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Shaw Group 10-K 2007 Documents found in this filing:
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission file number: 1-12227
4171 Essen Lane
Baton Rouge, Louisiana 70809
(225) 932-2500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ 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 a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was approximately
$1.4 billion (computed by reference to the closing sale
price of the registrant’s common stock on the New York
Stock Exchange on February 28, 2007, the last business day
of the registrant’s most recently completed second fiscal
quarter).
The number of shares of the registrant’s common stock
outstanding at November 26, 2007 was 81,723,194.
Portions of the registrant’s definitive proxy statement for
its 2008 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission (SEC) within
120 days of August 31, 2007, are incorporated by
reference into Part III of this Annual Report on
Form 10-K
for the fiscal year ended August 31, 2007 (this
Form 10-K).
The financial statements of The Shaw Group Inc. (Shaw, we, us,
and our) for the fiscal years ended August 31, 2006 and
2005 included in this Annual Report on
Form 10-K
for our fiscal year ended August 31, 2007 reflect a
restatement to correct accounting errors. The net aggregate
impact of the accounting errors on net income for fiscal years
2006 and 2005 is a decrease of $0.6 million and
$0.3 million, respectively; and our previously reported
retained earnings as of September 1, 2004 is reduced by
$2.4 million. These errors impact multiple previous
reporting periods.
As reported in our Current Report on
Form 8-K
dated November 13, 2007, in connection with a review of our
Annual Report on
Form 10-K/A
(Amendment No. 1) for the fiscal year ended
August 31, 2006 (2006 Annual Report), our Quarterly Report
on
Form 10-Q/A
(Amendment No. 1) for the three months ended
November 30, 2006 (2007 1st Quarter
Form 10-Q/A),
and our Quarterly Reports on
Form 10-Q
for the three months ended February 28, 2007 and
May 31, 2007, the Staff of the Corporate Finance Division
of the Securities and Exchange Commission (the Staff) issued a
letter in which the Staff commented on certain items in our
consolidated financial statements. Specifically, the
Staff’s comments addressed certain charges —
primarily recorded and disclosed in the 2007 1st Quarter
Form 10-Q/A —
that related to fiscal years 2006 and 2005.
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As a result of our discussions with the Staff regarding the
appropriate periods in which to reflect these adjustments, we
restated our financial statements for fiscal years 2005 and 2006
and the first three fiscal quarters of 2007. The adjustments
include errors in the accounting for the following items:
These restatements are reflected within this
Form 10-K.
We did not amend any previously filed reports.
As a result of our discussions with the Staff, on
November 12, 2007, our management and the Audit Committee
of our Board of Directors concluded that: (1) Shaw’s
previously issued financial statements and any related reports
of its independent registered public accounting firms for:
(a) the fiscal year ended August 31, 2005;
(b) the fiscal year ended August 31, 2006; and
(c) each of the three month periods ending
November 30, 2006, February 28, 2007, and May 31,
2007, should no longer be relied upon; (2) Shaw’s
earnings and press releases and similar communications should no
longer be relied upon to the extent that they relate to the
aforementioned financial statements; (3) Shaw’s
financial statements for the fiscal years ended August 31,
2005 and August 31, 2006 and the three month periods ending
November 30, 2006, February 28, 2007, and May 31,
2007 should be restated to reflect the changes discussed above;
and (4) the restatement of such financial statements would
be set forth in this Annual Report on
Form 10-K
when filed.
See Notes 1, 21 and 23 of our consolidated financial
statements included in Part II, Item 8 —
Financial Statements and Supplementary Data of this
Form 10-K
for additional information.
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Certain statements and information in this
Form 10-K
may constitute “forward-looking statements” within the
meaning of the Private Securities Litigation Act of 1995. The
words “believe,” “expect,”
“anticipate,” “plan,” “intend,”
“foresee,” “should,” “would,”
“could” or other similar expressions are intended to
identify forward-looking statements, which are generally not
historical in nature. These forward-looking statements are based
on our current expectations and beliefs concerning future
developments and their potential effect on us. While management
believes that these forward-looking statements are reasonable as
and when made, there can be no assurance that future
developments affecting us will be those that we anticipate. All
comments concerning our expectations for future revenues and
operating results are based on our forecasts for our existing
operations and do not include the potential impact of any future
acquisitions. Our forward-looking statements involve significant
risks and uncertainties (some of which are beyond our control)
and assumptions that could cause actual results to differ
materially from our historical experience and our present
expectations or projections. Important factors that could cause
actual results to differ materially from those in the
forward-looking statements include, but are not limited to,
those described in: (1) Part I,
Item 1A — Risk Factors and elsewhere in this
Form 10-K;
(2) our reports and registration statements filed from time
to time with the SEC; and (3) other announcements we make
from time to time.
Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of
this
Form 10-K.
We undertake no obligation to publicly update or revise any
forward-looking statements after the date they are made, whether
as a result of new information, future events or otherwise.
The Shaw Group Inc. (Shaw, we, us, our) was founded in 1987 by
Jim Bernhard, Chairman and Chief Executive Officer, and two
colleagues as a fabrication shop in Baton Rouge, Louisiana. We
have evolved into a diverse engineering, technology,
construction, fabrication, environmental and industrial services
organization. We provide our services to a diverse customer base
that includes multinational oil companies and industrial
corporations, regulated utilities, independent and merchant
power producers, government agencies and other equipment
manufacturers. Approximately 27,000 employees deliver our
services from more than 150 locations, including 22
international locations. Our fiscal year 2007 revenues were
approximately $5.7 billion. At August 31, 2007, our
backlog of approximately $14.3 billion was diversified in
terms of customer concentration, end markets served and services
provided. Approximately 48% of our backlog was comprised of
“cost-reimbursable” contracts and 52% of
“fixed-price” contracts. Most of our major fixed-price
contracts contain some cost risk-sharing mechanisms such as
escalation or price adjustments for items such as labor and
commodity prices. For an explanation of these contracts, see
Part I, Item 1 — Business — Types
of Contracts, below.
Through organic growth and a series of strategic acquisitions,
we have significantly expanded our expertise and the breadth of
our service offerings.
In July 2000, we acquired the assets of Stone &
Webster, a leading global provider of engineering, procurement
and construction (EPC), construction management and consulting
services to the energy, chemical, environmental and
infrastructure industries. Combined with our existing pipe
fabrication and construction capabilities, this acquisition
transformed us into a vertically-integrated provider of
engineering, procurement and construction services.
Our May 2002 acquisition of the IT Group assets significantly
increased our position in the environmental and infrastructure
markets, particularly in the federal services sector. The IT
Group acquisition further diversified our end market, customer
and contract mix and provided new opportunities to cross-sell
services, such as environmental remediation services, to our
existing EPC customers.
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Our October 2006 acquisition of 20% of Westinghouse enhanced our
opportunity to participate in the domestic and international
nuclear electric power markets. Westinghouse provides advanced
nuclear plant designs and equipment, fuel, and a wide range of
other products and services to the owners and operators of
nuclear power plants. For an explanation of this investment, see
Investment in Westinghouse Segment in Part I,
Item 1 — Business below. We have acquired and
developed significant intellectual property, including
downstream petrochemical technologies, induction pipe bending
technology and environmental decontamination technologies. We
believe we have significant expertise in effectively managing
the procurement of materials, subcontractors and craft labor.
Depending on the project, we may function as the primary
contractor, as a subcontractor to another firm or as a
construction manager engaged by the customer to oversee another
contractor’s compliance with design specifications and
contracting terms. We provide technical and economic analysis
and recommendations to owners, investors, developers, operators
and governments primarily in the global fossil and nuclear power
industries and energy and chemicals industries. Our services
include competitive market valuations, asset valuations,
assessment of stranded costs, plant technical descriptions and
energy demand modeling. Our proprietary olefin and refinery
technologies, coupled with ethyl benzene, styrene, cumene and
Bisphenol A technologies, allow us to offer clients integrated
refinery and petrochemicals solutions. Stone &
Webster, in conjunction with key alliance partners, including
Badger Licensing LLC, Total Petrochemicals, and Axens offers
leading technology in many sectors of the refining and
petrochemical industries.
Shaw Capital, Inc., a wholly owned subsidiary of Shaw, leverages
our global presence, technical and operational experience, and
transactional capabilities to identify and develop targeted
project investment opportunities. Shaw Capital, Inc. receives
management fees from its partners and affiliates and may also
have the opportunity to participate with equity ownership in
projects. Shaw Capital’s partners and affiliates provide
access to over $1 billion in equity, mezzanine, and debt
investment opportunities, to the energy, chemicals,
environmental, infrastructure, and related markets.
Operating
Segments
Segment revenue and profit information, additional financial
data and commentary on recent financial results for operating
segments are provided in Note 14 — Business
Segments to the consolidated financial statements and in
Part II, Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Operating businesses that are reported as segments include
Fossil & Nuclear, Energy and Chemicals (E&C),
Environmental and Infrastructure (E&I), Maintenance,
Fabrication and Manufacturing (F&M), and Investment in
Westinghouse. A summary description of each of our operating
segments follows.
The Fossil & Nuclear segment provides a range of
project-related services, including design, engineering,
construction, procurement, technology and consulting services,
primarily to the global fossil and nuclear power generation
industries.
Nuclear. We support the U.S. domestic
nuclear industry with engineering, maintenance and construction
services. We hold a leadership position in nuclear power uprates
for existing plants, having brought in excess of 2,000 megawatts
of new nuclear generation to the electric power transmission
grid in the U.S. between 1984 and present. In addition, we
are currently serving as architect-engineer for the National
Enrichment Facility and are providing engineering services in
support of new nuclear units in Korea and the People’s
Republic of China. We anticipate growth in the global nuclear
power sector, driven in large part by the U.S., China and India.
Our support of existing U.S. utilities, coupled with our
investment in Westinghouse, is expected to result in increased
levels of activity in this sector for us. Safe and reliable
operation of existing plants, concerns associated with climate
change, and incentives under the Energy Policy Act of 2005 have
prompted significant interest in new nuclear construction in the
U.S. Several domestic utilities are developing plans for
new baseload nuclear generation. According to the Nuclear Energy
Institute and the Nuclear Regulatory Commission, in the U.S.,
there are plans for 36 new units under development as of October
2007,
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with the Westinghouse advanced passive AP1000 design being
considered for at least 12 of them. Our existing base of nuclear
services work, coupled with our collaboration with Westinghouse
and the AP1000 design, should position us to capitalize on
growth within this industry.
Clean Coal-Fired Generation. The rise in oil
prices and wide fluctuations in natural gas prices have prompted
electric power companies in the U.S. to pursue construction
of new coal-fired power plants utilizing advanced combustion and
emission control technologies. Coal-fired capacity is typically
expensive to build but has relatively low operating costs. The
continued operating cost advantage of coal over other fossil
fuels has prompted electric utilities and independent power
producers (IPP’s) in recent years to focus on clean
coal-fired generation. During fiscal year 2007, we executed EPC
contracts for three new, highly-efficient coal generation
facilities: an 800 megawatt supercritical plant in North
Carolina, a 600 megawatt ultra-supercritical plant in Arkansas,
and a 585 megawatt circulating fluidized bed (CFB) facility in
Virginia. In addition, we are negotiating a contract on a 660
megawatt CFB facility. We continue to observe a steady stream of
new opportunities in this market and expect our experience to
position us to share in new clean coal-fired generation awards.
Air Quality Control (AQC). Our AQC business
includes domestic and selected international markets for flue
gas desulfurization (FGD) retrofits, installation of mercury
emission controls, projects related to controlling fine particle
pollution, carbon capture, and selective catalytic reduction
(SCR) markets.
Environmental regulations and related air quality concerns have
increased the need to retrofit existing coal-fired energy plants
with modern pollution control equipment. We have been selected
to provide EPC retrofit services on many of the power plants
requiring FGD for sulfur dioxide emissions control. The March
2005 Clean Air Interstate Rule (CAIR) issued by the
U.S. Environmental Protection Agency (EPA), which reduces
the allowable sulfur dioxide emissions in the eastern half of
the U.S. by 70% (from 2003 levels) by 2015 and reduces
emissions of nitrogen oxides by 60% (from 2003 levels) by 2015,
was a major driver for this market. According to the June 2007
Argus Scrubber Report, we believe that over 70,000 to 80,000
megawatts or approximately 60% to 70% of the domestic coal
plants that require FGD retrofit systems are in engineering,
construction or startup phase. We believe that we are the market
leader for these services, being awarded approximately 25% to
30% of the estimated domestic market for these services. We
expect most of the currently contracted domestic FGD projects
will achieve commercial operation by the end of 2009 in order to
meet regulatory requirements. We expect the remaining 25% of the
domestic FGD market of approximately 30,000 to 40,000 megawatts
to be contracted over the next three to five years.
There is also a growing market for installation of mercury
emission controls at existing coal-fired power plants. The Clean
Air Mercury Rule (CAMR) adopted by EPA in May 2005 and state
regulations imposing even more stringent mercury emission limits
are another driver for this retrofit market. Connecticut,
Massachusetts, New Jersey, Maryland, and Wisconsin currently
have state mercury emissions rules and at least 15 other states
are in the process of establishing mercury emission rules. We
have two EPC mercury control projects under execution. We
believe the domestic market for these services, based on
existing federal regulations, is approximately $4 billion
over the next four years. The market could increase in the
future as more states establish new rules.
AQC EPC opportunities outside the FGD and mercury control
markets, such as SCR, are expected to be limited to smaller
plant maintenance project work in 2008. Most electric power
producers have completed their fleet NOx emissions control
installations. However, we plan to pursue NOx control work with
existing clients.
Fine particle pollution regulations were promulgated by the EPA
in March, 2007. The EPA issued a rule defining requirements for
state plans to reduce concentrations of particulates in areas
with levels of fine particle pollution that do not meet national
air quality standards. State plans under this final rule, known
as the Clean Air Fine Particle Implementation Rule, are now
being developed. States must meet the fine particle pollution
standard by 2010. However, in their 2008 implementation plans,
states may propose an attainment date extension for up to five
years. Those areas for which EPA approves an extension must
achieve EPA’s national air quality standards for fine
particulates no later than 2015.
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Gas-Fired Generation. In fiscal year 2007
active investment in new power generation was focused primarily
on coal due to its relatively low operating cost compared to
natural gas. We have recently observed some renewed interest in
new gas-fired generation as electric utilities and IPP’s
looked to diversify their generation options, but we expect the
number of gas-fired projects to remain small in comparison to
expected coal and nuclear projects. However, recent initiatives
in many states to reduce emissions of carbon dioxide and other
“greenhouse gases” that are perceived to be
contributing to global warming could stimulate demand for
gas-fired power plants because gas-fired plants have
substantially lower emissions of carbon dioxide than coal-fired
plants. Gas-fired plants are typically less expensive to
construct than coal-fired and nuclear plants, but have
comparatively higher fuel costs. We expect this market to expand
and believe our capabilities and expertise will position us as a
market leader.
Other Markets. Shaw Energy Delivery Services,
Inc. (EDS) designs, builds, operates, and maintains power
transmission and distribution facilities and systems. Our
services include design, construction and maintenance of
transmission and distribution lines as well as substations.
Our E&I segment designs and executes remediation solutions
involving contaminants in soil, air and water. We also provide
project and facilities management and other related services for
non-environmental construction, watershed restoration, emergency
response services, outsourcing of privatization markets, program
management, operations and maintenance solutions to support and
enhance domestic and global land, water and air transportation
systems.
Federal Markets. Our core services include
environmental restoration, regulatory compliance, facilities
management, emergency response and design and construction
services to U.S. government agencies, such as the
Department of Defense (DOD), the Department of Energy (DOE), the
Environmental Protection Agency (EPA), and the Federal Emergency
Management Agency (FEMA). Environmental restoration activities
are centered on engineering and construction services to support
customer compliance with the requirements of the Comprehensive
Environmental Response, the Compensation and Liability Act
(CERCLA or Superfund) and the Resource Conservation and Recovery
Act (RCRA). Additionally, we provide regulatory compliance
support for the requirements of the Clean Water Act, Clean Air
Act and Toxic Substances Control Act. For the DOE, we are
presently working on several former nuclear weapons production
sites where we provide engineering, construction and
construction management for nuclear activities. For the DOD, we
are involved in projects at several Superfund sites and Formerly
Utilized Sites Remedial Action Program (FUSRAP) sites managed by
the U.S. Army Corps of Engineers. The DOD is increasingly
using performance-based contracting vehicles, including
guaranteed fixed-price contracts, wherein we assume
responsibility for cleanup and regulatory closure of
contaminated sites for a firm fixed-price. We purchase
environmental insurance to provide protection from unanticipated
cost growth due to unknown site conditions, changes in
regulatory requirements and other project risks. For the
U.S. Army, we are working on the Army’s chemical
demilitarization program at several sites.
Our Facilities Management business provides integrated planning,
operations and maintenance services to federal customers. These
services traditionally include operating logistics facilities
and equipment, providing public works maintenance services,
operating large utilities systems, managing engineering
organizations, supervising construction and maintaining public
safety services including police, fire and emergency services.
Our customers include the DOE, NASA, the U.S. Army and the
U.S. Navy.
We expect that a significant portion of future DOD and DOE
environmental expenditures will be directed to cleaning up
hundreds of domestic and international military bases and to
restoring former nuclear weapons facilities to acceptable
conditions. The DOD has determined there is a need to ensure
that the hazardous wastes present at these sites, often located
near population centers, do not pose a threat to the surrounding
population. We believe that we are positioned to assist DOD with
decontamination and remediation activities at these sites.
Similarly, the DOE has long recognized the need to stabilize and
safely store nuclear weapons materials and to remediate areas
contaminated with hazardous and radioactive waste, and we
believe that we are well positioned to assist DOE with these
efforts. We continue to provide engineering and project
leadership
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support to other DOE nuclear programs such as the Mixed Oxide
Fuel Fabrication and Yucca Mountain projects.
