Shaw Group (SHAW)

differ from the basis or value (generally representing the acquired entity’s actual or amortized cost) previously recorded by the acquired entity for its assets and liabilities. Accordingly, our post-acquisition financial statements are materially impacted by and dependent on the accuracy of management’s fair value estimates and adjustments. Our experience has been that the most significant of these estimates are the values assigned to construction contracts, production backlog, customer relationships, licenses and technology. These estimates can also have a positive or negative material effect on future reported operating results. Further, our future operating results may also be positively or negatively materially impacted if the final values for the assets acquired or liabilities assumed in our acquisitions are materially different from the fair value estimates which we recorded for the acquisition.

 

Assumptions and Approach Used

 

We performed our annual goodwill impairment analysis during the third quarter of fiscal year 2008 and concluded that no impairment existed. In 2007, we determined that the carrying value of goodwill in our EDS unit in the Fossil & Nuclear segment exceeded its fair value, and as a result, we recorded a goodwill impairment charge of $2.1 million and impaired the remaining $0.4 million carrying value of the EDS customer relationship intangible. There were no impairments of goodwill in 2006.

 

We test goodwill for impairment at each of our reporting unit levels. In evaluating whether an impairment of goodwill exists, we calculate the estimated fair value of each of our reporting units based on estimated projected discounted cash flows as of the date we perform the impairment tests (implied fair value). We then compare the resulting estimated implied fair values, by reporting unit, to the respective book values, including goodwill. If the book value of a reporting unit exceeds its fair value we measure the amount of the impairment loss by comparing the implied fair value (which is a reasonable estimate of the value of goodwill for the purpose of measuring an impairment loss) of the reporting unit’s goodwill to the carrying amount of that goodwill. To the extent that the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, we recognize an impairment loss on the goodwill at that time. In evaluating whether there was an impairment of goodwill, we also take into consideration changes in our business and changes in our projected discounted cash flows, in addition to our stock price and market value of interest bearing obligations. We do not believe any events have occurred since our annual impairment test that would cause an impairment of goodwill. However, our businesses are cyclical and subject to competitive pressures. Therefore, it is possible that the goodwill values of our businesses could be adversely impacted in the future by these or other factors and that a significant impairment adjustment, which would reduce earnings and affect various debt covenants, could be required in such circumstances. Our next required annual impairment test will be conducted in the third quarter of fiscal year 2009 unless indicators of impairment occur prior to that time.

 

 

Nature
of Estimates Required

 

Goodwill represents the excess of the cost of acquired
businesses over the fair value of their identifiable net assets.
Our goodwill balance as of August 31, 2008 was
approximately $507.4 million; most of which related to the
Stone & Webster acquisition in fiscal year 2000 and
the IT Group acquisition in fiscal year 2002 (see
Note 7 — Goodwill, Other Intangibles and Contract
Adjustments and Accrued Contract Losses included in
Part II, Item 8 — Financial Statements and
Supplementary Data). Our estimates of the fair values of the
tangible and intangible assets and liabilities we acquire in
acquisitions are determined by reference to various internal and
external data and judgments, including the use of third party
experts. These estimates can and do

differ from the basis or value (generally representing the
acquired entity’s actual or amortized cost) previously
recorded by the acquired entity for its assets and liabilities.
Accordingly, our post-acquisition financial statements are
materially impacted by and dependent on the accuracy of
management’s fair value estimates and adjustments. Our
experience has been that the most significant of these estimates
are the values assigned to construction contracts, production
backlog, customer relationships, licenses and technology. These
estimates can also have a positive or negative material effect
on future reported operating results. Further, our future
operating results may also be positively or negatively
materially impacted if the final values for the assets acquired
or liabilities assumed in our acquisitions are materially
different from the fair value estimates which we recorded for
the acquisition.

 

Assumptions
and Approach Used

 

We performed our annual goodwill impairment analysis during the
third quarter of fiscal year 2008 and concluded that no
impairment existed. In 2007, we determined that the carrying
value of goodwill in our EDS unit in the Fossil &
Nuclear segment exceeded its fair value, and as a result, we
recorded a goodwill impairment charge of $2.1 million and
impaired the remaining $0.4 million carrying value of the
EDS customer relationship intangible. There were no impairments
of goodwill in 2006.

 

We test goodwill for impairment at each of our reporting unit
levels. In evaluating whether an impairment of goodwill exists,
we calculate the estimated fair value of each of our reporting
units based on estimated projected discounted cash flows as of
the date we perform the impairment tests (implied fair value).
We then compare the resulting estimated implied fair values, by
reporting unit, to the respective book values, including
goodwill. If the book value of a reporting unit exceeds its fair
value we measure the amount of the impairment loss by comparing
the implied fair value (which is a reasonable estimate of the
value of goodwill for the purpose of measuring an impairment
loss) of the reporting unit’s goodwill to the carrying
amount of that goodwill. To the extent that the carrying amount
of a reporting unit’s goodwill exceeds its implied fair
value, we recognize an impairment loss on the goodwill at that
time. In evaluating whether there was an impairment of goodwill,
we also take into consideration changes in our business and
changes in our projected discounted cash flows, in addition to
our stock price and market value of interest bearing
obligations. We do not believe any events have occurred since
our annual impairment test that would cause an impairment of
goodwill. However, our businesses are cyclical and subject to
competitive pressures. Therefore, it is possible that the
goodwill values of our businesses could be adversely impacted in
the future by these or other factors and that a significant
impairment adjustment, which would reduce earnings and affect
various debt covenants, could be required in such circumstances.
Our next required annual impairment test will be conducted in
the third quarter of fiscal year 2009 unless indicators of
impairment occur prior to that time.

