term debt
2,233 
2,242 
Accounts payable and accrued subcontractor costs
349,457 
394,934 
Billings in excess of revenue
213,062 
227,501 
Accrued payroll and employee related liabilities
252,338 
272,458 
Other accrued liabilities
225,286 
210,121 
Current liabilities of discontinued operations
753 
208,105 
Total current liabilities
1,043,129 
1,315,361 
Long-term employee related liabilities
296,415 
308,118 
Long-term debt
515,899 
495,632 
Other long-term liabilities
108,469 
105,813 
Long-term liabilities of discontinued operations
83,403 
 
Total liabilities
2,047,315 
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 March 31, 2017 and as of December 30, 2016
48 
48 
Common stock, $0.01 par value, 100,000,000 shares authorized; 24,769,196 and 25,148,399 issued and outstanding at March 31, 2017 and December 30, 2016, respectively
248 
251 
Additional paid-in capital
151,136 
169,573 
Retained earnings
600,211 
586,252 
Accumulated other comprehensive loss
(193,823)
(209,408)
Total CH2M common stockholders’ equity
557,820 
546,716 
Noncontrolling interests of continuing operations
(6,474)
(8,643)
Noncontrolling interests of discontinued operations
 
(92,535)
Total stockholders' equity
551,346 
445,538 
Total liabilities and stockholders’ equity
$ 2,598,661 
$ 2,670,462 
Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2017
Dec. 30, 2016
Preferred stock
 
 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
50,000,000 
50,000,000 
Preferred stock, shares issued
4,821,600 
4,821,600 
Preferred stock, shares outstanding
4,821,600 
4,821,600 
Common stock
 
 
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
24,769,196 
25,148,399 
Common stock, shares outstanding
24,769,196 
25,148,399 
Series A Preferred Stock
 
 
Preferred stock
 
 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Consolidated Statements of Income (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 25, 2016
Consolidated Statements of Operations
 
 
Gross revenue
$ 1,240,433 
$ 1,287,010 
Equity in earnings of joint ventures and affiliated companies
7,361 
9,053 
Operating expenses:
 
 
Direct cost of services
(1,028,687)
(1,024,993)
Selling, general and administrative
(189,656)
(230,048)
Operating income
29,451 
41,022 
Other income (expense):
 
 
Interest income
100 
60 
Interest expense
(6,573)
(3,267)
Income from continuing operations before provision for income taxes
22,978 
37,815 
Provision for income taxes from continuing operations
(5,212)
(13,970)
Net income from continuing operations
17,766 
23,845 
Net income (loss) from discontinued operations
390 
(121)
Net income
18,156 
23,724 
Less: income attributable to noncontrolling interests from continuing operations
(4,257)
(471)
Less: loss attributable to noncontrolling interests from discontinued operations
60 
1,326 
Net income attributable to CH2M
$ 13,959 
$ 24,579 
Net income attributable to CH2M per common share:
 
 
Basic net income from continuing operations per common share
$ 0.32 
$ 0.70 
Basic net income from discontinued operations per common share
$ 0.01 
$ 0.04 
Basic net income per common share
$ 0.33 1
$ 0.74 1
Diluted net income from continuing operations per common share
$ 0.32 
$ 0.70 
Diluted net income from discontinued operations per common share
$ 0.01 
$ 0.04 
Diluted net income per common share
$ 0.33 1
$ 0.74 1
Weighted average number of common shares:
 
 
Basic weighted average number of common shares (in shares)
24,955,713 
26,305,098 
Diluted weighted average number of common shares (in shares)
24,958,734 
26,506,923 
Consolidated Statements of Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 25, 2016
Consolidated Statements of Operations
 
 
Income allocated to preferred stockholders
$ 1,700 
$ 2,451 
Accrued dividends attributable to preferred stockholders
$ 3,989 
$ 2,564 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 25, 2016
Consolidated Statements of Comprehensive Income
 
 
Net income
$ 18,156 
$ 23,724 
Other comprehensive income:
 
 
Foreign currency translation adjustments
13,608 
1,166 
Benefit plan adjustments, net of tax
1,977 
2,120 
Other comprehensive income
15,585 
3,286 
Comprehensive income
33,741 
27,010 
Less: income attributable to noncontrolling interests from continuing operations
4,393 
471 
Less: loss attributable to noncontrolling interests from discontinued operations
(60)
(1,326)
Comprehensive income attributable to CH2M
$ 29,408 
$ 27,865 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 25, 2016
Cash flows from operating activities:
 