Commercial, State and Local Markets. Our core
services include environmental consulting, engineering
construction, management and operation and maintenance services
to private-sector and state and local government customers. We
provide full service environmental capabilities, including site
selection, permitting, design, build, operation,
decontamination, demolition, remediation and redevelopment. We
also provide complete life cycle management of solid waste, with
capabilities that range from site investigation through landfill
design and construction to post-closure operations and
maintenance or site redevelopment.
Coastal and Natural Resource Restoration. We
have performed wetland construction, mitigation, restoration and
related work in the Everglades, Chesapeake Bay area and other
areas throughout the U.S. New opportunities for these types
of projects are present in both the governmental and commercial
markets. The Coastal Wetlands Planning Protection and
Restoration Act (CWPPRA) provides federal funds to conserve,
restore and create coastal wetlands and barrier islands, and we
believe our E&I segment is positioned to participate in
wetlands and coastal restoration work in Louisiana and other
locations throughout the U.S.
Transportation Infrastructure. The Safe,
Accountable, Flexible and Efficient Transportation Equity
Act — A Legacy for Users SAFETEA-LU stimulates new
transportation project funding opportunities. By leveraging our
capabilities across several business segments, we believe that
we can participate in large scale and localized infrastructure
projects by partnering with government agencies and with private
entities. We offer financing solutions to, and design and build
operations services for, our clients so that their critical
needs arising from aging infrastructure, congestion and
expansion requirements can be addressed.
Ports and Marine Facilities. We are pursuing
opportunities in maritime engineering and design services
including navigation, sediment management, port and waterway
development, coastal engineering, environmental services,
shoreline protection and marine security capabilities. As part
of this strategy, in fiscal year 2007, we acquired a maritime
engineering and design firm to enhance our portfolio of services
to government and commercial port and marine facility clients.
We believe this acquisition expands our marine infrastructure
planning services and positions us to provide a full range of
design, engineering and project management services to domestic
and international maritime clients.
Other Markets. Other service offerings include
maritime services, water quality initiatives and our
environmental liability transfer programs. Our maritime
engineering and design services including navigation, sediment
management, port and waterway development, coastal engineering,
environmental services, shoreline protection and marine security
capabilities. Our commercial water-treatment technologies target
public drinking water providers, municipal authorities and
industrial waste water treatment facilities with testing,
assessments and permitting services and specialized equipment
and water treatment systems to help meet regulatory standards.
Through two proprietary programs, we also serve clients who
desire to transfer or reduce their environmental liabilities. We
have created the “Shaw Insured Environmental Liability
Distribution” or
“SHIELD“tm
program, a proprietary structured transaction tool that uses
environmental insurance products and distributes environmental
liabilities for parties desiring to substantially reduce
contingent environmental liabilities. Another program is
provided through our subsidiary The LandBank Group, Inc.
(LandBank), which purchases at a discount environmentally
impaired properties with inherent value, purchases environmental
insurance to limit the environmental liabilities associated with
the properties, when appropriate, and then remediates
and/or takes
other steps to improve and increase the value of the properties.
Our E&C segment provides a range of project-related
services, including design, engineering, construction,
procurement, technology and consulting services, primarily to
the oil and gas, refinery, petrochemical, and chemical
industries. We expect that high crude oil prices will continue
to support capital expenditures by our major oil and
petrochemical customers and may provide opportunities for us to
increase our activity levels in these service areas.
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Chemicals. Demand in the chemical industries
remains strong, fueled by strong growth in the economies of
China and India as well as the rising standard of living in
other developing economies. We expect the number of new
petrochemical projects to continue to grow, driven primarily by
increasing demand for base chemicals, ethylene, propylene, and
other downstream petrochemical products. Internationally, we
believe the Middle East and China provide the majority of
petrochemical capacity expansion opportunities. In the Middle
East, we expect new petrochemical opportunities due to
relatively high crude oil prices and the availability of lower
priced feed stock and natural gas and the proximity of the
Middle East to the European and Asian markets. During fiscal
year 2007, we were awarded petrochemical projects in China and
Saudi Arabia for our Acrylonitrile —
butadiene — styrene (ABS) polymer emulsion technology.
ABS is a “bridge” polymer between commodity plastics
and higher performance thermoplastics.
Refining. We believe that refiners are
searching for new products that can be produced from petroleum
and considering integration production of those products into
petrochemical facilities. We believe the demand for our services
in the refining industry has been driven by refiners’ needs
to process a broader spectrum of heavier crude oils and to
produce a greater number of products. Additionally, we believe
relatively high crude oil prices, combined with refinery
capacity constraints and demand stimulated by clean fuels and
clean air legislation, are contributing to increasing
opportunities primarily in the U.S. and Europe. We are
currently participating in a major domestic refinery upgrade
incorporating capacity and clean fuels capabilities. While the
refining process is largely a commodity activity, refinery
configuration depends primarily on the grade of crude feedstock
available, desired mix of end-products and considerations of
capital and operating costs.
Fluid Catalytic Cracking (FCC) remains a key refining
technology. We were awarded a number of grass root technology
contracts in fiscal year 2007, primarily to facilities in Asia.
We have an exclusive agreement with one international customer
to license a key FCC-derived technology called Deep Catalytic
Cracking (DCC) that encourages the refiner’s entry
into the petrochemical arena. We believe this technology is
emerging because of its ability to produce propylene, a base
chemical that is in short supply and for which demand is growing
faster than that of ethylene.
Ethylene. Ethylene represents one of our core
technologies. We estimate global demand for ethylene may grow at
a rate of over 4% per year for the next three years, driven by
the expected increased demand for polyethylene, polyesters,
polystyrene and PVC, mainly in Asia. We expect that major oil
and petrochemical companies will integrate refining and
petrochemical facilities in order to improve profits, providing
additional opportunities for us. In petrochemicals, we have
extensive expertise in the construction of ethylene plants,
which convert gas
and/or
liquid hydrocarbon feed stocks into ethylene, and derivative
facilities which provide the source of many higher-value
chemical products, including packaging, pipe, polyester,
antifreeze, electronics, tires and tubes. We also perform
services related to gas-processing including propane
dehydrogenation facilities, gas treatment facilities and
liquefied natural gas plants.
We believe ethylene production from petroleum derived naphtha is
declining due to the availability of alternative low cost ethane
feed stock in the Middle East. This change impacts the economic
viability of gas feed steam crackers in North America where the
natural gas prices are more volatile as a result of commodity
market trading conditions. We expect new facilities to favor
primarily gas feed crackers based on ethane extracted from
natural gas. In fiscal year 2007, we were awarded the contract
for a major expansion of an ethylene plant in Singapore by a
major integrated oil and gas company. We estimate our market
share to be approximately 40% of the market during the last
15 years. We are aware of only four ethylene technology
licensor competitors and are well positioned to compete for new
opportunities in this market.
We perform routine and outage/turnaround maintenance including
restorative, repair, renovation, modification, predictive and
preventative maintenance services to customers in their
facilities primarily in North America. Our Maintenance segment
is positioned to assist the industrial market by providing a
full range of integrated asset life cycle capabilities that
complement our EPC services. We provide our clients with
reliability services, turnarounds and outage services, capital
construction services, tank design construction and maintenance,
insulation, painting, and scaffolding services. Our complete
range of services spanning from
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reliability engineering to hands-on maintenance expertise
combine to assist our clients by increasing capacity, reducing
failure and optimizing cost, ensuring the highest return on
critical production assets within their facilities.
Nuclear Plant Maintenance and
Modifications. The U.S. currently has 104
operating nuclear reactors that continue to require engineering
and maintenance services to support operations, planned outages,
life/license extension, material upgrades, capacity up rates and
improve performance. In addition to supporting operations and
improving performance, plant restarts, up rate related
modifications and new plant construction provide opportunities
for further expansion. We also believe there are opportunities
to take on additional in-plant support services.
We provide system-wide maintenance and modification services to
40 of the 104 operating domestic nuclear reactors. We
concentrate on more complicated, non-commodity type projects
where our historical expertise, and project management skills
can add value to the project. We also believe we have a leading
position in the decommissioning and decontamination business for
commercial nuclear energy plants.
Fossil Plant Maintenance and Modifications. We
provide fossil plant maintenance services for energy generation
facilities throughout North America. We believe that potential
opportunities exist for further expansion into this market as
energy demand continues to increase and customers seek longer
run time, higher reliability and better outage performance. In
addition, we believe our expertise developed by providing outage
and construction planning and execution in the nuclear industry
is valuable and is also recognized in the fossil power industry.
Chemical Plant Maintenance and Capital Construction
Services. We have a continuous presence in over
60 field service locations in the U.S. We service the
petrochemical, specialty chemicals, oil and gas, manufacturing
and refining markets. We believe that petrochemicals, clean
fuels and refining markets provide the best growth opportunities
for us. Expansion of these markets has been enhanced by
governmental regulations supporting cleaner burning fuels and
the supply of commodity chemicals to support the current
domestic construction market. Our Maintenance segment also
includes a capital construction component serving, in most
cases, existing client sites.
Our F&M segment is among the largest worldwide suppliers of
fabricated piping systems. Demand for our F&M
segment’s products is typically driven by capital projects
in the electric power, chemical and refinery industries.
Fabrication. We believe our expertise and
proven capabilities to furnish complete piping systems on-budget
and on-time in this global market have positioned us among the
largest suppliers of fabricated piping systems for energy
generation facilities in the U.S. We are also a leading
supplier worldwide, serving both our other business segments and
third parties. Piping systems are the critical path item in
chemical plants that convert raw or feedstock materials to
products. Piping system integration accounts for a significant
portion of the total
man-hours
associated with constructing energy generation and chemical and
other materials processing facilities. We fabricate
fully-integrated piping systems for chemical customers around
the world.
We provide fabrication of complex piping systems from raw
materials including carbon and stainless steel, and other
alloys, such as nickel, titanium and aluminum. We fabricate pipe
by cutting it to specified lengths, welding fittings on the pipe
and bending the pipe to precise customer specifications. We
currently operate pipe fabrication facilities in Louisiana,
Arkansas, Oklahoma, South Carolina, Utah, Venezuela and through
a joint venture in Bahrain. Our South Carolina facility is
authorized to fabricate piping for nuclear energy plants and
maintains a nuclear piping American Society of Mechanical
Engineers (ASME) certification.
We believe our induction pipe bending technology is one of the
most advanced, sophisticated and efficient technologies
available. We utilize this technology and related equipment to
bend pipe and other carbon steel and alloy items for industrial,
commercial and architectural applications. Pipe bending can
provide significant savings in labor, time and material costs,
as well as product strengthening. In addition, we have commenced
a
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robotics program that we believe may result in productivity and
quality levels not previously attained in this industry. By
utilizing robotics, as well as new welding processes and
production technology, we are able to provide our customers a
complete range of fabrication capabilities.
Manufacturing and Distribution. We operate
manufacturing facilities in Louisiana and New Jersey where
products are ultimately sold to operating plants, engineering
and construction firms as well as to our other business
segments. Manufacturing our own pipe fittings and maintaining
considerable inventories of fittings and pipe enables us to
realize greater efficiencies in the purchase of raw materials,
reduces overall lead times and lowers total costs. We operate
distribution centers in Louisiana, Oklahoma, Texas, Georgia and
New Jersey that distribute our products and products
manufactured by third parties.
Westinghouse serves the domestic and international nuclear
electric power industry by supplying advanced nuclear plant
designs, licensing, engineering services, equipment, fuel and a
wide range of other products and services to the owners and
operators of nuclear power plants to help keep nuclear power
plants operating safely and competitively worldwide.
Westinghouse technology is utilized in over 60 of the 104
operating domestic nuclear reactors and over 40% of the reactors
operating internationally. We are aware that plans for over 30
new domestic reactors are under development, with the
Westinghouse advanced passive AP1000 design being considered for
at least 12 of them. Internationally, Westinghouse technology is
currently being used for six reactors being constructed in South
Korea and four reactors in China.
Our Investment in Westinghouse segment includes our 20% equity
interest in Westinghouse, which we, along with Toshiba and
Ishikawajima-Harima Heavy Industries Co., Ltd, acquired on
October 16, 2006 from British Nuclear Fuels plc.
Our customers are principally multinational oil companies and
industrial corporations, regulated utilities, independent and
merchant power producers, governmental agencies and other
equipment manufacturers. We conduct our marketing efforts
principally with an in-house sales force. In addition, we engage
independent contractors to market to certain customers and
territories. We pay our sales force a base salary plus, when
applicable, an annual bonus. We pay our independent contractors
on a commission basis that may also include a monthly retainer.
A portion of our business, primarily our nuclear and fossil
power plant maintenance business, is seasonal, resulting in
fluctuations in revenues and gross profit in our Maintenance
segment during our fiscal year. Generally, the spring and autumn
are the peak periods for our Maintenance segment.
See Note 14 — Business Segments included in
Part II, Item 8 — Financial Statements and
Supplementary Data in the consolidated financial statements for
information regarding our customer concentrations. Additionally,
see in Part II, Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Backlog for information regarding our
backlog concentrations as of August 31, 2007.
We employ in excess of 27,000 people, including
approximately 12,000 permanent employees in our administrative
and engineering offices and fabrication facilities, and
approximately 15,000 employees at projects for which the
headcount varies seasonally. Approximately 4,000 of these
employees were represented by labor unions pursuant to
collective bargaining agreements. We often employ union workers
on a project-specific basis. We believe current relationships
with our employees (including those represented by unions) are
satisfactory. We are not aware of any circumstances that are
likely to result in a work stoppage at any of our facilities. In
addition, see Item 1A — Risk Factors for a
discussion of the risk related to work stoppages and other labor
issues.
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For our EPC services, we often rely on third party equipment and
raw materials manufacturers and subcontractors to complete our
projects. We are not substantially dependent on any individual
third party to support these operations; however, we are subject
to possible cost escalations based on inflation, currency and
other market price fluctuations resulting from supply and demand
imbalances. The current activity levels in many markets we serve
are generating higher demand for labor, materials and equipment
that we rely on to execute our contracts. We expect the current
market for these inputs to continue to remain competitive
throughout our fiscal year 2008.
Our principal raw materials for our pipe fabrication operations
are carbon steel, stainless and other alloy piping, which we
obtain from a number of domestic and foreign primary steel
producers. The market for most raw materials is extremely
competitive, and certain types of raw materials are available
from only one or a few specialized suppliers.
We purchase directly from other manufacturers a majority of our
pipe fittings. These arrangements generally lower our pipe
fabrication costs because we are often able to negotiate
advantageous purchase prices as a result of the volumes of our
purchases. If a manufacturer is unable to deliver the materials
according to the negotiated terms, we may be required to
purchase the materials from another source (or manufacture on
our own the pipe fittings) at a higher price. We keep items in
stock at each of our facilities and transport items between our
facilities as required. We obtain more specialized materials
from suppliers when required for a project.
In addition, see Item 1A — Risk Factors for a
discussion of our dependence on joint venture or consortium
partners, subcontractors, and equipment manufacturers.
In order to perform nuclear construction, fabrication, and
installation activities of ASME III Code items such as vessels,
piping systems, supports and spent fuel canister/storage
containments at nuclear plant sites, our domestic subsidiary
engineering and construction operations maintain the required
ASME certifications (N, N3, NPT, & NA stamps) (NS Cert).
These ASME certifications also authorize us to serve as a
material organization for the supply of ferrous and nonferrous
material. We also maintain the National Board nuclear repair
certification (NR stamp) and National Board registration
certification (NB stamp) for N and N3 stamped nuclear components.
In order to perform fabrication and repairs of coded piping
systems, our domestic construction operations and fabrication
facilities, as well as our subsidiaries in Derby, U.K. and
Maracaibo, Venezuela, maintain the ASME certification
(U & PP stamps). The majority of our fabrication
facilities, as well as our subsidiaries in Derby, U.K. and
Maracaibo, Venezuela have also obtained the required ASME
certification (S stamp) and the National Board certification (R
stamp).
Our domestic subsidiary engineering and construction operations
also maintain the required ASME certification (S stamp) and the
National Board repair certification (R stamp), in addition to
the ASME certifications (A, PP & U stamps) and the
National Board registration certification (NB stamp) for S, A,
PP, and U stamped items.
Our Laurens, South Carolina, facility also maintains a nuclear
piping ASME certification (NPT stamp) and is authorized to
fabricate piping for nuclear power plants and to serve as a
material organization to manufacture and supply ferrous and
nonferrous material. This facility is also registered by the
International Organization of Standards (ISO 9002).
Substantially all of our North American engineering operations,
as well as our U.K. operations, are also registered by the
International Organization of Standards (ISO 9001). This
registration provides assurance to our customers that we have
procedures to control quality in our fabrication processes.
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We consider our computerized project control system,
SHAW-MANtm,
and our web-based earned value application,
SHAWTRACtm,
to be proprietary assets. We believe that our Stone &
Webster subsidiary has a leading position in technology
associated with the design and construction of plants that
produce ethylene, which we protect and develop with license
restrictions and a research and development program.
Through Badger Licensing, LLC, we expanded our proprietary
technology licensing business through the acquisition of the
Shell Heritage Bisphenol A (BPA) technology from Resolution
Performance Products. Badger Licensing LLC, our joint venture
with ExxonMobil Chemical, is in a leading position to supply
proprietary ethyl benzene, styrene monomer, cumene and BPA
technologies to the petrochemical industry. In other
Stone & Webster technology partnerships, we are the
exclusive provider of front-end basic engineering for
Sasol’s Fischer-Tropsch technology in the areas of both
gas-to-liquids and coal-to-liquids.
Through our acquisition of the assets of the IT Group in 2002,
we have acquired certain patents that are useful in
environmental remediation and related technologies. The
technologies include the
Biofast®
in-situ remediation method, a vacuum extraction method for
treating contaminated formations, and a method for soil
treatment, which uses ozone. The IT Group acquisition also
included the acquisition of proprietary software programs that
are used in the management and control of hazardous wastes and
the management and oversight of remediation projects.
