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CH2M Hill Companies Ltd – ‘10-K’ for 12/31/04

On:  Wednesday, 2/23/05, at 8:18pm ET   ·   As of:  2/24/05   ·   For:  12/31/04   ·   Accession #:  1047469-5-4510   ·   File #:  0-27261

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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

Commission File Number 000-27261

CH2M HILL Companies, Ltd.
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
CH2M HILL common stock, Par Value $0.01 per share

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 ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price as of June 30, 2004 was approximately $185.2 million. For purposes of this calculation, it is assumed that the registrant's affiliates include the registrant's Board of Directors, its executive officers and certain of its employee benefit plans. The registrant disclaims the existence of any control relationship between it and such employee benefit plans.

As of February 17, 2005, there were 31,336,921 shares of the registrant's stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by reference in Part III of this Annual Report on Form 10-K where indicated.

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

Forward-Looking Statements

        The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on our behalf. We may from time-to-time make statements that are "forward-looking," including statements contained in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission (SEC) and in reports to our shareholders. Such statements may, for example, express expectations or projections about future actions that we may take or about developments beyond our control including changes in domestic or global economic conditions. These statements are made on the basis of our management's views and assumptions as of the time the statements are made and we undertake no obligation to update these statements. Our actual results may differ significantly from the results discussed in the forward-looking statements. General factors that might cause such differences include, but are not limited to:

•

The continuance of and funding for certain governmental regulation and enforcement programs which create demand for our services



•

Our ability to attract, finance and perform large, longer-term projects



•

Our ability to insure against or otherwise cover the liability risks inherent in our business, including environmental liabilities and professional engineering liabilities



•

Our ability to manage the risks inherent in the government contracting business



•

Our ability to manage the costs associated with our fixed-price contracts



•

Our ability to manage the risks inherent in international operations, including operations in war and conflict zones



•

Our ability to attract and retain professional personnel



•

Changes in economic conditions

        For more information on these and other risk factors that may affect our business, refer to "Risk Factors" included in this Annual Report on Form 10-K.

PART I

Item 1. Business

Summary

        We are one of the largest engineering services firms worldwide and are employee-owned. Our business provides engineering, construction, operations, major project management and related technical services to municipal, state, federal and private sector clients worldwide. Founded in 1946, we have nearly 14,000 employees worldwide.

        We believe we provide our clients with innovative project delivery using cost-effective approaches and advanced technologies. We continuously monitor acquisition and investment opportunities that will expand our portfolio of services, add value to the projects undertaken for clients, or enhance our capital strength. We believe that we are well positioned geographically, technically and financially to compete worldwide in the key markets we have elected to pursue and the clients we serve.

Our Operating Segments

        We provide services to our clients through three operating segments: Federal, Civil Infrastructure and Industrial. In 2004, we reorganized such that our operating segments are more closely aligned with the types of clients we serve. The structure is intended to provide for better decision making on an enterprise-wide basis. For example, while our Federal segment generally provides a comprehensive

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range of services to the U.S. federal government, it also provides services to international governments. Our Civil Infrastructure segment generally provides a comprehensive range of services to various state and local governments. Our Industrial segment generally provides a comprehensive range of services to various private companies. Financial information for each segment for each of the last three years, including 2004, is included in Note 17 of the Notes to Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.

Our Clients and Key Markets

        The following table summarizes our primary client types, revenues and key markets served by each of our operating segments.

Clients

        We provide our services to a broad range of domestic and international clients, including the U.S. federal government, state and local governments and private sector clients. Although we are typically the prime contractor, in some cases, we provide services as subcontractors or through joint ventures or partnership agreements with other service providers. The demand for our services generally comes from budgeting and capital spending decisions made by the U.S. federal government, state and local governments and private sector clients. The following table shows representative clients by our operating segments:

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Markets

        The following is a description of each of our key markets and the services we provide.

        Nuclear.    We provide program management, integration, engineering, design, construction management and a broad array of technical services for the DOE, U.S. commercial nuclear utility customers and various nuclear research, development and demonstration facilities. We manage the decommissioning (characterization, decontamination, dismantling and demolition), remediation and/or closure of weapons production facilities and research reactors, and are involved in the siting, permitting and design of nuclear waste treatment and handling facilities. Additionally, we provide services for special nuclear material processing and operations.

        We are partnering with Kaiser Group Holdings, Inc. through a joint venture in which we hold a 50% interest, Kaiser-Hill Company, LLC (Kaiser-Hill), on the closure of the Rocky Flats site in Golden, Colorado. Rocky Flats is a former DOE nuclear weapons production facility. Kaiser-Hill has been performing services under successive contracts awarded by the DOE since 1995, including the oversight of plutonium stabilization and storage, environmental restoration, waste management, decontamination and decommissioning, site safety and security.

        Kaiser-Hill's current contract with the DOE, which has been effective since 2000, is a site closure contract and does not have a defined term. We are targeting closure of the site in late 2005 to early 2006. Under the contract, Kaiser-Hill is compensated through a base fee affected, up or down, by its performance against the agreed upon site target closure timetable and costs. For every dollar that the DOE saves, Kaiser-Hill receives a fee increase ranging from 20 to 30 cents up to an agreed upon maximum. At the same time, for every dollar the cleanup is over budget, the fee is reduced by 20 to 30 cents down to an agreed upon minimum. The ultimate fee will also be affected by the schedule to achieve site closure and the safety of our performance.

        Environmental.    We provide program management, compliance and environmental consulting for contaminated site assessment and remediation projects, ecological and natural resource damage assessments, strategic environmental management and permitting services, environmental liability management services, site investigations, remedial design, implementation and construction services, treatment systems for hazardous, toxic and radioactive waste contaminated properties, ordnance and explosives management services and sustainable development planning and design and construction services.

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        CH2M HILL Services.    We provide privatization, contingency planning, logistics support and operations and maintenance of water treatment plants to U.S. federal government clients. Privatization services include outsourcing of facilities maintenance and management, utilities operations and maintenance, environmental support, other base operating services and minor capital construction projects. Contracts are typically long-term (5 to 50 years).

        Contingency planning and logistics support services include technical support material expediting, supply and value chain management, transportation and distribution, deployment logistics and logistics strategic planning, engineering and construction, operations and maintenance and contingency planning services primarily to U.S. federal government clients.

        Water, Wastewater and Water Resources.    We provide a complete range of services for the planning, design and design/build, construction and construction management, implementation of water supply and delivery systems and wastewater collection and treatment facilities. Services are provided for new and expanded water storage, transmission, treatment (including desalination plants and membrane technology) and disposal systems, wastewater distribution systems, wastewater collection and conveyance systems. Additionally, we provide water resources management, environmental restoration and watershed management, ground water modeling and protection, wastewater reclamation and reuse, biosolids management and financial planning.

        Transportation.    We provide consulting and construction services for airports, highways, bridges, marine terminals, railroads and transit systems. These services include transportation planning, environmental planning, project siting, permitting, design, construction and program management, management consulting and design/build delivery.

        Operations and Maintenance.    We provide water, wastewater and public works operations and maintenance services to water and wastewater facility operators, including startup and performance testing, consulting, asset management, facility operations, on-going maintenance and management. The facility operations services include water and wastewater treatment, collection and distribution, equipment and process maintenance and replacement and site grounds maintenance.

        Communications.    We provide program management, planning, design and construction management of local and regional wireless, fiber optic and hybrid fiber/coaxial systems for voice, video and data communications. We provide network security, operational support system consulting and systems integration and managed services to the communications market. We also provide geographical information systems (GIS) and managed services for private sector clients and GIS services for the government.

        Energy and Industrial Systems.    We provide full life cycle services for the energy and power, air and industrial water and wastewater processes and facilities and infrastructure services market segments for federal and municipal governments, utility and industrial clients. This includes the evaluation and analysis of cost effective integrated systems using advanced conventional and renewable energy technologies and distributed resources to meet premium and clean energy applications.

        Chemicals, Plastics and Refining.    We provide engineering, procurement and construction (EPC) services to the specialty chemicals, fine chemicals, bioprocessing and refining industries. This includes EPC services for consumer and biotechnology products, as well as services for the validation of U.S. Federal Drug Administration (FDA) Current Good Manufacturing Processes compliance. Projects are delivered by employing both union and non-construction units that optimize local subcontractors, who are managed through our project delivery and safety resources and systems. Our process engineering focus is in specialty chemicals, intermediates, basic chemicals, resins, fine chemicals, high purity chemicals, polymers and synthetic fibers.

4

        Manufacturing.    We provide a full range of EPC services, project management, and program management to the automotive, food and beverages, metals and consumer product sectors of the manufacturing industry. Additionally, we provide consulting and technology services for lean and agile manufacturing, supply chain and logistics management, manufacturing, packaging and material handling technology and Visioneering, our consulting product for optimizing customer operations. We also provide 3D computer simulation and modeling, site search and economic development consulting, security assessment and systems implementation, FDA and U.S. Department of Agriculture design and construction, plus process validation, design and installation.

        Pharmaceuticals and Biotechnology.    We provide EPC and validation services to major pharmaceutical, generic pharmaceutical, over-the-counter pharmaceutical, bioprocess and research biotechnology companies. This includes manufacturing technology-formulation/fill/finish, bioprocess and process engineering and simulation, integrated facilities, manufacturing and process design, containment and clean room design and laboratory and pilot scale operations.

        Electronics.    We provide program management, consulting, planning, design, construction, operations and maintenance services and products to electronics manufacturing clients in the integrated circuit, wafer, dynamic random access memory, foundry, nanotechnology and flat panel display manufacturing industries. Our clients typically require integrated design and construction services for complex manufacturing systems, including cleanrooms, ultrapure water and wastewater systems, chemical and gas systems and production tools. Our electronics business also provides specialized consulting services to optimize the operating efficiency and return on investment for complex manufacturing facilities.

        Power.    We provide planning, design and construction services to the industrial co-generation, clean air, non-regulated and regulated sectors of the power industry. This includes integrated EPC and startup services, enhanced engineering and management tools, Computer Aided Design modeling services, labor productivity and earned-value tracking tools, safety and comprehensive quality management services, project administration and cost and cash flow management services and supply and schedule and change management services.