 
Net income
$ 18,156 
$ 23,724 
Adjustments to reconcile net income to net cash provided by (used in) continuing operating activities:
 
 
Net (income) loss from discontinued operations
(390)
121 
Depreciation and amortization
14,870 
15,531 
Stock-based employee compensation
5,587 
9,124 
Loss on disposal of property, plant and equipment
1,250 
296 
Allowance for uncollectible accounts
1,253 
215 
Deferred income taxes
2,910 
(13,483)
Undistributed earnings and gains from unconsolidated affiliates
(7,361)
(9,053)
Distributions of income from unconsolidated affiliates
13,757 
18,170 
Contributions to defined benefit pension plans
(5,040)
(8,376)
Excess tax benefits from stock-based compensation
1,324 
2,068 
Change in assets and liabilities of continuing operations:
 
 
Receivables and unbilled revenue
26,696 
34,917 
Prepaid expenses and other
7,701 
205 
Accounts payable and accrued subcontractor costs
(46,193)
(30,421)
Billings in excess of revenue
(15,845)
(28,595)
Accrued payroll and employee related liabilities
(19,329)
5,137 
Other accrued liabilities
13,444 
(36,047)
Income tax receivable
(4,753)
19,757 
Long-term employee related liabilities and other
(4,312)
11,202 
Net cash provided by operating activities from continuing operations
3,725 
14,492 
Net cash used in operating activities from discontinued operations
(14,587)
(29,742)
Net cash used in operating activities
(10,862)
(15,250)
Cash flows from investing activities:
 
 
Capital expenditures
(4,294)
(36,828)
Investments in unconsolidated affiliates
(5,682)
(8,235)
Distributions of capital from unconsolidated affiliates
494 
2,621 
Proceeds from sale of operating assets
177 
533 
Net cash used in investing activities from continuing operations
(9,305)
(41,909)
Net cash used in investing activities from discontinued operations
(2,571)
(169)
Net cash used in investing activities
(11,876)
(42,078)
Cash flows from financing activities:
 
 
Borrowings on long-term debt
457,457 
573,662 
Payments on long-term debt
(437,203)
(490,110)
Repurchases and retirements of common stock
(24,028)
(38,130)
Settlement of tax-withholding obligation on stock-based compensation
(1,902)
(1,983)
Net distributions to noncontrolling interests for continuing operations
(1,700)
(624)
Net cash (used in) provided by financing activities from continuing operations
(7,376)
42,815 
Net cash provided by financing activities from discontinued operations
4,635 
19,032 
Net cash (used in) provided by financing activities
(2,741)
61,847 
Effect of deconsolidation of a joint venture partnership on cash
(13,011)
 
Effect of exchange rate changes on cash
2,021 
(1,880)
(Decrease) increase in cash and cash equivalents
(36,469)
2,639 
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
94,560 
185,699 
Cash and cash equivalents from discontinued operations, end of period
 
13,961 
Cash and cash equivalents, end of period
94,560 
199,660 
Supplemental disclosures:
 
 
Cash paid for interest
6,476 
3,075 
Cash paid for income taxes
$ 6,837 
$ 3,730 
Summary of Business and Significant Accounting Policies
Summary of Business and Significant Accounting Policies

(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.

 

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.

 

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

 

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 months ended March 31, 2017 were $2.6 million as compared to $5.5 million for the three months ended March 25, 2016.

 

Recently Adopted Accounting Standards

 

In March 2017, the FASB issued Accounting Standards Update ("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 Accounting Standard Update ("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 January 2017, the FASB issued Accounting Standard Update ("ASU") 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business).  This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  This ASU will be effective for fiscal years beginning after December 15, 2017, and should be applied prospectively.  Once effective, we will apply this guidance to determine if certain transactions are acquisitions (or disposals) of assets or businesses, but we do not believe this ASU will materially change how we currently evaluate similar transactions.

In October 2016, the FASB issued Accounting Standard Update ("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 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 $15.9 million of the acquisition related payments within our investing cash flows for the year ended December 30, 2016, of which zero occurred in the three months ended March 25, 2016, 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 $1.3 million within income tax benefit on the consolidated statements of income for the three months ended March 31, 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 $2.1 million for the three months ended March 25, 2016 were restated into cash flows from operating activities from cash flows from financing activity.  Additionally, adopted retrospectively, the Company reclassified $1.9 million and $2.0 million of employee withholding taxes paid from operating activities into financing activities for the three months ended March 31, 2017 and March 25, 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 March 31, 2017 are valued at $3.4 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 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.  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.