In our acquisition of Envirogen, Inc. in 2003, we gained
patented technologies, including processes for the control of
biomass in Fluidized Bed Reactors that enhance overall system
degradative performance and operating costs, biodegradation of
MTBE and other compounds utilizing specialized bacteria and
degradative techniques, and designs for Membrane Biological
Reactors that reduce operating costs and downtime associated
with membrane cleaning for water treatment.
In addition, see Item 1A — Risk Factors for the
impact of changes in technology or new technology developments
by our competitors could have on us.
The markets served by our Fossil & Nuclear, E&C,
Maintenance and E&I segments are highly competitive and for
the most part require substantial resources and highly-skilled
and experienced technical personnel. A large number of regional,
national and international companies are competing in the
markets we serve, and certain of these competitors have greater
financial and other resources, and more experience, market
knowledge and customer relationships. Neither we nor any one of
our competitors maintain a dominant market share position in the
segments’ markets.
In pursuing piping, engineering and fabrication projects, we
experience significant competition in both international and
domestic markets. In the U.S., there are a number of smaller
pipe fabricators; while internationally, our principal
competitors are divisions of large industrial firms. Some of our
competitors, primarily in the international sector, have greater
financial and other resources than we have.
Companies that we compete with in our Fossil & Nuclear
segment include: Bechtel; Fluor Corporation; Washington Group
International; Black & Veatch; and Zachary. Companies
that we compete with in our E&C segment include: Chicago
Bridge & Iron Company; KBR Inc.; Jacobs Engineering
Group, Inc.; TECHNIP; and JGC Corporation. Companies that we
compete with in our E&I segment include: CH2M Hill;
URS Corporation, TetraTech; Washington Group International;
and KBR, Inc. Companies that we compete with in our Maintenance
segment include: Fluor Corporation; Day &
Zimmerman/The Atlantic Group; Turner Industries; KBR, Inc.; and
Jacobs Engineering Group, Inc. Companies that compete with our
Investment in Westinghouse segment include: Areva; General
Electric (GE); Mitsubishi; Hitachi; and Atomstroyexport.
In addition, see Item 1A — Risk Factors for a
discussion of the risks related to competition we face in each
of our business segments.
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Discontinued
Operations
For information regarding our discontinued operations, see
Item 8 — Financial Statements and Supplementary
Data.
For detailed financial information regarding each business
segment and export sales information, see
Note 14 — Business Segments included in
Part II, Item 8 — Financial Statements and
Supplementary Data.
In addition, see Item 1A — Risk Factors for a
discussion of the risks related to our foreign operations.
Our backlog represents management’s estimate of the amount
of awards that we expect to result in future revenues. Awards in
backlog represent legally binding agreements for projects that
management believes are probable to proceed. Awards are
evaluated by management on a
project-by-project
basis, and are reported for each period shown based upon the
binding nature of the underlying contract, commitment or letter
of intent, and other factors, including the economic, financial
and regulatory viability of the project and the likelihood of
the contract proceeding. Projects in backlog may be altered
(increased or decreased) for scope changes
and/or may
be suspended or cancelled at any time by our clients.
See Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations for
additional information about our backlog as of August 31,
2007 and 2006.
Our work is performed under two general types of contracts:
cost-reimbursable plus a fee or
mark-up
contracts and fixed-price contracts, both of which may be
modified by cost escalation provisions or other risk sharing
mechanisms, and incentive and penalty provisions. Each of our
contracts may contain components of more than one of the
contract types discussed below. During the term of a project,
the contract or components of the contract may be renegotiated
to include characteristics of a different contract type. We
focus our EPC activities on a cost-reimbursable plus a fee or
mark-up and
negotiated fixed-price work, each as described in more detail
below. We believe these types of contracts may help reduce our
exposure to unanticipated and unrecoverable cost overruns. Our
fixed-price contracts are generally obtained by direct
negotiation rather than by competitive bid. When we negotiate
any type of contract, we frequently are required to accomplish
the scope of work and meet certain performance criteria within a
specified timeframe; otherwise, we could be assessed damages,
which in some cases are
agreed-upon
liquidated damages.
At August 31, 2007, approximately 48% of our backlog was
comprised of cost-reimbursable contracts and 52% was fixed-price
contracts.
Our cost-reimbursable contracts include the following:
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Our fixed-price contracts include the following:
U.S. Government contracts are typically awarded through
competitive bidding or negotiations pursuant to federal
acquisition regulations and may involve several bidders or
offerors. Government contracts also typically have annual
funding limitations and are limited by public sector budgeting
constraints. Government contracts may be terminated at the
discretion of the government agency with payment of compensation
only for work performed and commitments made at the time of
termination. In the event of termination, we generally receive
some allowance for profit on the work performed. Many of these
contracts are multi-year indefinite duration, indefinite
quantity (IDIQ) agreements. These programs provide estimates of
a maximum amount the agency expects to spend. Our program
management and technical staffs work closely with the client to
define the scope and amount of work required. Although these
contracts do not initially provide us with any specific amount
of work, as projects are defined, the work may be awarded to us
without further competitive bidding. We generally include in our
backlog an estimate of the work we expect to receive under these
specific agreements.
Although we generally serve as the prime contractor on our
federal government contracts, or as part of a joint venture,
which is the prime contractor, we may also serve as a
subcontractor to other prime contractors. With respect to
bidding on large, complex environmental contracts, we have
entered into and expect to continue to enter into joint venture
or teaming arrangements with competitors.
U.S. Government contracts generally are subject to
oversight audits by government representatives, to profit and
cost controls and limitations, and to provisions permitting
modification or termination, in whole or in part, without prior
notice, at the government’s discretion. Government
contracts are subject to specific procurement regulations and a
variety of socio-economic and other requirements. Failure to
comply with such regulations and requirements could lead to
suspension or debarment, for cause, from future government
contracting or subcontracting for a period of time. Among the
causes for debarment are violations of various statutes,
including those related to employment practices, the protection
of the environment, the accuracy of records and the recording of
costs.
Our continuing service agreements with customers expedite
individual project contract negotiations through means other
than the formal bidding process. These agreements typically
contain a standardized set of purchasing terms and
pre-negotiated pricing provisions and often provide for periodic
price adjustments. Service agreements allow our customers to
achieve greater cost efficiencies and reduced cycle times in the
design and fabrication of complex piping systems for power
generation, chemical and refinery projects. In addition, while
these agreements do not typically contain committed volumes, we
believe that these agreements provide us with a steady source of
new projects and help minimize the impact of short-term pricing
volatility and reduce our sales pursuit costs.
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We are subject to numerous international, federal, state and
local requirements relating to the protection of the environment
and the safety and health of personnel and the public. These
requirements relate to a broad range of our activities,
including those concerning emissions into the air, discharges
into waterways, generation, storage, handling, treatment and
disposal of hazardous materials and wastes. Environmental
protection laws and regulations generally require us to obtain
and comply with a wide variety of environmental registrations,
licenses, permits and other approvals. Failure to comply with
these laws and regulations may result in the assessment of
administrative, civil
and/or
criminal penalties, the imposition of remedial requirements, and
the issuance of orders enjoining future operations.
The environmental, health and safety laws and regulations to
which we are subject are constantly changing, and it is
impossible to predict the effect of such laws and regulations on
us in the future. We believe we are in substantial compliance
with all applicable environmental, health and safety laws and
regulations. To date, our costs with respect to environmental
compliance have not been material, and we have not incurred any
material environmental liability. However, we can provide no
assurance that we will not incur material environmental costs or
liabilities in the future. For additional information on how
environmental matters may impact our business, see
Item 1A — Risk Factors.
In addition, under CERCLA and comparable state laws, we may be
required to investigate and remediate hazardous substances and
other regulated materials that have been released into the
environment. CERCLA and comparable state laws typically impose
joint and several liability without regard to whether a company
knew of or caused the release of the materials, and liability
for the entire cost of
clean-up can
be imposed upon any responsible party. We could also incur
environmental liability at sites where we have been hired by
potentially responsible parties (PRPs) to remediate
contamination of the site. Some PRPs have from time to time
sought to expand the reach of CERCLA, RCRA and similar state
statutes to make the remediation contractor responsible for site
cleanup costs in certain circumstances. These PRPs have asserted
that environmental contractors are owners or operators of
hazardous waste facilities or that the contractors arranged for
treatment, transportation or disposal of hazardous substances.
If we are held responsible under CERCLA or RCRA for damages
caused while performing services or otherwise, we may be forced
to incur cleanup costs directly, notwithstanding the potential
availability of contribution or indemnification from other
parties. Over the past several years, the EPA and other federal
agencies have significantly constricted the circumstances under
which they will indemnify their contractors against liabilities
incurred in connection with the investigation and remediation of
contaminated properties.
In response to recent scientific studies suggesting that
emissions of carbon dioxide and other “greenhouse
gases” may be contributing to global warming, the
U.S. Congress is actively considering, and several states
have already adopted, legislation to reduce emissions of
greenhouse gases. In addition, the EPA is considering adopting
regulations to control emissions of carbon dioxide in response
to the U.S. Supreme Court’s April 2007 decision in
Massachusetts, et al. v. EPA. Any legislation or
regulation restricting emissions of greenhouse gases could have
a significant impact on our business. One potential negative
impact is a reduction in demand for construction of new
coal-fired power plants, but this impact could be offset by an
increase in demand for construction of new nuclear power plants.
It is not possible to predict at this time whether any such
legislation or regulation would have an overall negative or
positive impact on our business.
We are a Louisiana corporation. Our executive offices are
located at 4171 Essen Lane, Baton Rouge, Louisiana 70809. Our
telephone number is 1-225-932-2500. All of our periodic report
filings with the SEC pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (Exchange Act),
are made available, free of charge, through our website located
at
http://www.shawgrp.com,
including our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and any amendments to these reports. These reports are available
through our website as soon as reasonably practicable after we
electronically file with or furnish such material to the SEC. In
addition, the public may read and copy any materials we file
with the SEC at the SEC’s Public Reference Room at
100 F Street, NE, Washington, D.C.
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20549, or on the SEC’s Internet website located at
http://www.sec.gov.
The public may obtain information on the operation of the Public
Reference Room and the SEC’s Internet website by calling
the SEC at
1-800-SEC-0330.
We will timely provide the annual certification of our Chief
Executive Officer to the New York Stock Exchange (NYSE). We
filed last year’s certification on March 30, 2007. In
addition, our Chief Executive Officer and Chief Financial
Officer each have signed and filed the certifications under
Section 302 of the Sarbanes-Oxley Act of 2002 with this
Form 10-K.
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As of August 31, 2007, our backlog was approximately
$14.3 billion. There can be no assurance that the revenues
projected in our backlog will be realized or, if realized, will
result in profits. Further, project terminations, suspensions or
adjustments versus the original scope of our original estimates
may occur with respect to contracts reflected in our backlog as
discussed in more detail below.
Our backlog consists of projects for which we have signed
contracts or commitments from customers, including contracts
where there are legally binding agreements without the scope
being defined. Commitments may be in the form of written
contracts for specific projects, purchase orders or indications
of the amounts of time and materials we need to make available
for customers’ anticipated projects. Our backlog includes
expected revenue based on engineering and design specifications
that may not be final and could be revised over time. Our
backlog also includes expected revenues for government and
maintenance contracts that may not specify actual dollar amounts
of work to be performed. For these contracts, our backlog is
based on an estimate of work to be performed based on our
knowledge of customers’ stated intentions or our historic
experience.
Because of changes in project scope and schedule, we cannot
predict with certainty when or if backlog will be performed. In
addition, even where a project proceeds as scheduled, it is
possible that contracted parties may default and fail to pay
amounts owed to us. Material delays, cancellations or payment
defaults could materially affect our financial condition,
results of operation and cash flow, and may reduce the value of
our stock.
Reductions in our backlog due to cancellation by a customer or
for other reasons adversely affect, potentially to a material
extent, the revenues and earnings we actually receive from
contracts included in our backlog. Many of the contracts in our
backlog provide for cancellation fees in the event customers
cancel projects. These cancellation fees usually provide for
reimbursement of our out-of-pocket costs, revenues for work
performed prior to cancellation and a varying percentage of the
profits we would have realized had the contract been completed.
However, we typically have no contractual right upon
cancellation to the total revenues reflected in our backlog.
Projects may remain in our backlog for extended periods of time.
If we experience significant project terminations, suspensions
or scope adjustments to contracts reflected in our backlog, our
financial condition, results of operation, and cash flow may be
adversely impacted, and the value of our stock may be reduced.
A substantial portion of our revenues is directly or indirectly
derived from awards of large-scale domestic and international
projects that can span several years. It is difficult to predict
whether and when we will receive such awards due to the lengthy
and complex bidding and selection process, which is affected by
a number of factors, such as market conditions, financing
arrangements, governmental approvals and environmental matters.
Because a significant portion of our revenues is generated from
large projects, our results of operations and cash flows can
fluctuate from quarter to quarter depending on the timing of our
contract awards. In addition, many of these contracts are
subject to client financing contingencies and, as a result, we
are subject to the risk that the customer will not be able to
secure the necessary financing for the project, which could
delay or result in the cancellation of the project.
Approximately 48% of our backlog as of August 31, 2007 was
from cost-reimbursable contracts and the remaining 52% was from
fixed-price contracts. Revenues and gross profit from
cost-reimbursable, long-term contracts can be significantly
affected by contract incentives/penalties that may not be known
or finalized until the later stages of the contract term. Under
fixed-price contracts, we agree to perform the contract for a
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fixed-price.
While we benefit from costs savings and earnings from approved
change orders, under
fixed-priced
contracts, we are generally unable to recover cost overruns to
the approved contract price. Under certain
fixed-price
contracts, we share with the customer any savings up to a
negotiated or target ceiling. When costs exceed the negotiated
ceiling price, we may be required to reduce our fee or to absorb
some or all of the cost overruns. Contract prices are
established based, in part, on cost estimates that are subject
to a number of assumptions, including future economic
conditions, third party costs, estimated schedule to complete
the work, availability of labor and materials. If these
estimates prove inaccurate or circumstances change, cost
overruns could occur, having a material adverse effect on our
business and results of our operations. For example, our profit
for these projects could decrease or we could experience losses
if we are unable to secure fixed pricing commitments from our
suppliers at the time the contracts are entered into or if we
experience cost increases for material or labor during the
performance of the contracts. We have incurred significant
losses in the past three years on fixed-price contracts.
We enter into contractual agreements with customers for some of
our engineering, procurement and construction services to be
performed based on agreed upon reimbursable costs and labor
rates. Some of these contracts provide for the customer’s
review of the accounting and cost control systems to verify the
completeness and accuracy of the reimbursable costs invoiced.
These reviews could result in reductions in reimbursable costs
and labor rates previously billed to the customer.
Many of our contracts require us to satisfy specified design,
engineering, procurement or construction milestones in order to
receive payment for the work completed or equipment or supplies
procured prior to achievement of the applicable milestone. As a
result, under these types of arrangements, we may incur
significant costs or perform significant amounts of services
prior to receipt of payment. If the customer determines not to
proceed with the completion of the project or if the customer
defaults on its payment obligations, we may face difficulties in
collecting payment of amounts due to us for the costs previously
incurred or for the amounts previously expended to purchase
equipment or supplies. In addition, many of our customers for
large EPC projects are project-specific entities that do not
have significant assets other than their interests in the EPC
project. It may be difficult for us to collect amounts owed to
us by these customers. If we are unable to collect amounts owed
to us for these matters, we may be required to record a charge
against earnings related to the project which could result in a
material loss.
We estimate total contract costs in pricing our fixed-price
contracts by incorporating assumptions to address inflation and
fluctuations in market price for labor, equipment and materials.
However, we cannot predict these variable components with
certainty. As a result, we may incur total costs that exceed
original estimates due to increased materials, labor or other
costs, which could contribute to a lower than expected return or
losses on our projects that are not governed by escalation
clauses resulting in a material adverse effect on our results of
operations and financial condition.
Our projects generally involve complex design and engineering,
significant procurement of equipment and supplies and extensive
construction management. We may encounter difficulties in the
design or engineering, equipment and supply delivery, schedule
changes and other factors, some of which are beyond our control,
that impact our ability to complete the project in accordance
with the original delivery schedule. In addition, we generally
rely on third-party equipment manufacturers as well as
third-party subcontractors to assist us with the completion of
our contracts. In some cases, the equipment we purchase for a
project or that is provided to us by the customer does not
perform as expected, and these performance failures may result
in delays in completion of the project or additional costs to us
or the customer and, in some cases, may require us to obtain
alternate equipment at additional cost. Any delay by
subcontractors to complete their portion of the project, or any
failure by a subcontractor to satisfactorily complete its
portion of the project, as well as other factors beyond our
control, may result in delays in the overall progress of the
project or cause us to incur additional costs, or both. These
delays and additional costs may be substantial, and we may be
required to compensate the customer for these delays. While we
may recover these additional costs from the responsible
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vendor, subcontractor or other third-party, we may not be able
to recover all of these costs in all circumstances.
In addition, some contracts may require our customers to provide
us with design or engineering information or with equipment or
materials to be used on the project. In some cases, the customer
may provide us with deficient design or engineering information
or equipment or may provide the information or equipment to us
later than required by the project schedule. The customer may
also determine, after commencement of the project, to change
various elements of the project. We are subject to the risk that
we might be unable to obtain, through negotiation, arbitration,
litigation or otherwise, adequate amounts to compensate us for
the additional work or expenses incurred due to customer
requested change orders or failure by the customer to timely
provide required items. A failure to obtain adequate
compensation for these matters could require us to record an
adjustment to amounts of revenues and gross profit that were
recognized in prior periods. Any such adjustments, if
substantial, could have a material adverse effect on our results
of operations and financial condition.