Competition

        The market for our design, consulting, engineering and construction services is highly competitive. We compete with many firms, including large multinational firms having substantially greater financial, management and marketing resources. Some of our competitors are small firms with lower cost structures enabling them to offer lower prices for particular services. We also compete with government agencies, including our own clients that can utilize their internal resources to perform services that we might otherwise perform. To our knowledge, no individual company currently dominates any significant portion of our markets. Competition in our industry is based on quality of performance, reputation, expertise, price, technology, customer relationships, range of service offerings and domestic and international office networks. For additional information regarding competition, see "Risk Factors—Our industry is highly competitive."

5

Backlog

        The following table provides backlog revenues by operating segment and the consolidated totals for the year ended December 31, 2004 and 2003:

        We define backlog as contracted task orders less previously recognized revenue on such task orders. U.S. government agencies operate under annual fiscal appropriations by Congress and fund various federal contracts only on an incremental basis. The same is true of many state, local and foreign contracts. For more information on backlog, see "Risk Factors—Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future performance."

Available Information

        For additional information regarding CH2M HILL, including free copies of filings with the SEC, please visit our web site at www.ch2m.com. The SEC filings, which include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such filings, are located in the About Us/Employee Ownership section of our web site and are made available as soon as practicable after they are filed with the SEC.

6

Risk Factors

        You should carefully consider the following factors and other information contained in this Annual Report on Form 10-K before deciding to invest in our common stock.

Risks Related to Our Business

Unpredictable economic cycles, uncertain demand for our engineering capabilities and related services, and failure by our major customers to pay our fees, could cause our revenues to fluctuate.

        Demand for our engineering and other services is affected by the general level of economic activity in the markets in which we operate, both in the U.S. and internationally. Our customers, particularly our private sector customers, and the markets in which we compete to provide services, are likely to experience periods of economic decline from time-to-time. In particular, world markets are experiencing increasing commodity prices, including oil and raw materials prices, which could reduce or curtail projects by industrial customers. Similarly, the prolonged downturns in the telecommunications and semiconductor markets have subsided to a limited degree, but our customers in those markets have been slower than expected in starting new capital expenditure programs.

        Adverse economic conditions may decrease our customers' willingness to make capital expenditures or otherwise reduce their spending to purchase our services, which could result in diminished revenues and margins for our business. In addition, adverse economic conditions could alter the overall mix of services that our customers seek to purchase, and increased competition during a period of economic decline could force us to accept contract terms that are less favorable to us than we might be able to negotiate under other circumstances. Changes in our mix of services or a less favorable contracting environment may cause our revenues and margins to decline. Moreover, our customers may experience difficult business climates from time-to-time and could delay or fail to pay our fees as a result. If a customer failed to pay a significant outstanding fee, our financial results could be adversely affected and our stock price could be reduced.

Changes and fluctuations in government's spending priorities could adversely affect our revenue expectations.

        Because a substantial part of our overall business is generated either directly or indirectly as a result of federal and local government regulatory and infrastructure priorities, shifts in these priorities due to changes in policy imperatives or economic conditions are often unpredictable and may affect our revenues.

        For example, in 1998 Congress enacted the Transportation Equity Act for the 21st Century (TEA-21), a sweeping transportation infrastructure initiative. This initiative was expected to generate U.S. federal government appropriations and respective contracting opportunities in hundreds of millions of dollars over many years. The economic downturn in 2000 and the September 11, 2001 terrorist attacks have redirected short- and long-term government priorities, resulting in substantially lower than expected appropriations for TEA-21 initiatives. The reauthorization of TEA-21 has been extended through May 31, 2005 and the availability of the funding to support the initiative remains uncertain beyond that date. Continuing federal budget deficits and the costs and other demands of the war in Iraq have moved government spending priorities away from major infrastructure projects. While we have won and are continuing to seek federal contracts related to rebuilding Iraq and other projects that reflect current government priorities, it is possible that the reduction of infrastructure projects could adversely affect our business.

7

Environmental regulations and related compliance investigations are expensive, may adversely impact our project performance and could expose us to environmental liability.

        The assessment, analysis, remediation, handling, management and disposal of hazardous substances represent a significant portion of our business and involve significant risks. As a result, we are subject to a variety of environmental laws and regulations governing, among other things, discharges of pollutants and hazardous substances to air and water, the handling and disposal of hazardous waste including nuclear materials and related record keeping requirements. These laws and regulations and related investigations into our compliance, as it pertains to facility operations and remediation of hazardous substances, can cause project delays, substantial management time commitment and may significantly add to our costs. Violations of these environmental laws and regulations could subject us to civil and criminal penalties and other liabilities, which can be very large. Although we have not been subject to any material civil or criminal penalties for violations of these laws to date, we have had to expend funds and divert resources to respond to reviews that have had a negative impact on the profitability of some projects. While the costs of these reviews have not been material to our consolidated results of operations in the past, additional or expanded reviews or proceedings relating to these laws, or any substantial fines or penalties, could affect our profitability and our stock price in the future, or could adversely affect our ability to compete for new business. Moreover, these laws and regulations may become more stringent, or may be more stringently enforced in the future, which could increase our costs of operations and reduce our profitability.

We may not be successful in growing through acquisitions or integrating effectively and efficiently any businesses and operations we may acquire.

        Our success depends on our ability to continually enhance and broaden our service offerings in response to changing customer demands, technology, and competitive pressures. Numerous mergers and acquisitions in our industry have resulted in a group of larger firms that offer a full complement of single-source services including, studies, design, engineering, procurement, construction, operations, maintenance and, in some instances, facility ownership. To remain competitive, we may acquire new and complementary businesses to expand our portfolio of services, add value to the projects undertaken for clients or enhance our capital strength. We do not know if we will be able to complete any future acquisitions or whether we will be able to successfully integrate any acquired businesses, operate them profitably, or retain their key employees.

        Even if we do identify suitable acquisition candidates, we anticipate significant competition when trying to acquire these candidates, and there can be no assurance that we will be able to acquire such candidates at reasonable prices or on favorable terms. Some of the competing buyers may be stronger financially than we are. As a result of this competition, we may not succeed in acquiring suitable candidates or may have to pay more than we would prefer to make an acquisition. If we cannot identify or successfully acquire suitable acquisition candidates, we may not be able to successfully expand our operations and increase our revenues. Further, there can be no assurance that we will be able to generate sufficient cash flow from an acquisition to service any indebtedness incurred to finance such acquisitions or realize any other anticipated benefits. Nor can there be any assurance that our profitability will be improved by any one or more acquisitions. Any acquisition may involve operating risks, such as:

•

the difficulty of assimilating the acquired operations and personnel and integrating them into our current business;



•

the potential disruption of our ongoing business;



•

the diversion of management's attention and other resources;

8

•

the possible inability of management to maintain uniform standards, controls, procedures and policies;



•

the risks of entering markets in which we have little or no experience;



•

the potential impairment of relationships with employees;



•

the possibility that any liabilities we may incur or assume may prove to be more burdensome than anticipated; and



•

the possibility that any acquired firms do not perform as expected.

Inability to secure adequate bonding would impact our ability to win projects.

        As is customary in our industry, we are often required to provide performance and surety bonds to customers in connection with our construction, EPC and fixed price projects. These bonds indemnify the customer if we fail to perform our obligations under the contract. Failure to provide a bond on terms and conditions desired by a customer may result in an inability to compete for or win a project. Historically we have had and continue to have good relationships with our sureties and a strong bonding capacity. The issuance of bonds under any bonding facilities, however, is at the sureties' sole discretion. The recent difficult insurance market combined with large losses experienced by sureties in the aftermath of Enron and other financial scandals, as well as a result of the September 11, 2001 terrorist attacks have made surety bond markets, in general, unpredictable and chaotic. Bonds may be more difficult to obtain in the future or they may only be available at significant additional cost. There can be no assurance that bonds will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding may result in our ineligibility to bid for construction, EPC, and fixed price projects, which could have a material adverse effect on our growth and financial condition.

The success of our joint ventures depend on the satisfactory performance by our joint venture partners related to their joint venture obligations. The failure of our joint venture partners to perform their joint venture obligations could impose on us additional financial and performance obligations that could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture.

        We enter into various joint ventures as part of our EPC businesses and project specific joint ventures. The success of these and other joint ventures depend, in large part, on the satisfactory performance of our joint venture partners of their joint venture obligations. If our joint venture partners fail to satisfactorily perform their joint venture obligations as a result of financial or other difficulties, the joint venture may be unable to adequately perform or deliver its contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture.

Our dependence on subcontractors and equipment manufacturers could adversely affect us.

        We rely on third-party subcontractors as well as third-party equipment manufacturers to complete our projects. To the extent that we cannot engage subcontractors or acquire equipment or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price contracts, we could experience losses in the performance of these contracts. In addition, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This

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may reduce the profit to be realized or result in a loss on a project for which the services, equipment or materials were needed.

We face risks associated with our international business.

        In 2004, we derived approximately 11% of our revenues from operations outside of the U.S. Such operations are subject to a variety of risks associated with conducting business internationally. These risks include:

•

Currency exchange rate fluctuations, either independently or together with the impact of international tax laws, and restrictions on currency movements could adversely affect our results of operations if we are forced to maintain assets in currencies other than the U.S. dollar because our results are reported in U.S. dollars.



•

Political and economic instability and unexpected changes in regulatory requirements in foreign countries could adversely affect our projects overseas.



•

Inconsistent regulations and diverse licensing and legal requirements increase our costs because our operations must comply with a variety of laws that differ from one country to another.



•

Terrorist attacks and civil unrest in some of the countries where we do business may delay project schedules, threaten the health and safety of our employees and increase our cost of operations.

        We do not know the impact that such regulatory, geopolitical and other factors may have on our business in the future.

Special risks associated with doing business in highly corrupt environments.

        Our international business operations include projects in developing countries and countries torn by war and conflict. Many of these countries are rated poorly by Transparency International, the independent watchdog organization for government and institutional corruption around the world. To the extent we operate outside of the U.S., we are subject to the Foreign Corrupt Practices Act (FCPA), which generally prohibits U.S. companies and their intermediaries from paying or offering anything of value to foreign government officials for the purpose of obtaining or keeping business, or otherwise receiving discretionary favorable treatment of any kind. In particular, we may be held liable for actions taken by our local partners, subcontractors and agents even though such parties are not always subject to our control. Any determination that we have violated the FCPA (whether directly or through acts of others, intentionally or through inadvertence) could result in sanctions that could have a material adverse effect on our business and on our ability to secure U.S. federal government contracts. While our staff is trained on the FCPA issues and we have procedures and controls in place to monitor compliance, situations outside of our control may arise that could potentially put us in violation of the FCPA inadvertently and thus negatively impact our business.

