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From Olympic stadiums to nuclear cleanups, CH2M Hill is as ubiquitous as it is anonymous. An interview with CFO Michael Lucki.
Alix Stuart, CFO Magazine
June 1, 2011
CH2M Hill, a $6.3 billion consulting, engineering, and construction company, is much better known than its unassuming name would suggest. With nine business groups in 80 countries and counting, the Colorado-based firm is the force behind some of the world's best-known public-works projects. Right now, for example, it is overseeing the construction of London's 2012 Olympic venues, the expansion of the Panama Canal, and several of the Environmental Protection Agency's Superfund cleanup sites. CH (as it is often called) is also looking at hundreds of potential projects around the globe, from nuclear remediation work in Japan to new oil-field developments in Iraq.
"I view our company as almost a mutual fund," says CFO Michael Lucki, who joined the company from Ernst & Young last November. "Each business group focuses on a different end-market, with different economic cycles, creating a balanced portfolio." Lucki's E&Y experience has proven helpful, he says, because "at E&Y I had 8 to 12 clients at any given time, and here I have 8 to 12 projects at the same time. But at CH they're all the same fact pattern, so it seems easier."
Which of your business groups are hot right now, and which are lagging?
Our microelectronics and manufacturing businesses that deal with semiconductors and anything to do with photovoltaic flat screens are hot. [CH2M Hill designs and builds manufacturing facilities.] Demand for those have gone through the roof over the last six months. Power [including designing and building power-generation plants] has also taken off dramatically this year. Whereas if you look at the U.S. transportation market [which includes highway, bridge, rail, and airport projects], with the federal deficits and state deficits, and funding and appropriations [still in flux], that business has been very slow the last year.
What are your priorities as a relatively new CFO?
I was brought in to focus on four areas. One is capital structure and obtaining financing as we look at acquisitions. We have a $700 million credit facility with seven banks that we just renewed for five years, and we're also looking at term loans. Clearly, the cost of debt right now is very high; it seems like the banks have forgotten everything they went through three years ago. So we're evaluating all those as to the most effective type of debt we would like to take on if the need arises.
My second focus is acquisitions. Right now, CH is number one in about eight markets, including water, energy, and pipelines. Having a number-one ranking is very important to us, and as other companies consolidate, we could possibly lose some opportunities, so we have a couple of acquisitions in progress and others we're considering. Then, internally, we're continuing a cost-reduction program that we've had under way for a number of years. I'm also trying to split up federal and nonfederal projects for accounting purposes, rather than have a one-size-fits-all model.
Being in 80-some countries, you must have a pretty significant exposure to Foreign Corrupt Practices Act violations, including bribery. How do you mitigate those risks?
One of our guiding principles is that we won't work for any local government agencies in countries where we believe there's a high degree of corruption. Instead, we will work for large, global companies that have the same FCPA policies and procedures as we would.
We [also] have extensive employee training, especially within our international operations, and we try to avoid acquiring foreign companies that have done a lot of work on the municipal or government side, because they've been doing business a certain way and you can't change them.
What about two other major risks in global business, namely the volatility of currencies and commodities?
We put currency risk onto our clients. We'll write a contract in a local currency to cover local costs and then possibly split the contract so that part of it stays in U.S. dollars and part is in local currency. So we do some hedging [with financial instruments], but not a lot. [Editor's note: In 2010, the company gained $13.5 million on foreign-currency translation.]
From a commodity perspective, we try to get price escalators in our contracts, where if the price goes over x amount the client will pick up that increase. For example, in our power jobs we tend to have a price escalator for copper, which is a big component of a power plant. Customers usually are willing to [go along with that] because they pay more only if prices actually go up. If they want us to take on the commodity risk, our price tends to be a lot higher.
Looking at the nuclear cleanup that Japan faces, how costly might that effort be?
It could be a $10 billion–to–$20 billion cleanup, so we're actively pursuing opportunities that may exist there. But the challenge is that Japan historically has been a pretty closed environment for [foreign] engineering and construction, so time will tell whether we'll have an opportunity or not.
On a more positive note, you've benefited from a rise in the price of gold, although not in the way people might expect.
True, the price rise doesn't affect us directly, but it does affect some of our customers, because they are now spending more money to expand their mining operations, and so we may get more environmental permitting work from that. Every day that the price goes up many more mines become much more affordable.
And what about "black gold"?
Our focus to date has been on the United Arab Emirates, Abu Dhabi, and Dubai, but we're also looking at Saudi Arabia. Saudi Arabia plans major capital improvements — I've heard numbers up to $250 billion to be spent on refining and chemical infrastructure over the next 10 years. And if multinational firms go back into Iraq for oil-field development, that's a strong area for us.
In 2000, CH became an employee-owned company. Why does that structure make sense?
CH has always had a degree of employee ownership, and in 2000 we began to pay bonuses in a mix of stock and cash [versus all cash], to allow the balance sheet to build net worth, or equity. That gave us the balance sheet to get bonding and surety [insurance, which is critical to public-works projects], and allowed us to do more design-build projects, to the point where today such projects account for about 20% of our total.
CH2M Hill has its own stock market, essentially?
Yes, every quarter for two weeks you can buy or sell your shares. You can buy one share, sell all your shares, or any combination in between. So it's truly a very liquid market for employees. And we have a very simple formula for the stock price, based on the four prior quarters' earnings, shareholders' equity, [and some fixed multipliers]. Frankly, our employees probably feel more comfortable with our formula evaluation [than with publicly traded stock] because they know that some outside event, like the financial meltdown in 2007, or Fukushima [the Japanese nuclear-power-plant disaster], will not affect the share price. [Editor's note: On May 5, the price was set at $50.43 per share, a 7.9% increase from the previous quarter, and up 23% over the year.]
With 8,000-plus shareholders, you already have to do all of the Securities and Exchange Commission reporting. Why not just go public?
That's something that we, as a management team, evaluate all the time. Right now our plans are to continue our ownership structure, but as we look at acquisitions and other things in the future that may change.