As more fully discussed in Part II, Item 7 —
Management’s Discussion and Analysis of Financial Condition
and Results of Operations and in Note 1 —
Description of Business and Summary of Significant Accounting
Policies of our consolidated financial statements in
Item 8 — Financial Statements and Supplementary
Data, a substantial portion of our revenues are recognized using
the percentage-of-completion method of accounting, which is a
standard method for EPC contracts. The percentage-of-completion
accounting practices that we use result in our recognizing
contract revenues and earnings ratably over the contract term in
proportion to our incurrence of contract costs. The earnings or
losses recognized on individual contracts are based on estimates
of contract revenues, costs and profitability. Although a
significant portion of our contracts are cost-reimbursable and
our financial loss exposure on cost-reimbursable contracts is
generally limited, the loss provisions or adjustments to the
contract profit and loss resulting from future changes in our
estimates or contract penalty provisions could be significant
and could result in a reduction or elimination of previously
recognized earnings or result in losses. In certain
circumstances, these adjustments could be material to our
operating results.
We engineer, construct and perform services in large industrial
facilities where accidents or system failures can be disastrous.
Any catastrophic occurrences in excess of insurance limits at
locations engineered or constructed by us or where our products
are installed or services performed could result in significant
professional liability, product liability, warranty and other
claims against us. In addition, under some of our contracts, we
must use new metals or processes for producing or fabricating
pipe for our customers. The failure of any of these metals or
processes could result in warranty claims against us for
significant replacement or reworking costs.
Further, the engineering and construction projects we perform
expose us to additional risks including equipment failures,
personal injuries, property damage, shortages of materials and
labor, work stoppages, labor disputes, weather problems and
unforeseen engineering, architectural, environmental and
geological problems, each of which could significantly impact
our performance and materially impact our financial statements.
In addition, once our construction is complete, we may face
claims with respect to the performance of these facilities,
which could materially impact our financial statements.
In certain circumstances, we guarantee facility completion by a
scheduled acceptance date or achievement of certain acceptance
and performance testing levels. Failure to meet any such
schedule or performance requirements could result in a reduction
of revenues or additional costs, and these additional costs
could
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exceed projected profits. Our revenues could be reduced by
liquidated damages paid under contractual penalty provisions,
which can be substantial and can accrue on a daily basis. In
addition, our actual costs could exceed our projections.
Performance problems for existing and future contracts could
cause actual results of operations to differ materially from
those anticipated by us and could cause us to suffer damage to
our reputation within our industry and our client base. For
examples of the kinds of claims which may result from liquidated
damages provisions and cost overruns, see
Note 19 — Long-Term Construction Accounting for
Revenue and Profit/Loss Recognition Including Claims, Unapproved
Change Orders and Incentives to our consolidated financial
statements included in Part II, Item 8 —
Financial Statements and Supplementary Data.
We rely on third-party partners, equipment manufacturers as well
as third-party subcontractors to complete our projects. To the
extent our partners cannot execute their portion of the work or
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 work, we could experience
losses in the performance of these contracts. Our inability to
obtain materials from these suppliers could jeopardize our
ability to timely complete a project or realize a profit. In
addition, if a partner, subcontractor or a manufacturer is
unable to deliver its services, equipment or materials according
to the negotiated terms, we may be required to purchase the
services, equipment or materials from another source at a higher
price. This 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 often enter into joint ventures as part of our environmental
and engineering, procurement and construction businesses so that
we can jointly bid and perform on a particular project. The
success of these and other joint ventures depends, in large
part, on the satisfactory performance of the contractual
obligations by our joint venture partners. If our partners do
not meet their obligations, the joint venture may be unable to
adequately perform and 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, which could also affect our reputation in the
industries we serve.
The industries we serve historically have been, and will likely
continue to be, cyclical in nature and vulnerable to general
downturns in the domestic and international economies.
Consequently, our results of operations have fluctuated and may
continue to fluctuate depending on the demand for products and
services from these industries.
We are a major provider of services to U.S. governmental
agencies and therefore are exposed to risks associated with
government contracting, including reductions in government
spending, cancelled or delayed appropriations specific to our
projects, heightened competition and modified or terminated
contracts, which could have a material adverse effect on our
business. For the fiscal year ended August 31, 2007, 18% of
our backlog is with U.S. governmental agencies.
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Government customers typically can terminate or modify contracts
with us at their convenience. As a result, our backlog may be
reduced or we may incur a loss if a government agency decides to
terminate or modify a contract.
We are the subject of audits, cost reviews and investigations by
government contracting oversight agencies. During the course of
an audit, the oversight agency may disallow costs. Cost
disallowances may result in adjustments to previously reported
revenues and may require refunding previously collected cash
proceeds.
In addition, our failure to comply with the terms of one or more
of our government contracts or government regulations and
statutes could result in our being suspended or barred from
future government projects for a significant period of time and
possible civil or criminal fines and penalties and the risk of
public scrutiny of our performance, each of which could have a
material adverse effect on our business.
Legislatures typically appropriate funds on a
year-by-year
basis, while contract performance may take more than one year.
As a result, contracts may be only partially funded, and we may
not realize all of our potential revenues and profits from a
contract with the government. Appropriations, and the timing of
payment, may be influenced by, among other things, the state of
the economy, competing political priorities, curtailments in the
use of government contracting firms, budget constraints, the
timing and amount of tax receipts and the overall level of
government expenditures.
To prepare financial statements in conformity with accounting
principles generally accepted in the U.S. (GAAP),
management is required to make estimates and assumptions, as of
the date of the financial statements, which affect the reported
values of assets and liabilities and revenues and expenses and
disclosures of contingent assets and liabilities. Areas
requiring significant estimates by our management include, among
other things:
Our actual results could differ materially from our estimates.
Changes in reported amounts may be recorded in future periods.
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We incur significant interest cost on the Westinghouse bonds
that we issued to finance this acquisition. We can provide no
assurance that we will receive dividends from our investment in
an amount sufficient to cover these costs.
While we have significant influence as a member on the board of
Westinghouse acquisition companies, we generally do not have any
rights to control the outcome of material decisions and
activities related to the Westinghouse business. In addition, we
have limited access to and ability to disclose the details of
the Westinghouse business and its operations.
We are subject to certain limitations on our ability to sell our
investment without the approval of the other shareholders. In
addition, under the terms of our shareholders’ agreements
relating to the Westinghouse investment, the other shareholders
of Westinghouse would have a right to require us to sell our
shares to them if we undergo certain change of control events or
if we go bankrupt. In addition, when the bonds for our
investment matures in 2013 (or earlier in the event of certain
defaults), we will be required to either refinance such
indebtedness or to exercise our put option to sell our
investment back to Toshiba. As a result, we could lose some or
all of our investment in Westinghouse.
Although we have obtained certain exclusive rights to
participate in Westinghouse advanced passive AP 1000 nuclear
plant projects and preferred rights to provide other services,
we can provide no assurance that we will obtain significant
business from this arrangement.
Our Credit Facility contains certain financial covenants,
including a leverage ratio, a minimum fixed-charge coverage
ratio and a defined minimum net worth. In addition, we are
required to file our quarterly and annual reports with the SEC
on a timely basis. The defined terms used in calculating the
financial covenants require us to follow GAAP, which requires
the use of judgments and estimates, and may change from time to
time based on new accounting pronouncements. We may not be able
to satisfy these ratios, especially if our operating results
fall below management’s expectations as a result of, but
not limited to, the impact of other risk factors that may have a
negative impact on our future earnings. Additionally, we may not
be able to file our SEC reports on a timely basis. See
Part II, Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources for a
discussion of our Credit Facility.
A breach of any of these covenants or our inability to comply
with the required financial ratios could result in a default
under our Credit Facility, and we can provide no assurance that
we will be able to obtain the necessary waivers or amendments
from our lenders to remedy a default. In the event of any
default not waived, the lenders under our Credit Facility are
not required to lend any additional amounts or issue letters of
credit and could elect to declare any outstanding borrowings,
together with accrued interest and other fees, to be immediately
due and payable, or require us to apply all of our available
cash to repay any borrowings then outstanding and cash
collateralize any outstanding letters of credit at the time of
default. If we are unable to repay borrowings with respect to
our Credit Facility when due, our lenders could proceed against
their collateral, which consists of substantially all of our
assets, including property, equipment and real estate. If any
future indebtedness under our Credit Facility is accelerated, we
can provide no assurance that our assets would be sufficient to
repay such indebtedness in full. As of August 31, 2007, we
had no outstanding borrowings under the Credit Facility with
outstanding letters of credit inclusive of both domestic
financial and domestic performance of approximately
$731.0 million.
In addition, we have entered into indemnity agreements with our
sureties that contain cross-default provisions. Accordingly, in
the event of a default under our Credit Facility, we would need
to obtain a waiver from our sureties or an amendment to our
indemnity agreements. We can provide no assurance that we would
be successful in obtaining an amendment or waiver.
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Our Credit Facility restricts on our ability to, among other
things:
As discussed above, our Credit Facility requires us to maintain
certain financial ratios, including a leverage ratio, a minimum
fixed-charge coverage ratio and a defined minimum net worth. We
may not be able to satisfy these ratios, especially if our
operating results fall below management’s expectations. In
addition, in order to remain in compliance with the covenants in
our Credit Facility, we may be limited in our flexibility to
take actions resulting in non-cash charges, such as settling our
claims. These covenants may also impair our ability to engage in
favorable business activities and our ability to finance future
operations or capital needs in furtherance of our business
strategies.
A breach of any of these covenants or our inability to comply
with the required financial ratios could result in an event of
default under our Credit Facility. For additional information,
see “Non-compliance with covenants in our Credit Facility,
without waiver or amendment from the lenders, could adversely
affect our ability to borrow under the Credit Facility”
above.
Our operations could require us to utilize large sums of working
capital, sometimes on short notice and sometimes without
assurance of recovery of the expenditures. Circumstances or
events could create large cash outflows related to losses
resulting from fixed-price contracts, environmental liabilities,
litigation risks, unexpected costs or losses resulting from
acquisitions, contract initiation or completion delays,
political conditions, customer payment problems, foreign
exchange risks, professional and product liability claims, among
others. We cannot provide assurance that we will have sufficient
liquidity or the credit capacity to meet all of our cash needs
if we encounter significant working capital requirements as a
result of these or other factors.
Insufficient liquidity could have important consequences to us.
For example, we could:
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In addition, our inability to comply with the required financial
ratios under the terms of our Credit Facility could result in a
default under our Credit Facility. For additional information,
see Note 8 — Long-Term Debt and Revolving Lines
of Credit included in Part II, Item 8 —
Financial Statements and Supplementary Data.
As of August 31, 2007, we had total outstanding
indebtedness of approximately $1,104.5 million,
approximately $1,087.4 million of which relates to our
investment in Westinghouse and is of limited recourse to us. In
addition, as of August 31, 2007, letters of credit,
domestic and foreign, issued for our account in an aggregate
amount of $752.3 million were outstanding and we had no
borrowings under our Credit Facility. Our indebtedness could
have important consequences, including the following:
To the extent that new debt is incurred in addition to our
current debt levels, the leverage risks described above would
increase.
In certain circumstances, customers may require us to provide
credit enhancements, including bonds or letters of credit. In
line with industry practice, we are often required to provide
performance and surety bonds to customers. These bonds and
letters of credit indemnify the customer if we fail to perform
our obligations under the contract. If security is required for
a particular project and we are unable to obtain a bond or
letter of credit on terms commercially acceptable to us, we
cannot pursue that project. We have a letter of credit and a
bonding facility but, as is typically the case, the issuance of
bonds under our surety facility is at the surety’s sole
discretion. Moreover, due to events that affect the insurance
and bonding markets generally, bonding may be more difficult to
obtain in the future or may only be available at significant
additional cost. There can be no assurance that bonds or letters
of credit will continue to be available to us on commercially
reasonable terms.
In the event our debt ratings are lowered by Moody’s
Investors Service or Standards and Poor’s it might be more
difficult for us to obtain surety bonding for new projects in
the future, and we may be required to increase or provide
additional cash collateral to obtain these surety bonds, which
would reduce our available cash and could impact our ability to
renew or increase availability under our Credit Facility. Any
new or modified bonding facilities might not be on terms as
favorable as those we have currently and we could also be
subject to increased costs of capital and interest rates.
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On June 1, 2004, we were notified by the Staff of the SEC
that the Staff is conducting an informal inquiry relating to our
financial statements. The SEC has not advised us as to either
the reason for the inquiry or its precise scope. However, the
initial requests for information we received appear to relate
primarily to the purchase method of accounting for various
acquisitions. We have cooperated fully with the SEC during the
course of the inquiry, including providing documents and
responding to requests for voluntary production, as well as
conducting a detailed review of our accounting for our
acquisitions, and we will continue to do so.
Subsequent to an internal review that led to the restatement of
our financial statements for the second quarter of fiscal year
2006, as reflected in our Current Report on
Form 8-K
filed on July 10, 2006, the SEC also requested information
related to the restatement. This included information regarding
the clerical error in the computation of the amount of revenue
recognized on a construction contract and the misapplication of
GAAP in our accounting for a minority interest in a joint
venture. We provided the information requested.
The SEC’s review may have additional consequences
independent of the inquiry, including further restatement of our
financial results for past periods. In addition, if the SEC
takes further action, it may escalate the informal inquiry into
a formal investigation, which may result in an enforcement
action or other legal proceedings against us and members of our
management. Responding to such actions or proceedings has been
and could continue to be costly and could divert the efforts and
attention of our management team. If any action or proceeding is
resolved unfavorably to us or any of our management, we or they
could be subject to injunctions, fines, increased review and
scrutiny by regulatory authorities and other penalties or
sanctions, including criminal sanctions, that could materially
and adversely affect our business operations, financial
performance, liquidity and future prospects and materially
adversely affect the trading market and price of our stock. Any
unfavorable actions could also result in private civil actions,
loss of key personnel or other adverse consequences.
From time to time, our directors and certain of our current and
former officers are named as a party to lawsuits and regulatory
proceedings. A discussion of these lawsuits appears in
Note 13 — Contingencies and Commitments included
in Part II, Item 8 — Financial Statements
and Supplementary Data. Although it is not possible at this
stage to predict the likely outcome of these actions, an adverse
result in any of these lawsuits could have a material adverse
effect on us.
Litigation can involve complex factual and legal questions and
its outcome is uncertain. Any claim that is successfully
asserted against us could result in significant damage claims
and other losses. Even if we were to prevail, any litigation
could be costly and time-consuming and would divert the
attention of our management and key personnel from our business
operations, which could adversely affect our financial
condition, results of operations or cash flows. For additional
information, see Note 13 — Contingencies and
Commitments and Note 19 — Long-Term Construction
Accounting for Revenue and Profit/Loss Recognition Including
Claims, Unapproved Change Orders and Incentives.
Many of our E&I segment customers attempt to shift
financial and operating risks to the contractor, particularly on
projects involving large scale environmental remediation
and/or
projects where there may be a risk that the contamination could
be more extensive or difficult to resolve than previously
anticipated. In this competitive market, customers increasingly
seek to have contractors accept greater risks of performance,
liability for damage or injury to third parties or property and
liability for fines and penalties. Prior to our acquisition of
the IT Group, the IT Group was involved in claims and litigation
involving disputes over such issues. Therefore, it is possible
that we could also become involved in similar claims and
litigation in the future as a result of our acquisition of the
assets of IT Group and our participation in separate
environmental and infrastructure contracts.
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Environmental management contractors also potentially face
liabilities to third parties for property damage or personal
injury stemming from exposure to or a release of toxic,
hazardous or radioactive substances in connection with a project
performed for customers. These liabilities could arise long
after completion of a project. Although the risks we face in our
anthrax and other biological agent decontamination work are
similar to those faced in our toxic chemical emergency response
business, the risks posed by attempting to detect and remediate
these biological agents may include risks to our employees,
subcontractors and others and may be affected should our
detection and remediation prove less effective than anticipated.
Because biological contamination is difficult to evaluate and
highly variable, there may be unknown risks involved; and in
some circumstances, there may be no types of standard protocols
for dealing with these risks. The risks we face with respect to
biological agents may also include the potential ineffectiveness
of developing technologies to detect and remediate the
contamination, claims for infringement of these technologies,
difficulties in working with the smaller, specialized firms that
may own these technologies and have detection and remediation
capabilities, our ability to attract and retain qualified
employees and subcontractors in light of these risks, the high
profile nature of the work and the potential unavailability of
insurance and indemnification.
Certain subsidiaries within our E&I division are engaged in
two similar programs that may involve assumption of a
client’s environmental remediation obligations and
potential claim obligations. One program involves our
subsidiary, LandBank, which was acquired in the IT Group
acquisition. Under this program, LandBank purchases and then
remediates
and/or takes
other steps to improve environmentally impaired properties, with
a goal of selling the improved property at a price greater than
the combined cost of acquisition and remediation. The second
program is operated by our subsidiary, Shaw Environmental
Liability Solutions, LLC, which contractually assumes
responsibility for environmental matters at a particular site or
sites and provides indemnifications for defined cleanup costs
and post closing third party claims in return for compensation
by the client. These subsidiaries may operate
and/or
purchase and redevelop environmentally impaired property. As the
owner or operator of these properties, we may be required to
clean up all contamination at these sites even if we did not
place the contamination there. While we attempt to reduce our
exposure to unplanned risks through the performance of
environmental due diligence, the use of liability protection
provisions of federal laws like the Brownfields Revitalization
Act and similar state laws and the purchase of environmental and
cost cap insurance coverage or other risk management products,
we can provide no assurance that our risk management strategies
and these products and laws will adequately protect us in all
circumstances or that no material adverse impact will occur.
Our ability to be profitable in this type of business also
depends on our ability to accurately estimate cleanup costs.