Government contracts present risks of termination for convenience, adjustment of payments received, restrictions on ability to compete for government work and funding constraints.

        In 2004, we derived approximately 37% of our total revenues from contracts with the U.S. federal government and international governments. In addition, we own equity interests in joint ventures with revenues attributable primarily or entirely to contracts with U.S. federal government clients. The following risks are inherent in U.S. federal government contracts:

•

Because federal laws permit government agencies to terminate a contract for convenience, our government clients may terminate or decide not to renew our contracts with little or no prior notice.

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•

U.S. federal government clients may audit contract payments we receive for several years after these payments are made. Based on these audits, the clients may adjust or demand repayment of payments we previously received. Audits have been completed on our federal contracts through December 31, 2002, and are continuing for subsequent periods. None of the audits performed to date on our federal contracts have resulted in any significant adjustments to our financial statements. It is possible, however, that an audit in the future could result in a material adjustment to our consolidated financial statements.



•

U.S. federal government contract regulations provide that any company convicted of a crime or indicted on a violation of statutes related to federal contracting may lose its right to receive future contract awards or extensions.



•

Our ability to earn revenues from our existing and future U.S. federal government projects will depend upon the availability of funding from U.S. federal government agencies. We cannot control whether those clients will fund or continue funding our outstanding projects.

        Our ability to secure new government contracts and our revenues from existing government contracts could be adversely affected by any one or a combination of the factors listed above.

Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future performance.

        Our backlog at December 31, 2004 was approximately $3,239.6 million. We cannot assure that the revenues projected in our backlog will be realized or, if realized, will result in profits. Projects may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition, our ability to earn revenues from our backlog depends on the availability of funding for various U.S. federal, state, local and foreign government agencies. Most of our domestic and international industrial clients have termination for convenience provisions in their contracts. Therefore, project terminations, suspensions or reductions in scope may occur from time-to-time with respect to contracts reflected in our backlog. Some backlog reductions would adversely affect the revenue and profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog and the revenues and profits that we actually earn.

We could sustain losses on contracts that contain "fixed price" or "not to exceed" pricing provisions if our costs exceed the fixed or maximum prices.

        In 2004, we derived approximately 27% of our revenues from "fixed price" contracts and approximately 18% of our revenues from time-and-materials contracts, some of which had "not to exceed" price limits. Under "fixed price" contracts, we agree to deliver projects for a definite, predetermined price regardless of our actual costs incurred over the life of the project. Under time-and-materials contracts with "not to exceed" provisions, we are compensated for the labor hours expended at agreed-upon hourly rates plus cost of materials used; however, there is a stated maximum compensation for the services to be provided under the contract. Many fixed price and "not to exceed" contracts involve large industrial facilities and public infrastructure projects and present the risk that our costs to complete a project may exceed the fixed price or "not to exceed" price agreed upon with the client. The fixed or maximum fees negotiated for such projects may not cover our actual costs and desired profit margins. If our actual costs for a fixed or "not to exceed" price project are higher than we expect, our profit margins on the project will be reduced or we could suffer a loss.

Our industry is highly competitive.

        We are engaged in a highly competitive business in which most of our contracts with public sector clients are awarded through a competitive bidding process that places no limit on the number or type

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of potential service providers. The process usually begins with a government agency request for proposal that delineates the size and scope of the proposed contract. The government agency evaluates the proposals on the basis of technical merit and cost. In the water, wastewater and water resources markets, some contracts are awarded through qualification selection processes that vary among projects.

        In both the private and public sectors, acting either as a prime contractor or as a subcontractor, we may join with other firms that we otherwise compete with to form a team to compete for a single contract. Because a team can often offer stronger combined qualifications than any firm standing alone, these teaming arrangements can be very important to the success of a particular contract competition or proposal. Consequently, we maintain a network of relationships with other companies to form teams that compete for particular contracts and projects. Failure to maintain technical and price competitiveness, as well as failure to maintain access to strong teaming partners may impact our ability to win work.

Our projects may result in liability for faulty engineering services.

        Because our projects are often large and can affect many people, our failure to make judgments and recommendations in accordance with applicable professional standards could result in large damages and, perhaps, punitive damages. Our engineering practice involves professional judgments regarding the planning, design, development, construction, operations and management of industrial facilities and public infrastructure projects. Although we have adopted a range of insurance, risk management and risk avoidance programs designed to reduce potential liabilities, there can be no assurance that such programs will protect us fully from all risks and liabilities.

Our inability to attract and retain professional personnel could adversely affect our business.

        Our ability to attract, retain and expand our staff of qualified engineers and technical professionals will be an important factor in determining our future success and growth. A shortage of qualified technical professionals currently exists in the engineering industry. The market for these professionals is competitive in the U.S. and internationally. We cannot assure you that we will continue to be successful in attracting and retaining such professionals. Since we derive a significant part of our revenues from services performed by our professional staff, our failure to retain and attract professional staff could adversely affect our business by impacting our ability to complete our projects and secure new contracts.

A reduction in the scope of environmental regulations or changes in government environmental policies could adversely affect our revenues.

        A substantial portion of our business is generated either directly or indirectly as a result of federal, state, local and foreign laws and regulations related to environmental matters. Changes in environmental regulations could affect our business more significantly than they would affect some other engineering firms. Accordingly, a reduction in the number or scope of these laws and regulations, or changes in government policies regarding the funding, implementation or enforcement of such laws and regulations, could significantly reduce the size of one of our most important markets and limit our opportunities for growth or reduce our revenues below their current levels. In addition, any significant effort by government agencies to reduce the role of private contractors in regulatory programs, including environmental compliance projects, could have the same adverse effects.

Actual results may differ from results discussed in forward-looking statements.

        This Annual Report on Form 10-K and the documents incorporated by reference herein contain forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such

12

differences include, but are not limited to the risk factors described here and other factors that we cannot currently foresee. In addition, economic conditions and events generally affecting business, both on a local and a worldwide basis, can adversely affect our business and operations. If our actual results differ significantly and adversely from the results discussed in forward-looking statements, our results of operations could be adversely affected and our share price could decline.

Percentage-of-completion accounting used for our engineering and construction contracts can result in overstated or understated profits or losses.

        The revenue for our engineering and construction contracts is accounted for on the percentage-of-completion method of accounting. This method of accounting requires us to calculate revenues and profit to be recognized in each reporting period for each project based on our predictions of future outcomes, including our estimates of the total cost to complete the project, project schedule and completion date, the percentage of the project that is completed and the amounts of any probable unapproved change orders. Our failure to accurately estimate these often subjective factors could result in reduced profits or losses for certain contracts.

Actual results could differ from the estimates and assumptions used to prepare our financial statements.

        In order to prepare financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make estimates and assumptions as of the date of the financial statements which affect the reported values of our assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by us include:

•

Recognition of contract revenues, costs, profit or losses in applying the percentage-of-completion method of accounting;



•

Recognition of recoveries under contract change orders or claims;



•

Collectibility of billed and work-in-process unbilled accounts receivables and the need for and the amount of allowances for problematic accounts;



•

Estimated amounts for anticipated project losses, warranty costs and contract close-out costs;



•

Determination of potential liabilities under pension and other post-retirement benefit programs;



•

Income tax provisions and related valuation allowances; and



•

Accruals for other estimated liabilities.

Risks Related to Our Internal Market

Absence of a public market may prevent you from selling your stock and cause you to lose all or part of your investment.

        There is no public market for our common stock. While we intend the internal market to provide liquidity to shareholders, there can be no assurance that there will be enough orders to purchase shares to permit shareholders to resell their shares on the internal market, or that a regular trading market will be sustained in the future. The price in effect on any trade date may not be attractive enough to both buyers and sellers to result in a balanced market because the price will be fixed in advance by our Board of Directors, using their judgment of the fair market value of our common stock, and not by actual market trading activity. Moreover, although we may enter the internal market as a buyer of common stock if there are more sell orders than buy orders, we have no obligation to engage in internal market transactions and will not guarantee market liquidity. Consequently, insufficient buyer demand could cause sell orders to be prorated, or could prevent the internal market from opening on

13

any particular trade date. Insufficient buyer demand could cause shareholders to suffer a total loss of investment or substantial delay in their ability to sell their common stock. No assurance can be given that shareholders desiring to sell all or a portion of their shares of common stock will be able to do so. Accordingly, the investment in our common stock is suitable for you only if you have limited need for liquidity in your investment.

Transfer restrictions on our common stock could prevent you from selling your common stock and cause you to lose all or part of your investment.

        Since all of the shares of our common stock are subject to transfer restrictions, you will generally only be able to sell your common stock through our internal market on the four trade dates in each year. Unlike shares that are actively traded in the public markets, you may not be able to sell at a particular time even though you would like to do so. Our common stock price could decline between the time you want to sell and the time you become able to sell. For a detailed discussion of the transfer restrictions on our common stock, see "Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities."

Our stock prices are and will continue to be determined by our Board of Directors' judgment of fair market value and not by market trading activity.

        The offering prices at each trade date will be established by our Board of Directors approximately four weeks before each trade date. In establishing the price, our Board of Directors will take into consideration the factors that are described in Item 5 of this Annual Report on Form 10-K. Our Board of Directors will, however, set the offering price in advance of each trade date, and all trades on our internal market will take place at the price established for each trade date. Therefore, market trading activity on any given trade date cannot affect the price on that trade date. This is a risk to you because our common stock price will not change to reflect supply of and demand for shares on a given trade date as it would in a public market. You may not be able to sell shares or you may have to sell your shares at a price that is lower than the price that would prevail if the internal market price could change on a given trade date to reflect supply and demand. Our Board of Directors intends to use the common stock valuation methods that result in offering prices that represent fair market value. The valuation method for our common stock is subject to change at the discretion of our Board of Directors.

The limited market and transfer restrictions on our common stock will likely have anti-takeover effects.