 

differ from the basis or value (generally representing the acquired entity’s actual or amortized cost) previously recorded by the acquired entity for its assets and liabilities. Accordingly, our post-acquisition financial statements are materially impacted by and dependent on the accuracy of management’s fair value estimates and adjustments. Our experience has been that the most significant of these estimates are the values assigned to construction contracts, production backlog, customer relationships, licenses and technology. These estimates can also have a positive or negative material effect on future reported operating results. Further, our future operating results may also be positively or negatively materially impacted if the final values for the assets acquired or liabilities assumed in our acquisitions are materially different from the fair value estimates which we recorded for the acquisition.

 

  Assumptions and Approach Used

 

We completed our annual impairment test during the third quarter of fiscal year 2007 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and concluded that the carrying value of goodwill in our EDS unit in the Fossil & Nuclear segment exceeded its fair value. As a result, we recorded a goodwill impairment charge of $2.1 million and impaired the remaining $0.4 million carrying value of the EDS customer relationship intangible in fiscal year 2007.

 

We test goodwill for impairment at each of our reporting unit levels. In evaluating whether an impairment of goodwill exists, we calculate the estimated fair value of each of our reporting units based on estimated projected discounted cash flows as of the date we perform the impairment tests (implied fair value). We then compare the resulting estimated implied fair values, by reporting unit, to the respective book values, including goodwill. If the book value of a reporting unit exceeds its fair value we measure the amount of the impairment loss by comparing the implied fair value (which is a reasonable estimate of the value of goodwill for the purpose of measuring an impairment loss) of the reporting unit’s goodwill to the carrying amount of that goodwill. To the extent that the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, we recognize an impairment loss on the goodwill at that time. In evaluating whether there was an impairment of goodwill, we also take into consideration changes in our business and changes in our projected discounted cash flows, in addition to our stock price and market value of interest bearing obligations. We do not believe any events have occurred since our annual impairment test that would cause an impairment of goodwill. However, our businesses are cyclical and subject to competitive pressures. Therefore, it is possible that the goodwill values of our businesses could be adversely impacted in the future by these or other factors and that a significant impairment adjustment, which would reduce earnings and affect various debt covenants, could be required in such circumstances. Our next required annual impairment test will be conducted in the third quarter of fiscal year 2008 unless indicators of impairment occur prior to that time.

 

 

  Nature of Estimates Required, Assumptions and Approach Used

 

Effective September 1, 2005, we adopted FASB Statement No. 123(R), “Share-Based Payment” (Statement 123(R)). This statement replaced FASB Statement No. 123, “Accounting for Stock-Based Compensation” (Statement 123) and superseded APB No. 25. Statement 123(R), and requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. This statement was adopted using the modified prospective method of application, which requires us to recognize compensation cost on a prospective basis. For stock-based awards granted after September 1, 2005, we recognize compensation expense based on estimated grant date fair value using the modified Black-Scholes option-pricing model, considering various weighted-average assumptions. These weighted-average assumptions (volatility, risk-free interest rate, expected term, grant-date fair value) are based on multiple factors, including future and historical employment and post-employment option exercise patterns for certain relatively homogeneous participants and their impact on expected terms of the options and the implied volatility of our stock price.

 

  Nature of Estimates Required, Assumptions and Approach Used

 

Our pension benefit obligations and expenses are calculated using actuarial models and methods, in accordance with Statement of Financial Accounting Standards No. 158 (SFAS No. 158), “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 123(R).” Two of the more critical assumptions and estimates used in the actuarial calculations are the discount rate for determining the current value of plan benefits and the expected rate of return on plan assets. Other critical assumptions and estimates used in determining benefit obligations and plan expenses, including demographic factors such as retirement age, mortality, and turnover, are also evaluated periodically and updated accordingly to reflect our actual experience.

 

Discount rates are determined annually and are based on rates of return of high-quality corporate bonds (Moody’s AA rating). Expected long-term rates of return on plan assets are determined annually and are based on an evaluation of our plan assets, historical trends, and experience, taking into account current and expected market conditions. Plan assets are comprised primarily of equity and debt securities.

 

The discount rate utilized to determine the projected benefit obligation at the measurement date for our pension plans increased to 5.75% at August 31, 2007, compared to 5.0% at August 31, 2006, reflecting higher interest rates experienced during the last fiscal year. Correspondingly, the rate of return expected on our plan assets was increased to 7.25% at August 31, 2007 from 6.4% at August 31, 2006. To determine the rates of return, we consider the historical experience and expected future performance of the plan assets, as well as the current and expected allocation of the plan assets.

 

The actuarial assumptions used in determining our pension benefits may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, and longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect our financial position or results of operations.

 

SFAS No. 158 requires prospective application; recognition and disclosure requirements are effective for our fiscal year ended August 31, 2007. The impact of adopting SFAS No. 158 resulted in a reduction of $11.6 million to stockholders’ equity.

 

  Other Recent Accounting Pronouncements

 

For a discussion of other recent accounting pronouncements and the effect they could have on our consolidated financial statements, see Note 22 — New Accounting Pronouncements included in Part II, Item 8 — Financial Statements and Supplementary Data.