While we engage in comprehensive engineering and cost analyses,
if we materially underestimate the required cost of cleanup at a
particular project, our underestimation could materially
adversely affect us. Further, the continued growth of this type
of business is dependent upon the availability of environmental
liability and remediation cost cap insurance or other risk
management products. We can provide no assurance that such
products will continue to be available to us in the future or,
if it is available, at commercially reasonable terms. Moreover,
environmental laws and regulations governing the cleanup of
contaminated sites are constantly changing. We cannot predict
the effect of future changes to these laws and regulations on
our LandBank and Environmental Liability Solutions businesses.
Additionally, when we purchase real estate in this business, we
are subject to many of the same risks as real estate developers,
including the timely receipt of building and zoning permits,
construction delays, the ability of markets to absorb new
development projects, market fluctuations and the ability to
obtain additional equity or debt financing on satisfactory
terms, among others.
The Price-Anderson Act (PAA) comprehensively regulates the
manufacture, use and storage of radioactive materials, while
promoting the nuclear energy industry by offering broad
indemnification to nuclear energy
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plant operators and DOE contractors. Because we provide services
for the DOE relating to its nuclear weapons facilities and the
nuclear energy industry in the ongoing maintenance and
modification, as well as decontamination and decommissioning, of
its nuclear energy plants, we are entitled to the
indemnification protections under the PAA. Although the
PAA’s indemnification provisions are broad, it does not
apply to all liabilities that we might incur while performing
services as a radioactive materials cleanup contractor for the
DOE and the nuclear energy industry. If the indemnification
authority does not extend to all of our services, our business
could be adversely affected by either a refusal of new
facilities operations to retain us or our inability to obtain
commercially adequate insurance and indemnification.
In addition to the environmental risks described above relating
to the businesses acquired from IT Group and our environmental
remediation business, our operations are subject to
environmental laws and regulations, including those concerning:
Our projects often involve highly regulated materials, including
hazardous and nuclear materials and wastes. Environmental laws
and regulations generally impose limitations and standards
relating to the use, handling, discharge or disposal of
regulated materials and require us to obtain a permit and comply
with various other requirements. The improper characterization,
use, handling, discharge or disposal of regulated materials or
any other failure to comply with federal, state and local
environmental laws and regulations or associated environmental
permits may result in the assessment of administrative, civil
and criminal penalties, the imposition of investigatory or
remedial obligations, or the issuance of injunctions that could
restrict or prevent our ability to perform under existing
contracts.
The environmental, health and safety laws and regulations to
which we are subject are constantly changing, and it is
impossible to predict the effect of any future changes to these
laws and regulations on us. We do not yet know the full extent,
if any, of environmental liabilities associated with many of our
properties undergoing or scheduled to undergo site restoration,
as well as any liabilities associated with the assets we
acquired from Stone & Webster and IT Group. We can
provide no assurance that our operations will continue to comply
with future laws and regulations and that such noncompliance
would not materially adversely affect us. The U.S. Congress
is actively considering, and several states have already
adopted, legislation to reduce emissions of carbon dioxide and
other “greenhouse gases” believed to be contributing
to warming of the Earth’s atmosphere. It is not possible to
predict at this time whether or when greenhouse gas emission
controls will be implemented, but it is possible that such
controls could have a significant impact on our business in the
future.
The level of enforcement of these laws and regulations also
affects the demand for many of our services, since greater or
more vigorous enforcement of environmental requirements by
governmental agencies creates greater demand for our
environmental services. Any perception among our customers that
enforcement of current environmental laws and regulations has
been or will be reduced decreases the demand for some services.
Future changes to environmental, health and safety laws and
regulations or to enforcement of those laws and regulations
could result in increased or decreased demand for some of our
services. The ultimate impact of the proposed changes will
depend upon a number of factors, including the overall strength
of the economy and clients’ views on the cost-effectiveness
of remedies available under the changed laws and regulations. If
proposed or enacted changes materially reduce demand for our
environmental services, our results of operations could be
adversely affected.
For additional information, see Part I,
Item 1 — Business.
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Development and construction activities conducted through
various joint ventures with one strategic partner expose us to
risks, including:
Other risks directly associated with our military family housing
privatization contracts with the DOD include:
Ultimately, these risks could have an adverse effect on our
profitability and expose us to possible losses as well as the
loss of our investment in these military family housing
privatizations. During fiscal year 2007, we contributed
$4.0 million to these housing privatizations and recorded
impairment losses of approximately $44.0 million pre-tax.
Military family housing privatization contracts require initial
capital contributions in the early stages of the project, and
ultimately, permanent financing from a third party lender. In
addition, because occupancy rates and rents at a newly developed
property may fluctuate depending on a number of factors,
including market and economic conditions, we may be unable to
meet our profitability goals for a particular property.
Due to the size of our engineering and construction projects,
one or a few clients have historically and may in the future,
contributed a substantial portion of our consolidated revenues.
For additional information about our major customers, see
Note 14 — Business Segments included in
Part II, Item 8 — Financial Statements and
Supplementary Data. Similarly, our backlog frequently reflects
multiple projects for individual
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clients; therefore, one major customer may comprise a
significant percentage of our backlog at a point in time. For
additional information about major customers included in our
backlog, see Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Because these significant customers generally contract with us
for specific projects, we may lose these customers from year to
year as their projects with us are completed. If we do not
replace them with other customers or other projects, our
business could be materially adversely affected.
Additionally, we have long-standing relationships with many
significant customers, including customers with which we have
alliance agreements that have preferred pricing arrangements.
However, our contracts with these customers are on a project by
project basis, and they may unilaterally reduce or discontinue
their business with us at any time. The loss of business from
any one of these customers could have a material adverse effect
on our business or results of operations.
Because of the nature of our contracts, at times we may commit
our financial resources to projects prior to receiving payments
from the customer in amounts sufficient to cover expenditures on
the projects as they are incurred. Delays in customer payments
may require us to make a working capital investment. If a
customer defaults in making its payments on a project in which
we have devoted significant financial resources, it could have a
material adverse effect on our business or results of operations.
In our E&I segment, we compete with a diverse array of
small and large organizations, including national and regional
environmental management firms, national, regional and local
architectural, engineering and construction firms, environmental
management divisions or subsidiaries of international
engineering, construction and systems companies and waste
generators that have developed in-house capabilities. Increased
competition in this business segment, combined with changes in
client procurement procedures, has resulted in changes in the
industry, including among other things, lower contract profits,
more fixed-price or unit-price contracts and contract terms that
may increasingly require us to indemnify our clients against
damages or injuries to third parties and property and
environmental fines and penalties. We believe, therefore, these
market conditions may require us to accept more contractual and
performance risk than we have historically accepted for our
E&I segment to be competitive. In addition, the entry of
large systems contractors and international engineering and
construction firms into the environmental services industry has
increased competition for major federal government contracts and
programs, which have been a primary source of revenue in recent
years for our E&I business. There can be no assurance that
our E&I segment will be able to compete successfully.
In our Fossil and Nuclear, E&C and Maintenance segments, we
face competition from numerous regional, national and
international competitors, many of which have greater financial
and other resources than we do. Our competitors include
well-established, well-financed businesses, both privately and
publicly held, including many major energy equipment
manufacturers and engineering and construction companies, some
engineering companies, internal engineering departments at
utilities and some of our customers.
In our F&M segment, we face substantial competition on a
domestic and international level. In the U.S., there are a
number of smaller pipe fabricators. Internationally, our
principal competitors are divisions of large industrial firms.
Some of our competitors, primarily in the international sector,
have greater financial and other resources than we do. As a
result, they could exercise influence with suppliers and
negatively impact our ability to obtain raw materials.
Approximately 21% of our fiscal year 2007 revenues were
attributable to projects in international markets, some of which
are subject to political unrest and uncertainty. The services we
provide to our
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customers internationally have created several challenges,
including identifying, recruiting and retaining qualified
subcontractors and personnel, the safety of our employees and
subcontractors and the increased working capital demands. It is
possible that our employees and subcontractors may suffer injury
or death, repatriation problems or other unforeseen costs and
risks in the course of their international projects, which could
negatively impact our operations.
In addition to the specific challenges we face internationally,
international contracts, operations and expansion expose us to
risks inherent in doing business outside the U.S., including:
Approximately 4,000 of our employees are represented by labor
unions. A lengthy strike or other work stoppage at any of our
facilities could have a material adverse effect on us. From time
to time, we have also experienced attempts to unionize our
non-union shops. While these efforts have achieved limited
success to date, we cannot provide any assurance that we will
not experience additional union activity in the future.
We generally attempt to denominate our contracts in
U.S. dollars. However, we enter into contracts denominated
in a foreign currency. This practice subjects us to foreign
exchange risks, particularly to the extent contract revenues are
denominated in a currency different than the contract costs. We
attempt to minimize our exposure from foreign exchange risks by
obtaining escalation provisions for projects in inflationary
economies, matching the contract revenues currency with the
contract costs currency or entering into hedge contracts when
there are different currencies for contract revenues and costs.
However, these actions will not always eliminate all foreign
exchange risks.
Additionally, our debt used to fund our investment in
Westinghouse is Japanese Yen (JPY) denominated. As the
U.S. dollar versus JPY exchange rate changes, the amount of
U.S. dollars required to service this debt will change.
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Because we have grown in part through acquisitions, goodwill and
other acquired intangible assets represent a substantial portion
of our assets. Goodwill was approximately $514.0 million as
of August 31, 2007. If we make additional acquisitions, it
is likely that we will record additional intangible assets on
our books. We also have long-lived assets consisting of property
and equipment and other identifiable intangible assets of
$247.2 million as of August 31, 2007, which are
reviewed for impairment whenever events or circumstances
indicate the carrying amount of an asset may not be recoverable.
If a determination that a significant impairment in value of our
unamortized intangible assets or long-lived assets occurs, that
determination would require us to write off a substantial
portion of our assets and would negatively affect our earnings
and could adversely impact our stock price.
In July 2000, we acquired substantially all of the operating
assets and assumed certain liabilities of Stone &
Webster, Inc., and during fiscal year 2002, we acquired
substantially all of the operating assets and assumed certain
liabilities of The IT Group, Inc. We believe, pursuant to the
terms of the agreements for the Stone & Webster and IT
Group asset acquisitions that we assumed only certain
liabilities specified in those agreements. In addition, those
agreements provide that certain other liabilities, including but
not limited to, certain outstanding borrowings, certain leases,
certain contracts in process, completed contracts, claims or
litigation that relate to acts or events occurring prior to the
acquisition date, and certain employee benefit obligations are
specifically excluded from our transactions. There can be no
assurance, however, that we do not have any exposure related to
the excluded liabilities.
In addition, some of the former owners of companies we have
acquired are contractually required to indemnify us against
liabilities related to the operation of their companies before
we acquired them and for misrepresentations made by them in
connection with the acquisitions. In some cases, these former
owners may not have the financial ability to meet their
indemnification responsibilities. If this occurs, we may incur
unexpected liabilities.
Any of these unexpected liabilities could have a material
adverse effect on us and our financial condition.
From time to time, we acquire businesses and assets to pursue
market opportunities, increase our existing capabilities and
expand into new areas of operation. We plan to pursue select
acquisitions in the future. We may encounter difficulties
integrating our future acquisitions and in successfully managing
the growth we expect from the acquisitions. Our expansion into
new business areas may also expose us to additional business
risks that are different from those we have traditionally
experienced. To the extent we encounter problems in identifying
acquisition risks or integrating our acquisitions, our business
could be materially adversely affected. Because we may pursue
acquisitions globally and may actively pursue a number of
opportunities simultaneously, we may encounter unforeseen
expenses, complications and delays, including difficulties in
employing sufficient staff and maintaining operational and
management oversight, each of which could adversely impact our
operations and internal controls.
Our ability to attract and retain qualified engineers,
scientists and other professional personnel in accordance with
our needs, either through direct hiring or acquisition of other
firms employing such professionals, is an important factor in
determining our future success. The market for these
professionals is competitive, and there can be no assurance that
we will be successful in our efforts to attract and retain
needed professionals. In addition, our ability to be successful
depends in part on our ability to attract and retain skilled
laborers and craftsmen in our pipe fabrication and construction
businesses. Demand for these workers can at times be high and
the supply extremely limited.
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Our success is also highly dependent upon the continued services
of our key officers. The loss of any of our key officers could
adversely affect us. We do not maintain key employee insurance
on any of our executive officers.
We believe that we are an industry leader in the design and
construction of ethylene processing plants. We protect our
position through patent registrations, license restrictions and
a research and development program. However, it is possible that
others may develop competing processes that could negatively
affect our market position.
Additionally, we have developed construction and energy
generation and transmission software that we believe provides
competitive advantages. The advantages currently provided by
this software could be at risk if competitors were to develop
superior or comparable technologies.
We believe that our induction pipe bending technology and
capabilities favorably influence our ability to compete
successfully. Currently, this technology and our proprietary
software are not patented. Even though we have some legal
protections against the dissemination of this technology,
including non-disclosure and confidentiality agreements, our
efforts to prevent others from using our technology could be
time-consuming, expensive, and ultimately may be unsuccessful or
only partially successful. Finally, there is nothing to prevent
our competitors from independently attempting to develop or
obtain access to technologies that are similar or superior to
our technology.
Effective internal controls are necessary for us to provide
reliable financial reports and prevent fraud. If we cannot
provide reliable financial reports or prevent fraud, our
operating results could be harmed. We devote significant
attention to establishing and maintaining effective internal
controls. Implementing any appropriate changes to our internal
controls, if ever required, may require specific compliance
training of our directors, officers and employees, entail
substantial costs in order to modify our existing accounting
systems and take a significant period of time to complete. We
cannot be certain that these measures, if required, would ensure
that we implement and maintain adequate controls over our
financial reporting processes and related Section 404
reporting requirements. Any failure to implement required new or
improved controls or difficulties encountered in their
implementation could affect our operating results or cause us to
fail to meet our reporting obligations in future periods.
Ineffective internal controls could also cause investors to lose
confidence in our reported financial information, which could
have a negative effect on the market price of our stock.
The efficient operation of our business is dependent on computer
hardware and software systems. Information systems are
vulnerable to security breaches by computer hackers and cyber
terrorists. We rely on industry accepted security measures and
technology to securely maintain confidential and proprietary
information maintained on our information systems. However,
these measures and technology may not always be adequate to
properly prevent security breaches. In addition, the
unavailability of the information systems or the failure of
these systems to perform as anticipated for any reason could
disrupt our business and could result in decreased performance
and increased overhead costs, causing our business and results
of operations to suffer. Any significant interruption or failure
of our information systems or any significant breach of security
could adversely affect our business and results of operations.
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Terrorists’
actions have and could continue to negatively impact the global
economy and the markets in which we operate.
Terrorist attacks, like those that occurred on
September 11, 2001, have contributed to economic
instability in the U.S., and further acts of terrorism, violence
or war could affect the markets in which we operate, our
business and our expectations. There can be no assurance that
armed hostilities will not increase, which may further
contribute to global economic instability. These attacks or
armed conflicts may directly impact our physical facilities or
those of our suppliers or customers and could impact our
domestic or international revenues, our supply chain, our
production capability and our ability to deliver our products
and services to our customers. Political and economic
instability in some regions of the world may also result and
could negatively impact our business. For additional
information, see “Political and economic conditions in
foreign countries in which we operate could adversely affect
us,” above.
We have disclosed previously that we are the subject of an
informal inquiry by the SEC relating to our financial
statements. For additional information see Part I,
Item 1A — Risk Factors, “We are currently
the subject of an SEC informal inquiry that could adversely
affect our business.” To date, we have not received written
comments by the SEC regarding any of our periodic or current
reports filed under the Exchange Act, as amended, more than
180 days before the fiscal year ended August 31, 2007
that remain unresolved.
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Our principal properties (those where we occupy over
35,000 square feet) at August 31, 2007 are as follows:
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In addition to these locations, we occupy other owned and leased
facilities in various cities that are not considered principal
properties. Portions of certain office buildings described above
are currently being subleased for various terms. We consider
each of our current facilities to be in good operating condition
and adequate for its present use.
For a description of our material pending legal and regulatory
proceedings and settlements, see Note 13 —
Contingencies and Commitments and Note 19 —
Long-Term Construction Accounting for Revenue and
Profit/Loss
Recognition Including Claims, Unapproved Change Orders and
Incentives included in Part II, Item 8 —
Financial Statements and Supplementary Data.
None.
Our common stock, no par value, is traded on the NYSE under the
symbol “SGR.” The following table sets forth, for the
quarterly periods indicated, the high and low sale prices per
share for the common stock as reported by the NYSE for our two
most recent fiscal years and for the current fiscal year to date.
The closing sales price of our common stock on November 26,
2007, as reported on the NYSE, was $58.58 per share. On
November 26, 2007, we had 636 shareholders of record.
We have not paid any cash dividends on the common stock and
currently anticipate that, for the foreseeable future, any
earnings will be retained for the development of our business.
Accordingly, no dividends are expected to be declared or paid on
the common stock at the present. The declaration of dividends is
at the discretion of our Board of Directors. Our dividend policy
will be reviewed by the Board of Directors as may be appropriate
in light of relevant factors at the time. We are, however,
subject to certain prohibitions on the payment of dividends
under the terms of existing Credit Facilities.
For additional information on these prohibitions, see
Part II, Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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The following graph compares the cumulative five-year total
return attained by shareholders on our common stock relative to
the cumulative total returns of the S&P Smallcap 600 index
and an industry peer group comprised of Fluor Corporation,
Jacobs Engineering Group Inc., URS Corporation, Washington
Group International and us. The graph tracks the performance of
a $100 investment in our common stock, in the peer group and the
index (with the reinvestment of all dividends) from
August 31, 2002 to August 31, 2007.
This stock performance information is “furnished”
and shall not be deemed to be “soliciting material” or
subject to Rule 14A, shall not be deemed “filed”
for purposes of Section 18 of the Exchange Act or otherwise
subject to the liabilities of that section, and shall not be
deemed incorporated by reference in any filing under the
Securities Act of 1933, as amended, or the Exchange Act, whether
made before or after the date of this report and irrespective of
any general incorporation by reference language in any such
filing, except to the extent that we specifically incorporate
the information by reference.