        Only our employees, directors, eligible consultants and employee benefit plans may own our common stock and participate in our internal market. In addition, we have imposed significant restrictions on the transfer of our common stock other than through sales on our internal market. These limitations make it extremely difficult for a potential acquirer who does not have the prior consent of our Board of Directors to acquire control of our company, regardless of the price per share an acquirer might be willing to pay and whether or not our shareholders would be willing to sell at that price.

Item 2. Properties

        Our corporate headquarters is located in Englewood, Colorado, where we lease approximately 155,000 square feet of space. The lease on the corporate headquarters expires in 2013. In addition, we lease office space around the world on commercially available terms. We believe that our existing facilities are adequate for the present needs of our business and that suitable additional or substitute space will be available as needed to accommodate any expansion of operations.

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Item 3. Legal Proceedings

        We are a party to various contractual guarantees and legal actions arising in the normal course of our business. From time-to-time, agencies of the U.S. government investigate whether our operations are being conducted in accordance with applicable regulatory requirements. Because a large portion of our business comes from federal, state and municipal sources, our procurement practices at times are also subject to review and occasional investigations by U.S. and state attorneys offices. Such state and U.S. government investigations, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties, or could lead to suspension or debarment from future U.S. government contracting. These investigations often take years to complete and many result in no adverse action. Damages assessed in connection with and the cost of defending any such actions could be substantial. While the outcome of pending proceedings are often difficult to predict, as of the date of this filing, our management believes that no ongoing litigation or investigation is likely to result in a material adverse impact on our consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

        No items were submitted to a vote of security holders during the fourth quarter of 2004.

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PART II

Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

        We are employee owned. As a result, our stock is only available to certain employees, directors, eligible consultants and benefit plans. There is no market for our stock with the general public. In order to provide liquidity for our shareholders, however, an internal market (Internal Market) is maintained through an independent broker, currently Neidiger, Tucker and Bruner, Inc. (NTB).

        The Internal Market permits existing shareholders to offer to sell or purchase shares of our common stock on predetermined days (each, a Trade Date). Generally, there are four Trade Dates each year which typically occur approximately four weeks after the quarterly meetings of our Board of Directors. Currently our Board of Directors meetings are scheduled for February, May, August and November. All sales of our common stock are made at the price determined by our Board of Directors pursuant to the valuation methodology described below.

        All sales of common stock on the Internal Market will be restricted to the following authorized buyers:

•

Our employees, directors and eligible consultants



•

Trustees of the benefit plans



•

Administrator of the Payroll Deduction Stock Purchase Plan (PDSPP)

        We may impose limitations on the number of shares that an individual may purchase when there are more buy orders than sell orders for a particular Trade Date. After our Board of Directors determines the stock price for use on the next Trade Date, which is approximately four weeks prior to such Trade Date, all shareholders, employees, directors and eligible consultants will be advised as to the new stock price and the next Trade Date.

        Our Internal Market is managed through an independent broker, currently NTB, which acts upon instructions from the buyers and sellers to effect trades at the stock price set by our Board of Directors and in accordance with the Internal Market rules. NTB does not play a role in determining the price of our common stock and is not affiliated with us. Individual stock ownership account records are currently maintained by our in-house transfer agent.

        We may purchase shares if the Internal Market is under-subscribed. We may, but are not obligated to, purchase shares of common stock on the Internal Market on any Trade Date at the price in effect on that Trade Date, but only to the extent that the number of shares offered for sale by shareholders exceeds the number of shares sought to be purchased by authorized buyers. The decision as to whether or not we will purchase shares in the Internal Market, if the Internal Market is under-subscribed, is solely within our discretion and we will not notify investors as to whether or not we will participate prior to the Trade Date. Investors should understand that there can be no assurance that they will be able to sell their CH2M HILL stock without substantial delay or that their stock will be able to be sold at all on the Internal Market. We will consider a variety of factors including our cash position, financial performance and number of shares outstanding in making the determination as to whether to participate in an under-subscribed market. The terms of our existing unsecured revolving line of credit do not play a role in the decision as to whether to buy shares in the Internal Market. To date, no other factors have been considered by us in our decisions as to whether or not to participate in an under-subscribed market.

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        If the aggregate number of shares offered for sale on the Internal Market on any Trade Date is greater than the number of shares sought to be purchased, shareholder offers to sell will be accepted as follows:

•

If enough orders to buy are received to purchase all the shares offered by each seller selling fewer than 500 shares and at least 500 shares from each other seller, then all sell orders will be accepted up to the first 500 shares and the portion of any sell orders exceeding 500 shares will be accepted on a pro-rata basis



•

If not enough orders to buy are received to purchase all the shares offered by each seller selling fewer than 500 shares and at least 500 shares from each other seller, then the purchase orders will be allocated equally to each seller

        We may sell shares if the Internal Market is over-subscribed. To the extent that the aggregate number of shares sought to be purchased exceeds the aggregate number of shares offered for sale, we may, but are not obligated to, sell authorized but unissued shares of common stock on the Internal Market at the price in effect on that Trade Date to satisfy purchase demands. The decision as to whether or not we will sell shares in the Internal Market, if the Internal Market is over-subscribed, is solely within our discretion and we will not notify investors as to whether or not we will participate prior to the Trade Date. Investors should understand that there can be no assurance that they will be able to buy as many shares as they would like on a given Trade Date. We will consider a variety of factors including our cash position, financial performance and number of shares outstanding in making the determination as to whether to participate in an over-subscribed market. The terms of our existing unsecured revolving line of credit do not play a role in the decision as to whether to sell shares in the Internal Market. To date, no other factors have been considered by us in our decisions as to whether or not to participate in the over-subscribed market.

        If the aggregate purchase orders exceed the number of shares available for sale, the following prospective purchasers will have priority to purchase shares, in the order listed:

•

Administrator of the PDSPP



•

Trustees of the 401(k) Plan



•

Individual employees, directors and eligible consultants on a pro-rata basis

        All sellers on the Internal Market, other than us and the trustees of the 401(k) Plan, will pay NTB a commission equal to two percent of the proceeds from such sales. Employees who sell their common stock upon retirement from CH2M HILL will have the option to sell the common stock they own on the Internal Market and pay a commission on the sale or to sell to us without paying a commission. In the latter case, the employee will sell their common stock to us at the price in effect on the date of their termination in exchange for a four-year note at a market interest rate determined biannually. No commission is paid by buyers on the Internal Market.

Price of our Common Stock

        Our Board of Directors will determine the price, which is intended to be the fair market value, of the shares of our common stock to be used for buys and sells on each Trade Date pursuant to the valuation methodology described below. The price per share of our common stock generally is set as follows:

Share Price = [(7.8 × M × P) + (SE)] / CS

        In order to determine the fair market value of the common stock in the absence of a public trading market, our Board of Directors felt it appropriate to develop a valuation methodology to use as a tool to determine a price that would be a valid approximation of the fair market value. In

17

determining the fair market value stock price, our Board of Directors believes that the use of a going concern component (i.e., net income, which we call profit after tax, as adjusted by the market factor) and a book value component (i.e., total shareholders' equity) is important. Our Board of Directors believes that the process we have developed reflects modern equity valuation techniques and is based on those factors that are generally used in the valuation of equity securities.

        The existence of an over-subscribed or under-subscribed market on any given Trade Date will not affect the stock price on that Trade Date. However, our Board of Directors, when determining the stock price for a future Trade Date, may take into account the fact that there have been under-subscribed or over-subscribed markets on prior Trade Dates.

        Market Factor ("M").    "M" is the market factor, which is subjectively determined in the sole discretion of our Board of Directors. In determining the market factor, our Board of Directors will take into account factors the directors considered to be relevant in determining the fair market value of our common stock, including:

•

The market for publicly traded equity securities of companies comparable to us



•

The merger and acquisition market for companies comparable to us



•

The prospects for our future performance



•

General economic conditions



•

General capital market conditions



•

Other factors our Board of Directors deem appropriate

        Our Board of Directors has not assigned predetermined weights to the various factors it may consider in determining the market factor. A market factor greater than one would increase the price per share and a market factor less than one would decrease the price per share.

        In its discretion, our Board of Directors may change, from time-to-time, the market factor used in the valuation process. Our Board of Directors could change the market factor, for example, following a change in general market conditions that either increased or decreased stock market equity values for companies comparable to us, if our Board of Directors felt that the market change was applicable to our common stock as well. Our Board of Directors will not make any other changes in the method of determining the price per share of common stock unless in the good faith exercise of its fiduciary duties and, if appropriate, after consultation with its professional advisors, our Board of Directors determines that the method for determining the price per share of common stock no longer results in a stock price that reasonably reflects our fair market value on a per share basis.

        As part of the total mix of information that our Board of Directors considers in determining the "M" factor, our Board of Directors also may take into account company appraisal information prepared by The Environmental Financial Consulting Group, Inc. (EFCG), an independent appraiser engaged by the trustees of our benefit plans. In setting the stock price, our Board of Directors compares the total of the going concern and book value components used in the valuation methodology to the enterprise value of the Company in the appraisal provided by EFCG. If, after such comparison, our Board of Directors concludes that its initial determination of the "M" factor should be re-examined, our Board of Directors may review, and if appropriate adjust, the "M" factor. Since the inception of the program on January 1, 2000, the total of the going concern and book value components used by our Board of Directors in setting the price for our stock has always been within the enterprise appraisal range provided quarterly by EFCG.

        Since the inception of the program on January 1, 2000, the "M" factor has not deviated from 1.0. In deciding that the "M" factor should remain unchanged, our Board of Directors has considered our

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performance, the performance of the engineering and construction industry as a whole, and our perception of our future prospects.

        Profit After Tax ("P").    "P" is profit after tax, otherwise referred to as net income, for the four fiscal quarters immediately preceding the Trade Date. Our Board of Directors at its discretion may exclude from the calculation nonrecurring or unusual transactions. Nonrecurring or unusual transactions are developments that the market would not generally take into account in valuing an equity security. A change in accounting rules, for example, could increase or decrease net income without changing the fair market value of our common stock. Similarly, such a change could fail to have an immediate impact on the value of our common stock, but still have an impact on the value of our common stock over time. As a result, our Board of Directors believes that in order to determine the fair market value of our common stock, it needs the ability to review unusual events that affect net income. In the past, our Board of Directors has excluded unusual items from the calculation of "P", including nonrecurring revenue from the Rocky Flats project and a write off of an investment in an international telecommunications company. Because "P" is calculated on a four quarter basis, an exclusion impacts the calculation of fair market value for four consecutive quarters. There were no such nonrecurring or unusual transactions affecting "P" during 2004. Consequently, no exclusions are currently being taken into account in calculating the value of "P". It is possible, however, that our Board of Directors will determine to exclude future unusual or non-recurring items from the calculation of "P". For example, substantial incentive fees could be earned upon closure of the Rocky Flats facility in 2006. Such a non-recurring payment would likely be disregarded by the marketplace in evaluating our profitability on a go forward basis and therefore could be appropriate for exclusion by our Board of Directors, although no final decision has been reached at this time.