TOTAL SHAREHOLDER RETURN*
Among The Shaw Group Inc., The S&P Smallcap 600 Index
and The Peer Group
* Assumes $100 invested on August 31, 2002 in stock or
index-including reinvestment of dividends. Fiscal year ended
August 31.
THE
FOREGOING GRAPH REPRESENTS HISTORICAL STOCK PRICE PERFORMANCE
AND IS NOT NECESSARILY INDICATIVE OF ANY FUTURE STOCK PRICE
PERFORMANCE.
See Part III, Item 12 — Security Ownership
of Certain Beneficial Owners and Management and Related
Stockholder Matters with respect to information to be
incorporated by reference regarding our equity compensation
plans.
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The following table presents, for the periods and as of the
dates indicated, selected statements of operations data and
balance sheet data on a consolidated basis. The selected
historical consolidated financial data for each of the five
fiscal years ended August 31 presented below has been derived
from our audited consolidated financial statements. KPMG, LLP,
independent registered public accounting firm, audited our
consolidated financial statements for the fiscal year ended
August 31, 2007. Ernst & Young LLP, independent
registered public accounting firm, audited our consolidated
financial statements for each of the fiscal years ended
August 31, 2003 to August 31, 2006. Such data should
be read in conjunction with our Consolidated Financial
Statements and related notes thereto included in Part II,
Item 8 — Financial Statements and Supplementary
Data.
The following analysis of our financial condition and results of
operations should be read in conjunction with our Consolidated
Financial Statements and the notes thereto. The following
analysis contains forward-looking statements about our future
revenues, operating results and expectations. See
“CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS” for a discussion of the risks, assumptions
and uncertainties affecting these statements as well as
Part I, Item 1A — Risk Factors.
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Overview
All of our operating segments, except for our E&I segment,
experienced strong revenue growth; however, the earnings
associated with the increased revenues were offset by charges,
reevaluations of project claims and incentives and impairments
on our investment in a military housing privatization joint
venture, which in total exceeded $100 million pre-tax.
Additionally, during the fiscal year, we invested approximately
$1 billion for a 20% equity ownership in Westinghouse,
which positions us for future nuclear market opportunities. Our
investment was funded by approximately $1 billion of
JPY-denominated bonds that resulted in $33.2 million in
pre-tax foreign currency exchange losses and $30.6 million
in interest expense during the year.
Our fiscal year 2007 revenue growth was fueled by continued
strength in the global markets served by us for power generation
capacity, petrochemicals and refined products. These markets are
being driven by worldwide demand and economic expansion, and our
increased volume of business reflects the new power and chemical
contracts signed during late fiscal year 2006 and throughout
fiscal year 2007. Additionally, activity levels in our
Maintenance segment continue to increase with strong demand for
our services at an increasing number of new locations and from
work from existing customers.
We generated significant positive operating cash flows in fiscal
year 2007 primarily from new power project starts and positive
cash flows earned on in-process projects, and from the
collection of accounts receivable recorded in fiscal year 2006
as a result of the high volume of disaster relief, emergency
response and recovery services.
In fiscal year 2007, we built backlog to record levels and
expect our primary challenge in 2008 to be the successful
execution of our backlog of unfilled orders.
We expect that our fiscal year 2008 revenues will continue to
increase as compared to fiscal year 2007 as we progress on our
major power, chemical and petrochemical contracts.
Consolidated
Results of Operations
The increase in consolidated revenues in fiscal year 2007,
compared to fiscal year 2006, is due primarily to new contract
awards in fiscal year 2006 and early fiscal year 2007 primarily
in air quality and emissions control work and new coal power
generation projects in our Fossil & Nuclear operating
segment. Also contributing to the increasing revenues is our
work on major chemical and petrochemical projects started during
fiscal year 2006 in our E&C segment as those projects move
towards peak levels of activity. These factors more than offset
the significant decline in revenues related to the disaster
relief, emergency response and recovery services from Hurricanes
Katrina and Rita recorded in our E&I segment in 2006 that
were not repeated in 2007.
The increase in consolidated revenues in fiscal year 2006,
compared to fiscal year 2005, is due to the disaster relief,
emergency response and recovery services in the Gulf Coast area
of the U.S. as a result of Hurricanes Katrina and Rita in
fiscal year 2006, increased activity in the energy markets,
consistent demand for clean air and fuels, garrison support
services and transmission and distribution services. The 2005
hurricane season resulted in increased spending primarily in our
fiscal year 2006 by FEMA, the U.S. Army Corps of Engineers
(USACE) and other governmental agencies on hurricane-relief
efforts in the areas affected. We participated extensively by
performing over $1.0 billion in hurricane recovery projects
in fiscal year 2006 compared to $25.3 million in fiscal
year 2005.
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The same business activities that contributed to the increases
in revenues addressed above also contributed to the increase in
consolidated gross profit. Additionally, in fiscal year 2007,
our F&M segment, which has historically produced our
highest gross profit percentage results, experienced significant
increases in activity driven by the worldwide demand for
fabricated piping systems for power, chemical and petrochemical
new build applications. In addition to these factors, the
following events were recorded in our second fiscal quarter of
2007 that negatively impacted our gross profit for fiscal year
2007:
Gross profit for the fiscal year 2006 increased compared to the
same period for fiscal year 2005 primarily due to increased work
in our E&I segment driven by disaster relief, emergency
response and recovery services in the Gulf Coast area of the
U.S. Our Maintenance and F&M segments also experienced
increases in gross profit in fiscal year 2006 as compared to
fiscal year 2005 resulting from increased volume of capital
construction services for chemical industry customers and growth
in worldwide demand for piping systems, respectively. The gross
profit increases noted above were partially offset by a decline
in the E&C segment’s gross profit primarily due to
estimated cost increases on certain refinery projects, a power
project and the unfavorable ruling on litigation related to our
Wolf Hollow project that resulted in a $48.2 million
pre-tax charge in fiscal year 2006.
Consolidated G&A increased in fiscal year 2007 compared to
fiscal year 2006 in order to support our increasing revenue base
and level of business activity primarily in the
Fossil & Nuclear and E&C segments. G&A as a
percentage of revenues was 4.8% for fiscal year 2007 and 4.7%
for fiscal year 2006. Specific areas that contributed to the
increase in G&A during fiscal year 2007 included increased
labor costs due to higher headcount primarily in human
resources, legal, accounting and business development personnel;
increased professional fees for audit services, including
expenses associated with an independent investigation of an
E&C project, and increased insurance costs.
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G&A increased in fiscal year 2006 compared to fiscal year
2005 in order to support the increased revenue base and level of
business activity primarily in the E&I segment related to
disaster relief, emergency response and recovery services.
G&A as a percentage of revenues was 4.7% for fiscal year
2006 compared to 5.8% for fiscal year 2005. Specific items that
contributed to the increase in G&A during fiscal year 2006
included increased labor costs due to higher headcount primarily
in accounting and finance, corporate functional and business
development personnel, increasing professional fees for audit
and legal services related to the SEC informal inquiry and other
business agreements. Also contributing to higher G&A in
fiscal year 2006 was our expensing of previously deferred
third-party financing costs and certain due diligence costs
related to the proposed acquisition of a controlling interest in
Westinghouse and an increase in employee compensation expense
for the cost of stock options now accounted for under
SFAS 123(R).
Consolidated interest expense increased in fiscal year 2007 as
compared to fiscal year 2006 due to the addition of
$30.6 million in fiscal year 2007 from the Westinghouse
Bonds that were issued during our first fiscal quarter of 2007.
Consolidated interest expense declined in fiscal year 2006 as
compared to fiscal year 2005 due to the retirement of our Senior
Notes in 2005.
Our consolidated effective tax rate for fiscal year 2007 was a
provision of 32% as compared to 22% for fiscal year 2006. We
recorded $10.1 million of tax expense in fiscal year 2007
for tax matters under appeal, as well as matters related to
foreign taxes. Additionally, we treat unrealized foreign
currency gains and losses on the Westinghouse Bonds as discrete
items in each reporting period due to their volatility and the
difficulty in estimating such gains and losses reliably. We
incurred $13.0 million of tax expense related to unrealized
foreign currency gains and losses in fiscal year 2007.
Our effective tax rate decreased to 22% in fiscal year 2006 from
46% in fiscal year 2005, primarily due to a $6.9 million
increase in the deferred tax valuation allowance in fiscal year
2005, which was reversed in fiscal year 2006 related to U.K. net
operating losses.
NM — Not meaningful.
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The decreased earnings from unconsolidated entities was
primarily due to a $24.2 million net of tax
($44 million pre-tax) loss from our military housing
privatization entities recorded in our second fiscal quarter in
fiscal year 2007 and reflected in our earnings from
unconsolidated entities for fiscal year 2007 (see
Note 6 — Equity Method Investments and Variable
Interest Entities included in Part II,
Item 8 — Financial Statements and Supplementary
Data for further discussion). Additionally, we recorded an
impairment charge related to our KB Home/Shaw Louisiana LLC
joint venture of $2.0 million ($1.2 million, net of
tax) in fiscal year 2007. This impairment charge resulted from
the recent developments in the credit market and slow demand for
residential housing.
The decrease in consolidated net income for fiscal year 2007 is
due primarily to the events recorded in our second fiscal
quarter of fiscal year 2007 addressed in the Consolidated Gross
Profit section above, offset in part by the successful progress
on our major fossil power projects. Our net income also was
negatively impacted by our Investment in Westinghouse segment
which recorded a $66.7 million pre-tax loss for fiscal year
2007 including $33.2 million in foreign currency losses on
the Westinghouse Bonds and $30.6 million pre-tax of
interest on those bonds. There are no Westinghouse activities
included in the fiscal year 2006 financial results as we
acquired our investment interest in the first quarter of our
fiscal year 2007. Our net income for fiscal year 2005 reflects
the $47.8 million pre-tax loss on retirement of our Senior
Notes.
Segment
Results of Operations
The comments and tables that follow compare revenues, gross
profit and gross profit percentages by operating segment and a
discussion of other items, including G&A, interest expense
and income, income from unconsolidated subsidiaries and income
taxes at the consolidated level for the fiscal years ended
August 31, 2007, 2006 and 2005.
Selected summary financial information for our operating
segments is as follows (in millions, except for percentages):
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NM — Not meaningful.
Our revenues by industry were as follows:
42
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Our revenues by geographic region were as follows:
Segment
Analysis — Fiscal Year 2007 Compared to Fiscal
Year 2006 (Restated)
Our Fossil and Nuclear segment is experiencing significant
growth in domestic demand for our services primarily in the
areas of emissions control and coal fired power generation
facilities.
Revenues
The increase in revenues of $786.6 million or 92.7% for
fiscal year 2007 as compared to fiscal year 2006 is attributable
to:
The increase in revenues was partially offset by:
We expect fiscal year 2008 revenues will be higher than fiscal
year 2007 due to the number of major projects that we are
currently executing as well as increasing activity related to
our nuclear business.
Gross
Profit and Gross Profit Percentage
The increase in gross profit of $70.4 million or 1,530.4%
for fiscal year 2007 as compared to fiscal year 2006 is
attributable to:
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The increase in gross profit and gross profit percentage was
partially offset by:
The Fossil & Nuclear segment has recorded revenues of
$6.3 million related to unapproved change orders and claims
as of August 31, 2007 on a percentage-of-completion basis.
The amounts included in our estimated total revenues at
completion for these projects are estimated to be
$7.8 million. These unapproved change orders and claims
relate to delays and costs attributable to others. If we collect
amounts different from the amounts we have estimated, those
differences, which could be material, will be recognized as
income or loss when realized.
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
The increase from a loss position of $18.1 million for
fiscal year 2006 to an income position of $42.3 million for
fiscal year 2007 is primarily attributable to the factors
affecting gross profit discussed above as the segment has
experienced strong revenue and gross profit growth from both the
fossil and nuclear divisions.
Fiscal year 2006 included a significant amount of disaster
relief, emergency response and recovery services we performed in
connection with Hurricanes Katrina and Rita while fiscal year
2007 reflects a more typical overall revenue volume for
government contracting activity.
Revenues
The decrease in revenues of $646.0 million or 30.5% for
fiscal year 2007 as compared to fiscal year 2006 was
attributable to significantly lower levels of disaster relief,
emergency response and recovery services in fiscal 2007 compared
to the significant amount of work performed in fiscal year 2006.
The decrease in revenues for fiscal year 2007 was partially
offset by increases in revenues attributed to:
We expect fiscal year 2008 revenues to be slightly lower than
fiscal year 2007 revenues based on projections for work
currently in backlog and anticipated new work opportunities that
will be executed during fiscal year 2008.
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Gross
Profit and Gross Profit Percentage
The decrease in gross profit of $102.4 million or 52.0% for
fiscal year 2007 as compared to fiscal year 2006 is due to:
The decreases were partially offset by:
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
Income (loss) before income taxes, minority interest, earnings
(losses) from unconsolidated entities and income (loss) from
discontinued operations for fiscal year 2007 decreased by
$106.4 million or 85.3% as compared to fiscal year 2006 due
to the decline in disaster relief, emergency response and
recovery services in the U.S. Gulf Coast area partially
offset by increases in services to our commercial customers
during fiscal year 2007.
Demand for chemical and petrochemical production and refinery
capacity in the Middle East and Asia Pacific regions are
providing a continued strong petrochemicals market, resulting in
increasing activity levels for the E&C segment in fiscal
year 2007, as compared to fiscal year 2006.
Revenues
The increase in revenues of $476.3 million or 81.1% for
fiscal year 2007 as compared to fiscal year 2006 is attributable
to:
The increase in revenues for fiscal year 2007 as compared to
fiscal year 2006 was partially offset by completion of two
refinery projects in fiscal year 2006 and completion of major
construction activities on another refinery project in fiscal
year 2006.
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We expect fiscal year 2008 revenues to be higher than fiscal
year 2007 revenues based on expected growth primarily in
international markets for E&C segment services.
Gross
Profit and Gross Profit Percentage
The increase in gross profit of $47.6 million or 210.6% for
fiscal year 2007 as compared to fiscal year 2006 is attributable
to:
These increases in gross profit were offset by the following:
The increase in gross profit percentage is attributable to cost
increases in fiscal year 2006 on certain refinery projects.
Offsetting the increase is higher revenue associated with
“customer furnished materials,” which describes
circumstances where we assist in the procurement of equipment
and materials on a cost reimbursable basis on behalf of our
customers. Revenues and costs on customer furnished materials do
not impact gross profit or net income, but increase revenues and
costs in equal amounts. As a result, customer furnished
materials have the effect of reducing our reported gross profit
percentages.
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
The increase in pre-tax income of $28.2 million or 402.9%
for fiscal year 2007 as compared to fiscal year 2006 is
attributable to the higher gross profit discussed above,
increased foreign currency exchange costs related to changes in
currency exchange rates, offset by G&A related to higher
insurance and other corporate costs.
We experienced increased activity during fiscal year 2007,
performing a higher volume of outage work for new and existing
customers and capital construction work for our petrochemical
customers.
The increase in revenues of $177.5 million or 19.6% during
fiscal year 2007 compared to fiscal year 2006 was primarily
attributable to:
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The increases noted above offset the decrease in activity
associated with the completion of a major domestic power
construction project.
We anticipate fiscal year 2008 revenues to remain at or near
2007 levels despite the completion of a major construction
contract for a customer in the energy industry. We anticipate
providing additional services for current and new customers in
the energy and chemical industries due to increased market
demand in these industries.
The decrease in gross profit of $9.5 million or 32.3% for
fiscal year 2007 as compared to fiscal year 2006 is attributable
to reductions of revenues during fiscal year 2007 totaling
$15.5 million related to disputes with an owner over
project incentives as well as losses recorded on two offshore
production platform contracts.
Our maintenance segment has recorded revenues to date of
$29.5 million related to our significant estimated, project
incentives and unapproved change orders and claims as of
August 31, 2007 on a percentage-of-completion basis.
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
The decrease in pre-tax income of $8.8 million or 48.6% is
primarily attributable to the changes in gross profit discussed
above, as well as an increase in G&A attributable primarily
to an increase in the costs related to facilities and human
resources to support our business growth.
Demand for our fabrication and manufacturing services is
stronger than it has been in recent years as most power plants,
oil refineries, petrochemical and chemical plants require
significant quantities of piping. During fiscal year 2007, we
added additional capacity through existing facilities and
through acquisitions. We are building a new facility in Mexico
that, when completed, will be our largest facility worldwide. We
expect the new facility will be operational in the second half
of fiscal year 2008 and will allow us to satisfy more of the
global demand for its fabrication services.
The increase in revenues of $153.1 million or 47.9% during
fiscal year 2007 as compared to fiscal year 2006 is attributable
to significant new awards in both the domestic and foreign
markets and the global increase in demand of our manufactured
and fabricated products. We experienced increases in the foreign
and domestic market as a result of the increasing demand in the
petrochemical, refining and power generation industries.
In fiscal year 2008, we anticipate increased foreign and
domestic demand in the petrochemical, refining and power
generation industries for our fabrication and manufacturing and
distribution services. As a result of this higher demand, we in
turn expect increased revenues as a result of the additional
capacity which will be available to this segment during fiscal
year 2008.
The increase in gross profit of $47.7 million or 70.9% for
fiscal year 2007 as compared to fiscal year 2006 is attributable
to the increase in demand for most of our products resulting in
stronger volume and improved gross profit in both the domestic
and foreign markets as discussed above.
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Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
Pre-tax income before other items for fiscal year 2007 increased
$43.0 million or 89.2% as compared to fiscal year 2006. The
increases are due to the increases in revenues and the factors
impacting gross profit discussed above. G&A increased for
fiscal year 2007 compared to fiscal year 2006 due to increased
labor costs resulting from increased headcount levels to support
the higher demand in our markets.