        Total Shareholders' Equity ("SE").    "SE" is total shareholders' equity, which includes intangible items, as set forth on our most recently available quarterly or annual financial statements. Our Board of Directors, at its discretion, may exclude from Shareholders' Equity nonrecurring or unusual transactions that the market would not generally take into account in valuing an equity security. The exclusions from Shareholders' Equity will generally be those transactions that are non-cash and are reported as "accumulated other comprehensive income (loss)" on the face of our consolidated balance sheet. For example, during 2004, our Board of Directors excluded, and will continue to exclude, a non-cash reduction in shareholders' equity for a minimum pension liability adjustment. This adjustment was required by accounting rules and essentially reflected the stock market performance of the investments held in our pension plans relative to their future benefit obligations. Because this adjustment is unusual and may reverse as investment markets rebound, and given that the market would not generally take such adjustments into account when valuing equity securities, our Board of Directors excluded it from the SE parameter for stock valuation purposes. Similarly, other items that are reported as components of "accumulated other comprehensive income (loss)" include unrealized gains and losses on securities, unrealized gains and losses on derivatives and foreign currency translation adjustments.

        Common Stock Outstanding ("CS").    "CS" is the weighted-average number of shares of our common stock outstanding during the four fiscal quarters immediately preceding the Trade Date, calculated on a fully-diluted basis. By "fully-diluted" we mean that the calculations are made as if all outstanding options to purchase our common stock had been exercised and other "dilutive" securities were converted into shares of our common stock. In addition, an estimate of the weighted-average number of shares that we reasonably anticipate will be issued under our stock-based compensation programs and employee benefit plans is included in this calculation.

        The "CS" calculation is done on a fully-diluted basis since we believe that taking into account the issuance of all securities that will affect the per share value is a better representation of the share value over time. We have more than a 30-year history in making annual grants of stock-based compensation.

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Therefore, we believe that we have sufficient information to reasonably estimate the number of such "to be issued" shares and accrue for them during the year. This approach avoids an artificial variance in share value during the first calendar quarter of each year when the bulk of shares of our common stock are issued by us pursuant to our employee benefit plans and stock-based compensation programs.

        The following table shows a comparison of the "CS" value actually used by our Board of Directors to calculate stock prices on the dates indicated versus the year-to-date weighted-average number of shares of common stock as reflected in the diluted earnings-per-share calculation in our financial statements for the past three years.

        Constant 7.8.    In the course of developing this valuation methodology, it became apparent to our Board of Directors that a multiple would be required in order for the stock price derived by this methodology to approximate our historical, pre-Internal Market stock price. Another objective of our Board of Directors when developing the valuation methodology was to establish the fair market value of our common stock using a market factor of 1.0. We believe that it was important to begin the Internal Market program with an "M" factor equal to 1.0 in order to make it easier for shareholders to understand future changes, if any, to the market factor.

        Therefore, the constant 7.8 was introduced into the formula. The constant 7.8 is the multiple that our Board of Directors determined necessary (i) for the new stock price to approximate our historical stock price derived using the pre-Internal Market formula as well as (ii) to allow the use of the market factor of 1.0 at the beginning of the Internal Market program.

        We intend to announce the new stock price and the Trade Date approximately four weeks prior to each Trade Date. The information will be delivered by the broker to all employees, eligible consultants and eligible participants in the internal market. In addition, we will file a Current Report on Form 8-K disclosing the new stock price and all components used by our Board of Directors in determining such price in accordance with the valuation methodology described above. Trade Dates are expected to occur approximately 75 days after the end of each quarter.

        We will also distribute the most current prospectus for common stock and our audited annual financial statements to all shareholders, as well as other employees and eligible consultants, and to participants in the Internal Market through the employee benefit plans. Such information will be distributed at the same time as our annual reports, proxy information and solicitations are distributed for voting instructions from shareholders and participants in the employee benefit plans each year.

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Current Price of Our Common Stock

        Starting in 2000, with the introduction of the Internal Market and its quarterly trades, our Board of Directors reviews the common stock price quarterly using the valuation methodology described above to set the price for the common stock. The prices of our common stock for the past three years, along with the various factors and values used by our Board of Directors to determine such stock prices on each date, are as follows:

Holders of Our Common Stock

        As of February 17, 2005, there were 4,162 holders of record of our common stock. As of such date, all of our common stock of record was owned by our current employees, directors, eligible consultants, and by our various employee benefit plans.

Dividend Policy

        We have never declared or paid any cash dividends on our capital stock and no cash dividends are contemplated in the foreseeable future. We intend to retain any future earnings to finance the growth and development of our business. Under our existing unsecured revolving line of credit, which expires in July 2008, payment of dividends would represent a violation of our covenants.

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Issuer Purchases of Equity Securities

        The following table covers the purchases of our securities by CH2M HILL during the quarter ended December 31, 2004:

(a)

Shares purchased by CH2M HILL for terminated employees.

(b)

Shares purchased by CH2M HILL in the Internal Market.

Item 6. Selected Financial Data

        The following data has been derived from our consolidated financial statements. In 2004, 2003 and 2002, the financial statements from which this data was derived were reported on by KPMG LLP, an independent registered public accounting firm. Previously, the financial statements from which this data was derived were reported on by other independent auditors who have ceased operations. During the periods presented, we paid no cash dividends on our common stock. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto, included in this Annual Report on Form 10-K.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis explains our general financial condition, changes in financial condition and results of operations as a whole and each of our operating segments including:

•

Factors affecting our business



•

Our revenues and profits



•

The source of our revenues and profits



•

Why those revenues and profits were different from year to year

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•

Where our cash came from and how it was used



•

How all of this affects our overall financial condition

        The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described here. You should read this section in conjunction with the section "Risk Factors" and the consolidated financial statements and notes thereto contained in this Annual Report on Form 10-K.

Business Summary

        We are one of the largest engineering services firms worldwide and are employee-owned. Our business provides engineering, construction, operation, major project management and related technical services to municipal, state, federal and private sector clients worldwide. Founded in 1946, we have nearly 14,000 employees worldwide.

        We believe we provide our clients with innovative project delivery using cost-effective approaches and advanced technologies. We continuously monitor acquisition and investment opportunities that will expand our portfolio of services, add value to the projects undertaken for clients, or enhance our capital strength. We believe that we are well positioned geographically, technically and financially to compete worldwide in the key markets we have elected to pursue and the clients we serve.

        The engineering and construction industry continues to undergo substantial change as public and private clients privatize and outsource many of the services that were formerly provided internally. Numerous mergers and acquisitions in the industry have resulted in a group of larger firms that offer a full complement of single-source services including studies, designs, construction, operations, maintenance and in some instances, facility ownership. Included in the current trend is the movement towards longer-term contracts for the expanded array of services, e.g., 5 to 20 year contracts. These larger, longer, more full-service contracts require us to have substantially greater financial capital than has historically been necessary to remain competitive.

        We provide services to our clients through three operating segments: Federal, Civil Infrastructure and Industrial. In 2004, we reorganized such that our operating segments are more closely aligned with the types of clients we serve. The structure is intended to provide for better decision making on an enterprise-wide basis. For example, while our Federal segment generally provides a comprehensive range of services to the U.S. federal government, it also provides services to international governments. Our Civil Infrastructure segment generally provides a comprehensive range of services to various state and local governments. Our Industrial segment generally provides a comprehensive range of services to various private sector clients.

Acquisition of Lockwood Greene Engineers, Inc.

        In December 2003, we acquired substantially all of the assets and assumed certain liabilities of Lockwood Greene Engineers, Inc. (Lockwood Greene). Lockwood Greene is an industrial engineering and construction firm focused on national and multi-national clients. The operating results of Lockwood Greene are included in our Industrial operating segment.

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Summary of Operations

        Revenues and pre-tax profit or loss for the years ended December 31, 2004, 2003 and 2002 by operating segment were as follows:

Results of Operations for the Year Ended December 31, 2004 Compared to 2003

Federal

        Revenues increased for the year ended December 31, 2004, compared to 2003 by $107.9 million, or 12.2%. All of our businesses within the Federal operating segment improved gross revenue over 2003. Our nuclear business reported significantly higher revenue for the year ended December 31, 2004 compared to 2003, primarily from various contracts with the U.S. Department of Energy's (DOE) Hanford River Protection Project (Hanford) and certain other DOE projects. In the first three quarters of 2004, revenues related to these projects were behind the prior year because of delays in the timing of delivery efforts, however, progress was made on the projects in the fourth quarter of 2004. Our CH2M HILL services business also reported improved revenues over last year resulting from our work on three reconstruction projects in Iraq, Qatar and Jordan that were awarded by the U.S. Department of Defense earlier in 2004. Our environmental services business reported increased revenues from U.S. federal government contracts including increased work on the Johnston Atoll in the Pacific under the ENRAC contract, Superfund work for the U.S. Environmental Protection Agency and continued expansion of our regulatory and construction work for the U.S. Air Force.

        Pre-tax profit increased for the year ended December 31, 2004, compared to 2003 by $2.0 million, or 6.2%. Our earnings on certain nuclear projects (primarily with the DOE) have increased compared to 2003 and the reconstruction projects in the Middle East in our CH2M HILL services business positively impacted our pre-tax profits. Additionally, we continue to be successful in our administrative cost containment efforts.

Civil Infrastructure

        Revenues decreased for the year ended December 31, 2004 compared to 2003 by $39.3 million, or 4.4%. The decrease was primarily attributable to project and pursuit delays in our water, wastewater and water resources business. These delays resulted in lower volume of new business compared to last year at this time for our domestic design/build businesses and a flat domestic consulting market. These delays are a result of longer than expected finalization of contract terms and delays in the funding of several projects. We realized improvement during the fourth quarter of 2004, indicating that we are beginning to recover from these delays as we move into 2005. The overall decline in revenue for the water, wastewater and water resources business was partially offset by improvements in our international consulting and design/build businesses, particularly in Asia Pacific and the Middle East, where we were recently awarded an Iraq water reconstruction contract and in Canada where we have seen an increase in consulting projects. The international market remains strong and we believe we are well positioned for future large design/build projects. These opportunities are driven by population and

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economic growth in certain regions, aging infrastructure, capacity shortfalls and regulatory requirements.

        Offsetting the decline in revenue in our water, wastewater and water resources business was continued growth from successful pursuits in design/build services with key cruise terminal and highway bridge projects, an increase in transportation consulting and an increase in transportation projects in Canada. Our operations and maintenance business reported a slight improvement in revenues over last year. The relatively flat growth in the operations and maintenance business was attributable to the reduction in scope of certain active projects resulting in lower service fees and lost revenue derived from non-renewed projects which were offset by newly acquired projects, as targeted projects with negative margins were exited during 2004 as part of our strategy to improve overall margin performance.

        Pre-tax profit decreased by $4.1 million, or 13.0%, for the year ended December 31, 2004 compared to 2003. The decrease is primarily attributable to increased costs on certain projects that were greater than anticipated due to project delivery issues in addition to project overruns on several smaller projects in our transportation business. Additionally, the transportation business incurred increased overhead spending and significantly increased business development expenditures compared to 2003. While the business development expenditures did reduce pre-tax profit for 2004, we anticipate that, with the recent win of a major highway/bridge project and several other major design/build projects being pursued or awaiting award, our pre-tax profit will improve in 2005. Our operations and maintenance business incurred increased costs on projects and a deterioration of project margins driven by competition for market share. However, we began showing slight improvement in pre-tax profit late in 2004 indicating that we are beginning to improve as we move into 2005 due to increased project controls, risk management processes and cost containment efforts. These decreases in pre-tax profit were offset by improvements in our water, wastewater and water resources business, as a result of higher overall margins and controlled overhead spending.

Industrial

        Revenues increased significantly for the year ended December 31, 2004 compared to 2003 by $492.5 million, or 130.4%. The increase is primarily due to the December 2003 acquisition of Lockwood Greene. Lockwood Greene contributed revenues of $359.6 million for the year ended December 31, 2004. These revenues from Lockwood Greene were generated in projects related to the power, pharmaceutical, chemicals and general manufacturing sectors. Due to the timing of the acquisition, the operating results for Lockwood Greene had minimal impact on our revenues and pre-tax profits during 2003.

        Additionally, our industrial design business has experienced growth in revenues as a result of increased opportunities in the semiconductor and microelectronics industries as economic conditions in those industries have recovered. However, the economic recoveries in some industries have not been as strong or as enduring as had been initially predicted. We also experienced growth in our energy and industrial systems business primarily resulting from an increase in volume from our U.S. federal government contracts with the U.S. Air Force where we provide design and construction services for federal facilities in Asia. Additional growth was attributable to significant stabilization in the domestic wireless market, coupled with wireless and wireline work in India and Germany. Overall, the outlook for our Industrial segment is uncertain because of the continued weakness in the semiconductor and microelectronics industries.

        In October 2004, we acquired the assets of MicroSource, Inc. (MicroSource) for a purchase price of $4.5 million. This acquisition has maximum contingent payments of $1.8 million, which become due based upon achieving certain operating results over 2005 through 2009. MicroSource provides network managed services focused on data networks for private sector and local government enterprises. We

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believe that this acquisition will provide a platform for our telecommunications business to obtain long-term network operations and maintenance contracts from private sector and local government enterprise clients.

        Pre-tax profit significantly increased for the year ended December 31, 2004 compared to 2003 by $18.5 million, or 136.0%. Improvements over last year were reported in all of the industrial businesses. Although the semiconductor and microelectronics industries continued to operate in a slower than historical market, they significantly improved pre-tax profit year over year as a result of increased volumes and a reduction in indirect labor overhead. Improvements were also reported as a result of the acquisition of Lockwood Greene in December 2003 and increased volumes in the telecommunications business despite a depressed market.

Results of Operations for the Year Ended December 31, 2003 Compared to 2002

Federal

        Revenues increased for the year-ended December 31, 2003, compared to 2002 by $109.3 million, or 14.1%. The increase was a result of our environmental and energy businesses reporting increases in U.S. federal government contracts and delivery orders. Additionally, effective in January 2003, our nuclear business was awarded a new performance-based contract by the DOE to accelerate the safe closure of the nuclear facilities at the former Mound Closure Plant in Miamisburg, Ohio, and to transition the site to industrial use. This new Mound Closure Project reported $103.8 million in revenues for the year ended December 31, 2003. This increase was offset by decreases in revenue at Hanford due to the timing of certain delivery efforts.

        Pre-tax profit declined by $11.5 million, or 26.3%, for December 31, 2003 compared to 2002. The decrease in pre-tax profit resulted from a decline in earnings from Kaiser-Hill Company, LLC (Kaiser-Hill). The Federal operating segment recorded $17.0 million of additional earnings in 2002 ($6.7 million net of incentive accruals and related tax expense) from Kaiser-Hill as a result of favorable performance on the Rocky Flats project for the DOE. Kaiser-Hill's performance has increased the likelihood of receiving a larger performance fee upon completion, and therefore the financial results in 2002 reflected this positive performance.

Civil Infrastructure

        Revenues increased for the year ended December 31, 2003 compared to 2002 by $74.5 million, or 9.1%. The increase was primarily attributable to significant growth in our water, wastewater and water resources business, as well as operations and maintenance business. These increases were achieved primarily from the strong performance of both our traditional and design/build North American operations. Market conditions continued to improve domestically as utilities invested in water related facilities. These investments domestically and abroad are driven by population and economic growth in certain regions, and capacity shortfalls and regulatory requirements in other regions. Further, our transportation business has seen some increases in business due to solid federal funding that remains intact, although state and local funding was down.

        Pre-tax profit declined by $0.6 million, or 1.9%, for December 31, 2003 compared to 2002. The decrease was due to project delivery challenges in our operations and maintenance business on certain projects. This decline was offset by revenue improvements, service delivery improvements on design/build projects, additional efficiencies in business development and a reduction of overhead costs in our water, wastewater and water resources business.

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Industrial

        Revenues improved slightly for the year ended December 31, 2003 compared to 2002 by $15.5 million, or 4.3%. Lockwood Greene contributed $11.5 million of revenue. Our telecommunications business reported increased revenues as a result of slight improvements in the domestic wireless markets. While the telecommunications industry was still slow to recover on the capital expenditure side, we continued to invest in this business in order to be positioned to compete for work in other sectors of the telecommunications industry. These increases were offset by a decline in revenue primarily attributable to the depressed facility capital spending levels resulting from the recession in the semiconductor industry. The semiconductor industry showed initial signs of recovery at the end of 2003 which resulted in slightly increased workload and bid opportunities.

        Pre-tax loss improved by $1.8 million, or 11.7%, for the year ended December 31, 2003 compared to 2002, of which $0.5 million was related to Lockwood Greene. Pre-tax profit for the year ended December 31, 2002 was negatively impacted by the one time write-off of a $10.0 million equity investment (which is estimated to be $3.6 million, net of incentive compensation accrual reductions and tax benefits). These improvements in the pre-tax loss for the Industrial segment were offset by a decline in our industrial business due to low workload volumes and a competitive market which forced reductions in project margins. Indirect labor costs, which consist of salaries and benefits of all administrative personnel, plus salaries and benefits of technical personnel for hours not spent working on billable client services, decreased as a percent of total labor costs. This decrease in non-billable labor was primarily due to labor reductions related to the decline in the microelectronics industry.

Joint Ventures

        We routinely enter into joint ventures to service the needs of our clients. Such arrangements are customary in the engineering and construction industry and generally are project specific. Our largest joint venture is Kaiser-Hill, in which we own a 50% interest. This joint venture is included in our Federal operating segment. Kaiser-Hill's current contract with the DOE, which has been effective since 2000, is a site closure contract and does not have a defined term. We are targeting closure of the site in late 2005 to early 2006. Under the contract, Kaiser-Hill is compensated through a base fee affected, up or down, by its performance against the agreed upon site target closure timetable and costs. For every dollar that the DOE saves, Kaiser-Hill receives a fee increase ranging from 20 to 30 cents up to an agreed upon maximum. At the same time, for every dollar the cleanup is over budget, the fee is reduced by 20 to 30 cents down to an agreed upon minimum. The ultimate fee will also be impacted by the schedule to achieve site closure and the safety of our performance.

        The earnings from Kaiser-Hill are reported as equity in earnings of joint ventures and affiliated companies, along with other joint ventures that are individually insignificant. For the years ended December 31, 2004, 2003 and 2002 we reported total equity in earnings of joint ventures and affiliated companies of $29.9 million, $26.9 million and $44.0 million, respectively. The earnings from the Kaiser-Hill joint venture for the years ended December 31, 2004, 2003 and 2002 were $20.3 million, $20.0 million and $36.8 million, respectively. The increase in earnings for 2002 is primarily attributable to the portion of the fee that is impacted by cost estimate reductions as a result of favorable performance on the Rocky Flats project for the DOE. Effectively, Kaiser-Hill's performance to date has increased the likelihood of receiving a larger performance fee upon completion. Therefore, the 2002 financial results were adjusted to reflect this positive performance and we recorded $17.0 million of additional earnings ($6.7 million net of incentive accruals and related tax expense) from Kaiser-Hill.

        During the years ended December 31, 2004, 2003 and 2002, we recognized undistributed earnings from Kaiser-Hill of $2.8 million, $3.6 million and $21.1 million, respectively. Kaiser-Hill's ability to distribute cash is based on pre-negotiated payment terms in accordance with its contract with the DOE and can be different from the earnings recognized for accounting purposes. As the cleanup of the site

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progresses toward the targeted closure date of 2006, undistributed earnings could continue to increase if Kaiser-Hill continues to perform at better than cost and schedule targets. This could result in an increase in our investment in Kaiser-Hill, which was $35.2 million and $32.4 million as of December 31, 2004 and 2003, respectively.