The Investment in Westinghouse segment includes our equity
investment in Westinghouse that was acquired on October 16,
2006. The total impact from the Investment in Westinghouse
segment on our pre-tax income before other items for the three
and twelve months ended August 31, 2007 were losses of
$60.5 million and $66.7 million, pre-tax, and
$36.1 million and $38.3 million, net of tax,
respectively. The pre-tax income before other items of the
Investment in Westinghouse segment for the three and twelve
months ended August 31, 2007 included the following:
Additionally, our net income (loss) for the three and twelve
months ended August 31, 2007 includes income from our 20%
interest in Westinghouse earnings of $0.7 million and
$2.2 million, respectively.
We expect G&A for the Investment in Westinghouse segment to
be lower in fiscal year 2008 than for fiscal year 2007 due to
costs incurred in fiscal year 2007 for Westinghouse audited
financial statements related to the Westinghouse acquisition.
We enter into foreign currency forward contracts from
time-to-time to hedge the impact of exchange rate changes on our
JPY interest payments on the Westinghouse Bonds. If we exercise
the Put Option for our full 20% equity investment in
Westinghouse, we would expect to recover 97% of our investment
that was originally made in JPY.
Westinghouse maintains its accounting records for reporting to
its majority owner, Toshiba, on a calendar quarter basis with a
March 31 fiscal year end. We expect that reliable financial
information about Westinghouse’s operations will be
available to us for Westinghouse’s calendar quarter
periods. As a result, we record our 20% interest of the equity
earnings (loss) reported to us by Westinghouse based upon
Westinghouse’s calendar quarterly reporting periods, or two
months in arrears of our current periods. Under this policy,
Westinghouse’s operations from the date of our acquisition
through their calendar quarter ended June 30, 2007, an
eight and one-half month period, was included in our financial
results for the twelve months ended August 31, 2007.
General
and Administrative Expenses
G&A increased by $8.1 million or 9.8% in fiscal year
2007 compared to fiscal year 2006 in order to support the
increasing revenue base and level of business activity. Specific
items that contributed to the increase in G&A during fiscal
year 2007 included increased labor costs due to higher headcount
primarily in accounting and finance, corporate functional and
business development personnel, and audit and professional fees
associated with changing our independent registered accounting
firm. We expect our G&A to be higher in fiscal year 2008
than fiscal year 2007 due to anticipated additional costs
required to support the growth in our business activities as a
result of the continuing strength of our markets.
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G&A for fiscal year 2006 includes $4.7 million of
expenses related to costs associated with a potential
acquisition. We defer certain third party costs directly
attributable to our efforts on potential acquisitions. During
the second quarter of fiscal year 2006, we determined that it
was unlikely that we would obtain a controlling interest in the
potential acquisition and, therefore, expensed all costs
including the amounts previously deferred, related to the
incremental effort required to obtain the contemplated
controlling interest (primarily financing and certain due
diligence costs). A portion of the costs related to due
diligence was deferred as of August 31, 2006, and is
reflected in our accounting for the acquisition of our
investment in Westinghouse, which closed in October 2006.
Segment
Analysis — Fiscal Year 2006 (Restated) Compared to
Fiscal Year 2005 (Restated)
Revenues
The $38.3 million or 4.7% increase in Fossil &
Nuclear segment revenues for fiscal year 2006 as compared to
fiscal year 2005 is primarily attributable to:
The increase in revenues for fiscal year 2006 was partially
offset by:
Gross
Profit and Gross Profit Percentage
The decrease gross profit for the fiscal year 2006 of
$74.4 million or 94.2% as compared to fiscal year 2005 is
primarily attributable to:
The decrease in gross profit and gross profit percentage for
fiscal year 2006 as compared to fiscal year 2005 was partially
offset by a higher gross profit due to increased activities on
power projects.
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
The decrease in Income (loss) before income taxes, minority
interest, earnings (losses) from unconsolidated entities and
income (loss) from discontinued operations of $74.5 million
for fiscal year 2006 as compared to fiscal year 2005 is
primarily due to the decrease in gross profit discussed above, a
decrease in interest earned on the $170.8 million of
restricted cash for a domestic EPC project, and gains recorded
on the sale of Shaw Power Technologies, Inc. (PTI) in 2005.
Revenues
The increase in revenues of $994.3 million or 88.7% for
fiscal year 2006 as compared to fiscal year 2005 was primarily
attributable to:
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The increase in revenues for fiscal year 2006 was partially
offset by decreases in revenues attributed to:
Gross
Profit and Gross Profit Percentage
The increase in gross profit in fiscal year 2006 of
$80.2 million or 68.6% as compared to fiscal year 2005 is
due primarily to:
The increases in gross profit and related gross profit
percentage are partially offset by:
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
The $69.8 million or 127.1% increase in Income (loss)
before income taxes, minority interest, earnings (losses) from
unconsolidated entities and income (loss) from discontinued
operations for fiscal year 2006 as compared to fiscal year 2005
is due primarily to the changes in gross profit addressed above,
partially offset by incremental costs incurred as a result
growth in the segment needed to meet the demands of
hurricane-related work.
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Revenues
The $215.5 million or 57.9% increase in E&C segment
revenues for fiscal year 2006 as compared to fiscal year 2005 is
primarily attributable to:
Gross
Profit and Gross Profit Percentage
Gross profit decreased $6.2 million for fiscal year 2006 as
compared to fiscal year 2005 primarily as a result of loss
provisions on certain refinery projects and completion of a
chemical project. The decrease in gross profit and gross profit
percentage for fiscal year 2006 as compared to fiscal year 2005
was partially offset by:
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
Income (loss) before income taxes, minority interest, earnings
(losses) from unconsolidated entities and income (loss) from
discontinued operations for fiscal year 2006 decreased
$7.6 million or 52.1% as compared to fiscal year 2005. The
decrease is primarily due to the decrease in gross profit
discussed above.
Revenues
The increase of $167.2 million or 22.7% during fiscal year
2006 compared to fiscal year 2005 was primarily attributable to:
The increase in revenues for fiscal year 2006 was partially
offset by a reduction in the amounts of maintenance services for
three customers in the energy industry due to these
customers’ seasonal schedules of refueling outages and the
successful completion of a decommissioning project in the energy
industry.
Gross
Profit and Gross Profit Percentage
The increase in gross profit of $2.9 million or 10.9%
compared to fiscal year 2005 is due to the increase in capital
construction services for chemical industry customers, which is
being executed at a higher gross profit than the routine
maintenance services. The increase in gross profit percentage
related to capital construction services has been partially
offset by a reduction of our estimate of total performance
incentive
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fees on an energy project in the U.S., which resulted in a
reduction of revenues and gross profit and the lower gross
profit percentage.
Our maintenance segment has recorded revenues to date of
$34.7 million related to our significant estimated, project
incentives and unapproved change orders and claims as of
August 31, 2006 on a percentage-of-completion basis.
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
The $0.7 million increase in pre-tax income before other
items for fiscal year 2006 as compared to fiscal year 2005 is
primarily attributable to the changes in gross profit addressed
above offset by an increase in G&A to support our revenue
growth.
Revenues
The increase in revenues of $92.6 million or 40.8% in
fiscal year 2006 as compared to fiscal year 2005 is primarily
attributable to significant new contract awards from the energy
and chemical industries and the continued shortage of materials
available in the manufacturing and distribution markets
worldwide.
The increase in revenues is also due to a change in the method
of eliminating intersegment revenues. Our F&M segment
performs pipe fabrication work on several E&C projects. We
have previously classified these revenues as “intersegment
revenues” and eliminated them from our F&M segment;
however, the gross profit from these sales remained within the
F&M segment. Beginning April 1, 2006 we are now
segmenting the E&C contracts and the revenue from the pipe
fabrication portion of the contract will remain in the F&M
segment.
Gross
Profit and Gross Profit Percentage
The increase in gross profit for fiscal year 2006 of
$25.9 million or 62.6% compared to fiscal year 2005 was
primarily attributable to the increase in volume and better
pricing of fabricated piping systems, increase in gross profit
from bending machines sold and shipped, and better than
anticipated gross profit from the domestic manufacturing and
distribution business due the continued strong worldwide demand.
The increase in gross profit percentage was offset by the
presentation of intersegment project activity mentioned above.
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
The $26.4 million or 121.1% increase in pre-tax income
before other items for fiscal year 2006 as compared to fiscal
year 2005 is due primarily to the changes in gross profit
addressed above as well as a decrease in G&A primarily due
to legal and professional fees related to a customer-related
claim.
Income
(loss) before income taxes, minority interest, earnings (losses)
from unconsolidated entities and income (loss) from discontinued
operations
The $27.7 million decrease in pre-tax loss before other
items is due to a decrease in interest expense and a decrease in
loss on the retirement of debt, which was partially offset by an
increase in G&A.
The decrease in interest expense reflects the decrease in our
long-term debt, which resulted from the repurchase of our Senior
Notes during the third quarter of fiscal year 2005, which was
partially offset by interest due to borrowings on our Credit
Facility. Fiscal year 2005 included a loss of $47.8 million
on the retirement of debt.
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G&A increased by $26.7 million, or 47.2%, during
fiscal year 2006 compared to fiscal year 2005 in order to
support the increasing revenue base and level of business
activity. Specific items that contributed to the increase in
G&A during fiscal year 2006 included increased labor costs
due to higher headcount primarily in accounting and finance,
corporate functional and business development personnel, as well
as, an increase in professional fees for audit and legal
services related to the SEC informal inquiry and other business
agreements. Also contributing to higher G&A in fiscal year
2006 was our expensing of previously deferred third party
financing costs and certain due diligence costs related to the
proposed acquisition of a controlling interest in Westinghouse
and an increase in employee compensation expense for the cost of
stock options now accounted for under SFAS 123(R).
Unconsolidated
Entities, Income Taxes and Discontinued Operations
During fiscal year 2006, we recognized earnings of
$2.1 million as compared to earnings of $3.8 million
for fiscal year 2005 from operations of unconsolidated entities,
including joint ventures, which are accounted for using the
equity method. The decreased earnings from unconsolidated
entities, net reflects the consolidation of a previously
unconsolidated entity due to our acquisition of one of our joint
venture partners, a decrease in earnings from privatization
entities as a whole, and start up of our joint venture with KB
Home.
Our effective tax rate was 22% and 46% for fiscal years 2006 and
2005, respectively. During fiscal year 2005, we recorded a
$6.9 million income tax expense to establish a valuation
allowance for deferred tax assets related to our U.K. pension
liability. Excluding the $6.9 million valuation allowance
discussed above, our effective tax rate for 2005 was 28%. The
decrease in the effective rate for fiscal year 2006 is primarily
due to utilization of foreign Net Operating Losses (NOL)
previously reserved.
Liquidity
and Capital Resources
We generated significant positive operating cash flows for
fiscal year 2007 due primarily to collections of accounts
receivable related to fiscal year 2006 disaster relief and
recovery services work, and the positive cash performance on
several EPC projects. The disaster relief and recovery services
work was the primary cause of the decline in operating cash
flows in fiscal year 2006 as compared to fiscal year 2005. We do
not expect to have to borrow on existing lines of credit to meet
our cash flow requirements for fiscal year 2008, but we do
expect to require additional letter of credit and surety bonding
capacity to increase our ability to negotiate and execute major
EPC projects. Though markets for our EPC services continue to be
strong, our ability to continue to sign incremental major EPC
contracts may be dependent on our ability to increase our letter
of credit and surety bonding capacity, our ability to achieve
timely release of existing letters of credit and surety bonds,
and/or our
ability to obtain more favorable terms from our customers
reducing letter of credit and surety requirements on new work.
Additionally, as discussed below under “Credit
Facility,” the increase in the usage of the Credit Facility
for performance letters of credit may reduce our borrowing
capacity available for general working capital needs. We believe
cash generated from operations and available borrowings under
our Credit Facility, will be sufficient to fund operations for
the next twelve months. We may finance the construction of a new
pipe fabrication facility in Mexico which is estimated to
require approximately $25 million of capital expenditures
in fiscal year 2008. We also anticipate the need to increase the
amounts available under our credit facility during fiscal year
2008 to accommodate anticipated growth in our businesses.
The terms we negotiate on new major EPC projects include
arrangements for significant retainage of amounts billed by us
or significant other financial security in forms including
performance bonds and letters of credit or a combination of
retainage and other security. Our expectations may vary
materially from what is actually received as the timing of these
new projects is uncertain and a single or group of large
projects could have a significant impact on sources and uses of
cash.
As of August 31, 2007, we had cash and cash equivalents of
$341.4 million, which excludes $19.3 million of
restricted and escrowed cash. Additionally, we had
$119.0 million of revolving credit availability under our
$850.0 million Credit Facility. On October 13, 2006,
we entered into Amendment IV to our Credit Facility to
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allow for the investment in Westinghouse and allow for an
increase in the Credit Facility from $750.0 million to
$1.0 billion. We made effective $100.0 million of the
approved increase, thus increasing the capacity of the Credit
Facility to $850.0 million. Subject to outstanding amounts,
the entire Credit Facility, as amended, is available for
performance letters of credit. Additionally, the sublimit for
revolving lines of credit and financial letters of credit
increased from $425.0 million to $525.0 million until
November 30, 2007, and $425.0 million thereafter. The
Credit Facility retains the original maturity of April 25,
2010.
The following table sets forth the cash flows (in thousands):
Net operating cash flows increased by $555.6 million in
fiscal year 2007 compared to fiscal year 2006. The increase was
due, in part, to a $326.0 million improvement in
E&I’s operating cash flow due primarily to collection
of amounts due to us in connection with disaster relief,
emergency response and recovery services performed for federal,
state and local government agencies, and private entities
performed during fiscal year 2006.
The decrease in operating cash for fiscal year 2006 as compared
to fiscal year 2005 is due primarily to providing hurricane
disaster recovery work. In executing our disaster recovery work
associated with Hurricanes Katrina and Rita, we experienced
payment terms with subcontractors generally shorter than
historical levels reflecting a tight market for delivery of
services and supplies into the disaster affected area. In
contrast, we experienced significantly slower historical
receipts for our services as final contract terms were resolved
with customers and our state and local government customers
await federal relief funds. The extended periods to collect
payment for our services combined with a significant increase in
the volume of work on these disaster relief efforts resulted in
a use of cash and reduction in operating cash flows during
fiscal year 2006. The decrease in net operating cash flows in
fiscal year 2006 was also impacted by the disbursement of funds
associated with one project in the U.S., which achieved
substantial completion during the third quarter of fiscal year
2006. Additionally, we recorded claims and unapproved charge
orders on certain projects that were being executed in 2006
which did not result in cash flows until the final contractual
terms were mutually agreed and settled in fiscal year 2007.
Partially offsetting these fiscal year 2006 decreases were cash
receipts related to claims recovery of approximately
$67.7 million.
Cash used in investing activities increased $1.2 billion
from fiscal year 2006 to fiscal year 2007 primarily due to the
proceeds from the Westinghouse Bonds with an approximate
principal amount of $1.1 billion that were used to fund our
acquisition of a 20% interest in Westinghouse. Partially
offsetting the year-over-year increase in cash used in investing
activities was a reduction of $108.8 million in net cash
received from restricted and escrowed cash in fiscal year 2007
as compared to fiscal year 2006 associated with a power project.
Significant cash was deposited into restricted and escrowed cash
accounts, primarily to set aside funding for one project in the
U.S. during the first half of fiscal year 2005 as compared
to significant cash received from the withdrawal of funds from
restricted and escrowed cash accounts associated with completion
of that project during fiscal year 2006.
The increase in cash provided by investing activities of
$193.5 million in fiscal year 2006 as compared to fiscal
year 2005 is due primarily to the cash deposited into restricted
and escrowed cash accounts for one
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domestic power project during fiscal year 2005 as compared to
significant withdrawal of those funds from restricted and
escrowed cash accounts associated with completion of that
project during fiscal year 2006.
Net financing cash flows increased $742.8 million from
fiscal year 2006 to fiscal year 2007 primarily due to the
acquisition of our 20% interest in Westinghouse with proceeds
from the Westinghouse Bonds. Partially offsetting this increase
in financing cash flows were net reductions in our revolving
credit facilities during fiscal year 2007 by $150.8 million
as compared to net borrowings on our revolving credit facilities
of $103.9 million in fiscal year 2006.
See Note 8 — Long-Term Debt and Revolving Lines
of Credit and Note 2 — Acquisition of Investment
in Westinghouse and Related Agreements included in Part II,
Item 8 — Financial Statements and Supplementary
Data for additional information about our Westinghouse Bonds.
On May 31, 2007, we redeemed our remaining Senior Notes of
$15.2 million plus interest with existing cash on hand.
Net financing cash flows increased $99.0 million from
fiscal year 2005 to fiscal year 2006 primarily due to higher net
borrowings on our Credit Facility during fiscal year 2006 to
support the disaster relief, emergency response and recovery
services addressed in the operating cash flow discussion above.
On October 13, 2006, we entered into Amendment IV to
our Credit Facility to allow for the investment in Westinghouse
and to allow for an increase in the Credit Facility from
$750.0 million to $1.0 billion. We made effective
$100.0 million of the approved increase, thus increasing
the capacity of the facility to $850.0 million. Subject to
outstanding amounts, the entire Credit Facility, as amended, is
available for performance letters of credit. We also increased
our sublimit for revolving lines of credit and financial letters
of credit from $425.0 million to $525.0 million until
November 30, 2007, and $425.0 million thereafter. The
Credit Facility retains the original maturity of the agreement
of April 25, 2010.
The Credit Facility is available for working capital needs and
to fund fixed asset purchases, acquisitions and investments in
joint ventures and general corporate purposes. During fiscal
year 2007, we borrowed and repaid such borrowings and we may
periodically borrow under our Credit Facility in the future.
As of August 31, 2007, we were in compliance with the
financial covenants contained in the Credit Facility agreement.