Corporate Expenses

        Corporate expenses represent centralized management costs that are not allocable to individual operating segments and primarily include expenses associated with administrative compliance functions such as legal, treasury, accounting, tax and general business development efforts. Corporate expenses for the year ended December 31, 2004 were $14.9 million compared to $9.6 million in 2003 and $8.2 million in 2002. The increases of 55.2% in 2004 and 17.1% in 2003 compared to the prior years were due primarily to an increase in expenses associated with our implementation efforts to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002.

Income Taxes

        The decrease in the effective tax rate for the year ended December 31, 2004 compared to 2003 was primarily due to an increase in tax benefits realized under the Extraterritorial Income Exclusion (EIE) rules, an increase in the utilization of our foreign tax credits for U.S. income tax purposes and the realization of previously deferred foreign losses. Under the EIE rules, taxpayers may elect to exclude from taxable income certain foreign-related income. Our effective tax rate continues to be higher than the U.S. statutory income tax rate of 35.0% due to the effect of state income taxes, non-deductible foreign net operating losses and disallowed portions of meals and entertainment expenses.

        We have presented a claim to the Internal Revenue Service (IRS) relating to the research and experimentation tax credit for the years 1996-2003. Although we are seeking resolution with the IRS, we only recognize tax benefits related to these credits for financial statement purposes when it is probable that such benefits will be realized. The amount of the tax credit claimed is significant, however, the ultimate amount to be realized and the timing of the recognition of the tax credit will depend upon the final resolution with the IRS.

Liquidity and Capital Resources

        Our primary sources of liquidity are cash flows from operations and borrowings under our unsecured revolving line of credit. Our primary uses of cash are to fund our working capital, acquisitions, capital expenditures and purchases of stock presented on our internal market. We believe based on our total cash and credit capacity at December 31, 2004 of $195.5 million that we have sufficient resources to fund our operations, any future acquisition and capital expenditure requirements,

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as well as purchases of stock presented on our internal market, should we choose to do so, for the next 12 months and beyond.

        We are dependent, however, on the cash flows generated by our subsidiaries and, consequently, on their ability to collect on their respective accounts receivables. Substantially all of our cash flows necessary to meet our operating expenditures are generated by our subsidiaries. The financial condition and operational requirements of our subsidiaries may limit our ability to obtain cash from them.

        Billings and collections on accounts receivable can impact our operating cash flows. We continuously monitor collection efforts and assess the allowance for doubtful accounts. Based on this assessment at December 31, 2004, we have deemed the allowance for doubtful accounts to be adequate; however, future economic conditions may adversely impact some of our clients' ability to pay our bills or the timeliness of their payments. Consequently, it may also impact our timing of cash receipts necessary to meet our operating needs.

        Over the last three years we have acquired several companies, the largest being Lockwood Greene in 2003 in which we used $79.9 million of cash, net of cash acquired. We used $4.5 million in cash for our 2004 acquisition of MicroSource.

        We are a professional services organization and, therefore, we do not require significant outflows of cash for capital expenditures. Our capital expenditures are primarily for office equipment and leasehold improvements. Capital expenditures during the years 2004, 2003 and 2002 were $6.8 million, $7.0 million and $6.0 million, respectively. We have a formal operating lease program under which most of our computers and related equipment is procured on an ongoing basis.

        We used $34.2 million in cash for purchases of stock presented on our internal market in 2004 compared to $27.7 million in 2003 and $26.7 million in 2002. Additionally, during the year ended December 31, 2004, our average daily borrowing was $13.8 million under our credit facility for general corporate purposes. In December 2003, we borrowed $47.0 million under our credit facility to ensure sufficient liquidity to close our Lockwood Greene acquisition. These borrowings were repaid from cash flows from operations. It is likely, but uncertain, that we will continue to utilize our credit facility periodically during 2005 depending on the timing of cash receipts and disbursements. There were no amounts outstanding under our line of credit at December 31, 2004 or 2003.

        Our contractual obligations at December 31, 2004 are shown below. Based upon our cash flow from operations and our credit capacity discussed above, we believe that we have or have access to adequate financial resources to fund these contractual obligations and fund our operations in 2005 and

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beyond, including working capital requirements, capital expenditures and potential future acquisitions or strategic investments.

        During December 2003, we amended our unsecured revolving line of credit to increase the maximum borrowing capacity from $125.0 million to $160.0 million. During June 2004, we amended our unsecured revolving line of credit and extended the expiration date. The credit facility may be used for general corporate purposes, permitted acquisitions and to support letters of credit.

        The credit facility, as amended, expires in July 2008, however, with the lender's consent, the credit facility can be extended for an additional year prior to July 2005. At our option, the credit facility bears interest at a rate equal to either the London InterBank Offered Rate plus 1.00% to 1.75%, or the lender's applicable base rate plus margin of 0.0% to 0.25% based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined. A commitment fee of approximately 0.20% to 0.35% per year on the unused portion of the line of credit is payable based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined.

        The agreement requires us to, among other things, maintain minimum levels of net worth, a minimum coverage ratio of certain fixed charges, and a minimum leverage ratio of earnings before interest, taxes, depreciation and amortization to funded debt (all as defined in the agreement). As of December 31, 2004 we were in compliance with the covenants required by the agreement.

        The agreement also allows us to issue letters of credit to support various trade activities. Issued letters of credit are reserved against the borrowing base of the line of credit. At December 31, 2004 and 2003 there were $20.4 million and $40.7 million issued and outstanding letters of credit, respectively.

Off-Balance Sheet Arrangements

        We are party to two lease agreements related to our corporate headquarters and two adjacent buildings. These lease agreements were recently restructured and the new lessors are not variable interest entities (VIEs) as the lessors are considered a business per the definition of revised Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 46 (FIN 46R), "Consolidation of Variable Interest Entities." These leases remain operating leases. One of the lease agreements calls for monthly lease payments of approximately $0.4 million through March 3, 2013 and requires that we guarantee a residual value of the facilities for approximately $42.0 million. Upon completion of the lease term, we have the option to purchase the facilities for $53.0 million. The other lease agreement calls for monthly lease payments at a variable interest rate, estimated to be approximately $0.1 million per month, based on current interest rates. The lease agreement requires that we guarantee a residual value of this building of approximately $17.6 million. Upon completion of the lease term, we have the option to purchase the additional building from the lessor for $20.8 million. The lease matures on September 28, 2008 and provides for five one year renewal option.

Aggregate Commercial Commitments

        We maintain a variety of commercial commitments that are generally made available to provide support for various provisions in engineering and construction contracts. Letters of credit are provided

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to clients in the ordinary course of the contracting business in lieu of retention or for performance and completion guarantees on engineering and construction contracts. We also post surety bonds, which are contractual agreements issued by a surety, for the purpose of guaranteeing our performance on contracts. Bid bonds are also issued by a surety to protect owners and are subject to full or partial forfeiture for failure to perform obligations arising from a successful bid.

        Commercial commitments outstanding as of December 31, 2004 are summarized below:

Insurance

        We carry substantial premium paid, traditional insurance for our business risks including professional liability and general casualty insurance and other coverage which is customary in our industry. We also have surety bond commitments. We believe that we will be able to continue to have access to professional liability and general casualty insurance, as well as surety bonds, with sufficient coverage limits, and on acceptable financial terms necessary to support our business. The cost of such coverage has increased and is expected to continue to increase in the short term. Such cost increases are expected to range annually between 5.0% and 10.0% for various insurance policies and surety bonds. We do not believe that such increases will have a material impact on our business.

        Our current insurance policies include coverage for terrorist acts, except for acts of war. In the future, terrorist act coverage may be limited or expensive to obtain due to the uncertainty of the extension beyond December 2005 of the Terrorism Risk Insurance Act of 2002. While we will attempt to renew our insurance policies without losing terrorism coverage, we do not believe that lack of such coverage would have a material impact on our business and also believe that the commercial insurance market may fill the void in the absence of the current federal program.

        Our risk management personnel continuously monitor the developments in the insurance market. The financial stability of the insurance and surety providers is one of the major factors that we take into account when buying our insurance coverage. Currently our insurance and bonds are purchased from several of the world's leading and financially stable providers often in layered insurance or co-surety arrangements. The built-in redundancy of such arrangements usually enables us to call upon existing insurance and surety suppliers to fill gaps that may arise if other such suppliers become financially unstable.

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect both the results of operations as well as the carrying values of our assets and liabilities. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We base estimates on historical experience and on various other assumptions

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that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as of the date of the financial statements that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        Although our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements, below is a summary of our most critical accounting policies.

Revenue Recognition

        We earn our revenues from different types of services under a variety of different types of contracts, including cost-plus, firm fixed-price and time-and-materials. In recognizing revenue, we evaluate each contractual arrangement to determine the appropriate authoritative literature to apply. We recognize revenue and profit for most of our 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 contracts. In making such estimates, judgments are required to evaluate potential variances in schedule, the cost of materials and labor, productivity, liability claims, contract disputes, or achievement of contract performance standards.

        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 can be reliably estimated. 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.

        We have a history of making reasonable estimates of the extent of progress towards completion, total contract revenue and total contract costs on our engineering and construction contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual total contract revenue and completion costs may vary from estimates.

        Below is a description of the three basic types of contracts from which we may earn revenues under the percent complete basis.

        Cost-Plus Contracts.    Cost-plus contracts can generally 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 negotiated fee or award fee. We generally recognize revenues based on the actual labor costs and non-labor costs we incur, plus the portion of the fixed fee or award fee we have earned to date. If the actual labor hours and other costs we expend are lower than the total number of hours and other costs we have estimated, our revenues related to cost recoveries from the project will be lower than originally estimated. If the actual labor hours and other costs we expend exceed the original estimate, we must obtain a change order, contract modification, or successfully prevail in a claim in order to receive payment for the additional costs.

        In the case of a cost-plus award fee, we generally include in the total contract value the portion of the fee that we are probable of receiving. 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 revenues on fixed price contracts using the percentage-of-completion method. For operations and maintenance contracts, we recognize revenues on fixed price contracts using the straight-line method over the life of the contract. 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. If our actual costs exceed the original estimate, we attempt to obtain a change order or contract modification.

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        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, revenues under these contracts are recognized under the percentage-of-completion method. Revenues on contracts that are not subject to maximum contract values are 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. Our time-and-materials contracts generally include annual billing rate escalation provisions.

        A portion of our contracts are operations and maintenance (O&M) type contracts. Typically, these contracts may include fixed and variable components along with incentive fees. Revenue is recognized on O&M contracts on a straight line basis over the life of the contract once we have an arrangement, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured.

Income Taxes

        In determining net income for financial statement purposes, we must make estimates and judgments in the calculation of tax assets and liabilities and in the determination of the recoverability of the deferred tax assets. The tax assets and liabilities arise from temporary differences between the tax return and the financial statement recognition of revenues and expenses.

        We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our tax provision by recording a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable. As of December 31, 2004 and 2003, we reported a valuation allowance of $6.1 million and $3.2 million, respectively.

        In addition, the calculation of our tax assets and liabilities involves dealing with uncertainties in the application of complex tax regulations. We may recognize a tax asset or adjust taxes payable for anticipated state or federal tax credits, such as those relating to the research and experimentation tax credit.

Pension Benefits

        We have two frozen and one active noncontributory defined benefit pension plans. Our earnings and shareholders' equity may be impacted by these qualified defined benefit plans because FASB Statement of Financial Accounting Standard (SFAS) No. 87, "Employers' Accounting for Pensions," requires that the amounts we record be computed using actuarial valuations. These valuations include many assumptions, but the two most critical assumptions are the discount rate and the expected long-term rate of return on plan assets. We use judgment in selecting these assumptions each year because we have to consider not only current market conditions, but also make judgments about future market trends, changes in the interest rates and equity market performance. We also have to consider factors like the timing and amounts of expected contributions to the plans and benefit payments to plan participants.

        An actual example of how changes in these assumptions can affect our financial statements occurred in 2003. Based on our review of market trends and other factors, we lowered the discount rate assumption to 6.25% for 2003, from 6.95% for 2002. This change, together with other factors such as the effects of the actual return on plan assets, resulted in an adjustment in the shareholders' equity section of our balance sheet to reflect a minimum pension liability adjustment. This adjustment is determined by comparing the accumulated benefit obligation (ABO) to the fair value of plan assets.

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The amount by which the ABO exceeds the fair value of plan assets, after adjusting for previously recorded accrued or prepaid pension cost for the plan, must be recorded as a minimum pension liability adjustment, with a corresponding increase in an intangible asset, if appropriate, and a reduction to shareholders' equity. The non-cash after-tax adjustment related to our recording of a minimum pension liability adjustment in 2003 did not impact earnings, but reduced our shareholders' equity by $15.5 million, net of tax.

        In 2004 we lowered the discount rate assumption to 5.90%. The non-cash after-tax adjustment in 2004 was $2.6 million and is reflected in accumulated other comprehensive loss in the consolidated statements of shareholders' equity and comprehensive income. This adjustment is computed each year and may reverse in the future if financial markets improve and interest rates increase, or may increase if financial market performance is less than expected and/or interest rates decline.

New Accounting Standards

        In December 2004, the FASB issued SFAS No. 123 (Revised) "Share-Based Payment," (SFAS No. 123 (R)), which replaces SFAS No. 123 and supercedes APB No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R) is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. SFAS 123(R) requires that the costs resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) applies to all awards granted after the required effective date, but does not apply to awards granted in periods before the required effective date, except if prior awards are modified, repurchased or cancelled after the effective date. SFAS 123(R) also amends SFAS No. 95, "Statement of Cash Flows," to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. Adoption of SFAS 123(R) will require us to record an expense for stock based compensation plans using the fair value method and will have an impact on our financial statements as management has historically recorded compensation expense in accordance with APB No. 25, which requires the recording of an expense for stock based compensation plans based upon the equity investment's fair market value as compared to the purchase price by the employee on the grant date. We will adopt SFAS No. 123(R) on January 1, 2006 and are currently assessing the impact on our consolidated financial statements.

        The American Jobs Creation Act created a temporary incentive for U.S. multinationals to repatriate accumulated earnings outside of the U.S. by providing an 85% dividend received deductions from controlled foreign corporations. In December 2004, the FASB issued FASB Staff Position No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004," which provides accounting and disclosure guidance for this repatriation provision. We have not completed our evaluation of the new repatriation provisions and we do not expect to complete our evaluation until after Congress or the Treasury Department provides additional guidance clarifying key elements of the provision. We expect to complete our evaluation of the effects of these provisions within a reasonable period of time following the publication of additional clarifying language. The range of possible amounts that we are currently considering eligible for repatriation is between zero and $20.0 million, as of December 31, 2004. The related potential range of income tax cannot be reasonably estimated. While we are currently studying the impact of the one-time favorable repatriation provision, it is our intention to continue to indefinitely reinvest our undistributed foreign earnings.

        In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," which supercedes SAB No. 101, "Revenue Recognition in Financial Statements." SAB No. 104's primary purpose is to rescind accounting guidance contained in SAB No. 101 related to multiple element revenue arrangements, which was effectively superceded as a result of the issuance of Emerging Issues Task Force (EITF) Consensus No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables". While the wording of SAB No. 104 has changed to

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reflect the issuance of EITF No. 00-21, the revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104. SAB No. 104 applies to our O&M type contracts. SAB No. 104 does not have a material impact on our consolidated financial statements.

        In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities," which provides guidance on when to consolidate VIEs. In December 2003, the FASB revised FIN 46 with FIN 46R. In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain VIEs. We adopted the provisions of FIN 46R immediately for entities created after December 31, 2003. For entities created before December 31, 2003, we will adopt FIN 46R in the first quarter of 2005, as required.

        We have interests in multiple joint ventures that are considered VIEs under FIN 46R. These entities facilitate the completion of service contracts that are jointly owned with our joint venture partners. These joint ventures are formed to leverage the skills of the respective partners, and include consulting, construction, design, project management and operations and maintenance contracts. Our risk of loss on joint ventures is similar to what our risk of loss would be if the project was self-performed, other than the fact that the risk is shared with our partner(s). Losses, if incurred, on joint venture projects would be reflected in our financial statements as soon as they are known.

        We have classified entities identified as VIEs into two groups, the first of which includes those entities that we will be required to consolidate under the guidance of FIN 46R in the first quarter of 2005 and the second group which includes those entities which we will not be required to consolidate. At December 31, 2004, the assets and liabilities, including minority interest balances, of the identified VIEs that will be consolidated are $43.1 million and $35.7 million, respectively, of which we currently consolidate $5.4 million and $4.2 million, respectively. At December 31, 2004, the assets and liabilities of the identified VIEs that will not be consolidated are $36.0 million and $31.7 million, respectively.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        In the ordinary course of our operations we are exposed to certain market risks, primarily changes in foreign currency exchange rates and interest rates. This risk is monitored to limit the effect of foreign currency exchange rate and interest rate fluctuations on earnings and cash flow.

        Foreign currency exchange rates.    We are exposed to foreign currency exchange risks in the normal course of our international business operations. Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. We engage in forward foreign exchange contracts to reduce our economic exposure to changes in exchange rates. Generally, forward contracts are entered into to hedge specific commitments and anticipated transactions but not for speculative or trading purposes.

        Interest rates.    Our interest rate exposure is generally limited to our unsecured revolving credit agreement and a building lease agreement that calls for monthly lease payments at a variable interest rate. Historically, we have used short-term variable rate borrowings under the unsecured revolving credit agreement on a limited basis. There were no amounts outstanding under the unsecured revolving credit agreement at December 31, 2004. Our variable lease payments on the building lease agreement are estimated to be approximately $0.1 million per month, based on current interest rates. We have assessed the market risk exposure on these financial instruments and determined that any significant changes to the fair value of these instruments would not have a material impact on our consolidated results of operations, financial position or cash flows.

Item 8. Financial Statements and Supplementary Data

        Reference is made to the information set forth beginning on page F-1.

35

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

        Not applicable.

Item 9A. Controls and Procedures

        We carried out an evaluation as of the last day of the period covered by this Annual Report on Form 10-K, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

        There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2004 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management's Report on Internal Control Over Financial Reporting

        Our management report on internal control over financial reporting is incorporated herein from page F-2 attached hereto.

Item 9B. Other Information

        Not applicable.

36

PART III

Item 10. Directors and Executive Officers of the Registrant

        The following table shows our directors and executive officers as of December 31, 2004:

        See also the information set forth under "Election of Directors," "Continuing Directors" and "Other Executive Officers" in the Proxy Statement, which is incorporated herein by reference.

Item 11. Executive Compensation

        See the information set forth under "Executive Compensation" in the Proxy Statement, which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

        See the information set forth under "Security Ownership of Certain Shareholders and Management" in the Proxy Statement, which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

        None.

Item 14. Principal Accountant Fees and Services

        See the information set forth under "Audit Subcommittee" in the Proxy Statement which is incorporated herein by reference.

37

PART IV

Item 15. Exhibits and Financial Statement Schedules

        Documents Filed as Part of this Report

2.

Financial Statement Schedules

        Financial Statements of Kaiser-Hill Company, LLC as of December 31, 2004 and 2003 and for the three years ended December 31, 2004, 2003 and 2002.

        All financial statement schedules except the one listed above have been omitted because the required information is included in the consolidated financial statements or notes thereto, or because such schedules are not applicable.

3.

Exhibits

        The following exhibits are filed as part of this annual report:

        Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession

38

Articles of Incorporation and Bylaws

Material Contracts—Management Agreements, Compensatory Plans or Arrangements

39

Material Contracts—Other

Code of Ethics

40

Power of Attorney

*

Filed herewith

41

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of CH2M HILL Companies, Ltd.:

        We have audited the accompanying consolidated balance sheets of CH2M HILL Companies, Ltd. (an Oregon corporation) and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CH2M HILL Companies, Ltd. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CH2M HILL Companies, Ltd. and subsidiaries internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.

KPMG LLP

Denver, Colorado
February 23, 2005

F-1

Management's Report on Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

        Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included on page F-3.

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
CH2M HILL Companies, Ltd:

        We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that CH2M HILL Companies, Ltd. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). CH2M HILL Companies, Ltd. and subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, management's assessment that CH2M HILL Companies, Ltd. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, CH2M HILL Companies, Ltd. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

F-3

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CH2M HILL Companies, Ltd. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated February 23, 2005 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

Denver, Colorado
February 23, 2005

F-4

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

Consolidated Balance Sheets
(Dollars in thousands)

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

F-5

CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES

Consolidated Statements of Income
(Dollars in thousands except per share)