During fiscal year 2007, we have obtained waivers of financial
reporting covenants in the Credit Facility through
December 31, 2007, as a result of delays in filing our
periodic reports with the SEC.
See Note 8 — Long-Term Debt and Revolving Lines
of Credit included in Part II, Item 8 —
Financial Statements and Supplementary Data for a description
of: (1) the terms and interest rates related to our Credit
Facility and revolving lines of credit; (2) amounts
available and outstanding for performance letters of credit,
financial letters of credit and revolving loans under our Credit
Facility; and (3) a description of our Credit Facility
financial covenants and matters related to our compliance with
those covenants during fiscal year 2007.
Additionally, we have various short-term (committed and
uncommitted) revolving credit facilities from several financial
institutions which are available for letters of credit and, to a
lesser extent, working capital loans. See
Note 8 — Long-Term Debt and Revolving Lines of
Credit included in Part II, Item 8 —
Financial Statements and Supplementary Data for additional
information.
On a limited basis, performance assurances are extended to
customers that guarantee certain performance measurements upon
completion of a project. If performance assurances are extended
to customers, generally
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our maximum potential exposure is the remaining cost of the work
to be performed under engineering and construction contracts
with potential recovery from third party vendors and
subcontractors for work performed in the ordinary course of
contract execution. As a result, the total costs of the project
could exceed our original cost estimates and we could experience
reduced gross profit or possibly a loss for that project. In
some cases, where we fail to meet certain performance standards,
we may be subject to contractual liquidated damages.
See Note 6 — Equity Method Investments and
Variable Interest Entities included in Part II,
Item 8 — Financial Statements and Supplementary
Data for a discussion of guarantees related to our Privatization
entities.
During the third quarter of fiscal year 2005, we entered into a
guarantee with a third party to guarantee a revolving line of
credit of one of our unconsolidated entities, Shaw YPC Piping
(Nanjing) Co. LTD, for helping the entity meet its working
capital needs. This guarantee expired during fiscal year 2007.
During the fourth quarter of fiscal year 2005, we entered into a
guarantee with a third party to guarantee the payment of certain
tax contingencies related to Roche Consulting, Group Limited,
which was sold during the fourth quarter of fiscal year 2005.
Our maximum exposure under this guarantee at the time we entered
into this agreement was estimated at $2.3 million.
Our lenders issue letters of credit on our behalf to customers
or sureties in connection with our contract performance and in
limited circumstances certain other obligations to third
parties. We are required to reimburse the issuers of these
letters of credit for any payments which they make pursuant to
these letters of credit. At August 31, 2007, we had both
letter of credit commitments and bonding obligations, which were
generally issued to secure performance and financial obligations
on certain of our construction contracts, which expire as
follows (in millions):
Of the amount of outstanding letters of credit at
August 31, 2007, $526.3 million were issued to
customers in connection with contracts (performance letters of
credit). Of the $526.3 million, five customers held
$312.5 million or 59% of the outstanding letters of credit.
The largest letter of credit issued to a single customer on a
single project is $84.5 million. Draws under our letters of
credit as of August 31, 2007 totaled $9.4 million.
As of August 31, 2007 and 2006, we had total surety bonds
of $875.2 million and $438.2 million, respectively.
However, based on our percentage of completion on contracts
covered by these surety bonds, our estimated potential liability
as of August 31, 2007 and August 31, 2006 was
$467.7 million and $310.8 million, respectively.
Fees related to these commercial commitments were
$18.8 million for fiscal year 2007 as compared to
$17.8 million for fiscal year 2006 and were recorded in the
accompanying consolidated statements of operations.
For a discussion of long-term debt and a discussion of
contingencies and commitments, see Note 8 —
Long-Term Debt and Revolving Lines of Credit and
Note 13 — Contingencies and Commitments,
respectively, included in Part II, Item 8 —
Financial Statements and Supplementary Data.
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Aggregate
Contractual Obligations
As of August 31, 2007 we had the following contractual
obligations (in millions):
See Note 8 — Long-Term Debt and Revolving Lines
of Credit, Note 12 — Operating Leases,
Note 13 — Contingencies and Commitments and
Note 16 — Employee Benefit Plans included in
Part II, Item 8 — Financial Statements and
Supplementary Data for a discussion of long-term debt, leases
and contingencies.
Backlog
of Unfilled Orders
General. Our backlog represents
management’s estimate of the amount of awards that we
expect to result in future revenues. Backlog is based on legally
binding agreements for projects that management believes are
probable to proceed. Awards are evaluated by management on a
project-by-project
basis, and are reported for each period shown based upon the
nature of the underlying contract, commitment, and other
factors, including the economic, financial and regulatory
viability of the project and the likelihood of the contract
proceeding. We estimate that approximately 42% of our backlog at
August 31, 2007 will be completed in fiscal year 2008.
Our backlog is largely a reflection of the broader economic
trends being experienced by our customers and is important to us
in anticipating our operational needs. Backlog is not a measure
defined in generally accepted accounting principles (GAAP), and
our methodology for determining backlog may not be comparable to
the methodology used by other companies in determining their
backlog. We cannot assure you that revenues projected in our
backlog will be realized, or if realized, will result in profits.
Many of the contracts in backlog provide for cancellation fees
in the event customers cancel projects. These cancellation fees
usually provide for reimbursement of our out-of-pocket costs,
revenues associated with work performed prior to cancellation
and a varying percentage of the profits we would have realized
had the contract been completed.
Fossil & Nuclear and E&C
Segments. We define our backlog in the
Fossil & Nuclear segment and in the E&C segment
to include projects for which we have received a commitment from
our customers and our pro rata share of our consolidated joint
venture entities. This commitment typically takes the form of a
written contract for a specific project, a purchase order, or a
specific indication of the amount of time or material we need to
make available for a customer’s anticipated project.
Certain backlog engagements are for particular products or
projects for which we estimate anticipated future revenues,
often based on engineering and design specifications that have
not been finalized and may be revised over time.
E&I Segment. Our E&I segment’s
backlog includes the value of awarded contracts including the
estimated value of unfunded work and our pro rata share of
consolidated joint venture entities. The unfunded backlog
generally represents various government (federal, state and
local) project awards for which the project
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funding has been partially authorized or awarded by the relevant
government authorities (e.g., authorization or an award has been
provided for only the initial year of a multi-year project).
Because of appropriation limitations in the governmental budget
processes, firm funding is usually made for only one year at a
time, and, in some cases, for periods less than one year, with
the remainder of the years under the contract expressed as a
series of one-year options. Amounts included in backlog are
based on the contract’s total awarded value and our
estimates regarding the amount of the award that will ultimately
result in the recognition of revenues. These estimates are based
on indications of future values provided by our clients, our
experience with similar awards, similar clients and our
knowledge and expectations relating to the given award.
Generally the unfunded component of new contract awards is added
to backlog at 75% of our expected value. The programs are
monitored and estimates are reviewed periodically, and
adjustments are made to the amounts included in backlog and in
unexercised contract options to properly reflect our estimate of
total contract value in the E&I backlog. Our E&I
segment backlog does not include any awards (funded or unfunded)
for work expected to be performed more than five years after the
date of our financial statements. The amount of future actual
awards may be more or less than our estimates.
Maintenance Segment. We define our backlog in
the Maintenance segment to include projects which are based on
legally binding contracts from our customers and our pro rata
share of consolidated joint venture entities. This commitment
typically takes the form of a written contract for a specific
project purchase order, or a specific indication of the amount
of time or material we need to make available for a
customer’s anticipated projects. Certain backlog
engagements are for particular products or projects for which we
estimate anticipated future revenues. Our backlog for
maintenance work is derived from maintenance contracts and our
customers’ historic maintenance requirements, as well as
our future cost estimates based on the client’s indications
of future plant outages. Our Maintenance segment backlog does
not include any awards for work expected to be performed more
than five years after the date of our financial statements.
F&M Segment. We define our backlog in the
F&M segment to include projects for which we have received
a commitment from our customers. This commitment typically takes
the form of a written contract for a specific project, a
purchase order, or a specific indication of the amount of time
or material we need to make available for customers’
anticipated projects.
Our backlog is as follows:
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Backlog for the Fossil & Nuclear segment as of
August 31, 2007 increased $3.5 billion as compared to
August 31, 2006. The increase in backlog is primarily a
result of booking multiple significant fossil AQCS FGD and clean
coal power projects, and services for four nuclear unit plants
to be constructed at two sites in China.
Backlog for the E&I segment as of August 31, 2007
decreased $175.9 million compared to August 31, 2006.
Awards for fiscal year 2007 primarily relate to remediation,
consulting and logistics services from federal and commercial
clients. While the fiscal year 2007 storm season was mild, the
impact of disaster relief, emergency response and recovery
services can be significant to the E&I segment’s
backlog, as was experienced in fiscal year 2006.
We expect our E&I segment backlog to remain sensitive to
the levels of government funding, awards related to disaster
relief, emergency response, recovery services projects, and to a
lesser extent commercial clients’ environmental quality
needs. The E&I backlog will rest on our ability to win new
contract awards in this highly competitive environment. As of
August 31, 2007, contracts with government agencies or
entities owned by the U.S. Government are a predominant
component of the E&I backlog, accounting for
$2.2 billion or 86% of the $2.6 billion in backlog.
Unfunded backlog related to federal government projects awarded
for which funding has not been approved is $2.0 billion at
August 31, 2007 and 2006, respectively.
Backlog for the E&C segment as of August 31, 2007
increased $1.1 billion as compared to August 31, 2006.
Included in backlog at August 31, 2007 and 2006, is
$994.4 million and $872.0 million, respectively, of
customer furnished materials which do not have any associated
gross profit. The increase in backlog is due primarily to the
signing of a major ethylene project in Singapore. At
August 31, 2007, two customers account for approximately
$1.9 billion or 75% of backlog for the E&C segment.
Backlog for the Maintenance segment as of August 31, 2007
increased $440.7 million as compared to August 31,
2006. The increase in backlog was due primarily to a significant
new award in the energy industry to provide maintenance,
modification, and construction services to a customer at
multiple sites as well as many smaller awards for other
construction services. At August 31, 2007, two customers
account for nearly $1.0 billion or 59% of the
$1.7 billion in backlog for Maintenance.
Backlog for the F&M segment as of August 31, 2007
increased $304.9 million as compared to August 31,
2006 due to the increasing demand in the chemical,
petrochemical, refining, and power generation industries for our
fabrication and manufacturing and distribution services. At
August 31, 2007, two customers account for approximately
$235 million or 33% of backlog for the F&M segment.
Inflation
and Changing Prices
We believe that overall inflation and changing prices in the
economies in which we perform our services have a minimal effect
on our revenues and our income from continuing operations.
Generally, for our long-term contract pricing and related cost
to complete estimates, we attempt to consider the impact of
potential
59
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price changes on deliveries of materials and equipment expected
to occur in the future. In addition, for our projects that are
reimbursable at cost plus a fee, we generally are reimbursed for
all contractual costs including rising costs in an inflationary
environment. Our fixed price contracts may provide for price
adjustments through escalation clauses. See Part I,
Item 1 — Business — Types of Contracts
and Part I, Item 1A — Risk Factors for
additional information about the nature of our contracts.
Additionally, Item 7A — Quantitative and
Qualitative Disclosures about Market Risk addresses the impact
of changes in interest rates on our earnings
Critical
Accounting Policies and Related Estimates That Have a Material
Effect on Our Consolidated Financial Statements
We consider an accounting estimate to be critical if:
(1) the accounting estimate requires us to make assumptions
about matters that were highly uncertain at the time the
estimate was made; and (2) changes in the estimate that are
reasonably likely to occur from period to period, or use
different estimates that we reasonably could have used in the
current period, would have a material impact on our financial
condition or results of operations. Management has discussed the
development and selection of these critical accounting estimates
with the Audit Committee of our Board of Directors and the Audit
Committee has reviewed the foregoing disclosure. In addition,
there are other items within our financial statements that
required estimation, but are not deemed critical as defined
above. Changes in estimates used in these and other items could
have a material impact on our financial statements. Information
regarding our other accounting policies is included in
Note 1 — Description of Business and Summary of
Significant Accounting Policies in our consolidated financial
statements in Item 8 — Financial Statements and
Supplementary Data.
Nature
of Estimates Required
A substantial portion of our revenue is derived from long-term
construction contracts. The contracts may be performed as
stand-alone engineering, procurement or construction contracts
or as combined contracts (i.e. one contract that covers
engineering, procurement and construction or a combination
thereof). For contracts that meet the criteria under
SOP 81-1,
we recognize revenues on the percentage-of-completion method,
primarily based on costs incurred to date compared with total
estimated contract costs.
It is possible there will be future and currently unforeseeable
significant adjustments to our estimated contract revenues,
costs and gross profit for contracts currently in process,
particularly in the later stages of the contracts. These
adjustments are common in the construction industry and inherent
in the nature of our contracts. These adjustments could,
depending on the magnitude of the adjustments
and/or the
number of contracts being executed, materially, positively or
negatively, affect our operating results in an annual or
quarterly reporting period. These adjustments are, in our
opinion, most likely to occur as a result of, or be affected by,
the following factors in the application of the
percentage-of-completion method discussed above for our
contracts.
Incentives can be tied to measurable criteria such as costs,
schedule, performance, safety, milestones, etc. Recognition of
revenue from incentives requires significant judgment and is
based on a project-specific basis.
Generally, the penalty provisions for our cost-reimbursable
contracts are “capped” to limit our monetary exposure.
Although we believe it is unlikely that we could incur losses or
lose all of our
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gross profit on our cost-reimbursable contracts, it is possible
for penalties to reduce or eliminate previously recorded profits.
The incentive/penalty provisions are usually finalized as
contract change orders either subsequent to negotiation with, or
verification by, our customers. Therefore, while
cost-reimbursable contracts generally limit our risks on the
related projects, we can incur losses on these contracts.
In most situations, the amount and impact of
incentives/penalties are not, or cannot be, finalized until the
later stages of the contract, at which time we record
adjustments to the amounts of project revenues and cost on a
cumulative
catch-up
basis. Since the percentage complete is high at these later
stages, recognizing the incentives or penalties can have a
significant impact on a period’s earnings.
The accuracy of the gross profit we report for fixed-price
contracts is dependent upon the judgments we make in estimating
our contract performance, contract revenues and cost, and our
ability to recover additional contract costs through change
orders, claims or backcharges to the customer, subcontractors
and vendors. Many of these contracts also have incentive/penalty
provisions. Increases in cost estimates and decreases in revenue
estimates, unless recoverable from claims or change orders, will
result in a reduction in profit.
Disputes with other parties involved in the contract can and
often do occur. These disputes are generally the result of one
party incurring costs or damages caused by another party during
execution of a project. We may incur additional costs or be
damaged and we may cause additional costs or damage to other
parties. The other parties include our customer on the contract,
subcontractors and vendors we have contracted with to execute
portions of the project and others. We may claim damages against
others and others may claim damages against us. Collectively, we
refer to disputes related to collection of these damages as
“claims.” Claims include amounts in excess of the
agreed contract price (or amounts not included in the original
contract price) that we seek to collect from our customers for
delays, errors in specifications and designs, contract
terminations, change orders in dispute or unapproved as to both
scope and price, or other causes of unanticipated additional
costs. These claims against customers are included in our
revenue estimates as additional contract revenues up to the
amount of contract costs incurred when the recovery of such
amounts is probable. Backcharges and claims against and from our
vendors, subcontractors and others are included in our cost
estimates as a reduction or increase in total estimated costs
when recovery or payment of the amounts is probable and the
costs can be reasonably estimated.
Claims are included in costs and estimated earnings in excess of
billings on the balance sheet (see Note 19 —
Long-Term Construction Accounting for Revenue and Profit/Loss
Recognition Including Claims, Unapproved Change Orders and
Incentives included in Part II, Item 8 —
Financial Statements and Supplementary Data for further
discussion of our significant claims).
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Assumptions
and Approach Used
We use accounting principles set forth in
SOP 81-1,
“Accounting for Performance of Construction-Type and
Certain Production-Type Contracts,” and other applicable
accounting standards to account for our contracts. Performance
incentives are included in our estimates of revenues using the
percentage-of-completion method when their realization is
probable. Cancellation fees are recognized when received.
Provisions for estimated losses on uncompleted contracts are
made in the period in which the losses are identified. The
cumulative effect of changes to estimated contract gross profit
and loss, including those arising from contract penalty
provisions such as liquidated damages, final contract
settlements, warranty claims and reviews of our costs performed
by customers, are recognized in the period in which the
revisions are identified. To the extent that these adjustments
result in a reduction or elimination of previously reported
profits, we report such a change by recognizing a charge against
current earnings, which might be significant depending on the
size of the project or the adjustment. Gross profit is recorded
for change orders and claims in the period such amounts are
settled or approved.
Revenue
Recognition — Contract Segmenting
Certain contracts include services performed by more than one
operating segment, particularly EPC contracts which include pipe
fabrication and steel erection services performed by our
F&M segment. We segment revenues, costs and gross profit
related to our significant F&M subcontracts that meet the
criteria in
SOP 81-1.
Revenues recorded in our F&M segment under this policy are
based on our prices and terms for such similar services to third
party customers. This policy may result in different interim
rates of profitability for each segment of the affected EPC
contract than if we had recognized revenues on a
percentage-of-completion for the entire project based on the
combined estimated total costs of all EPC and pipe fabrication
and steel erection services.
Nature
of Estimates Required
Revenues generated from licensing our chemical industry
performance enhancement technologies are recorded in the period
earned based on the performance criteria defined in the related
contracts.
Assumptions
and Approach Used
For running royalty agreements, we recognize revenues based on
customer production volumes at the contract specified unit
rates. Sales of
paid-up
license agreements are coupled with the sale of engineering
services for the integration of the technology into the
customers’ processes. For
paid-up
license agreements, revenue is recognized using the
percentage-of-completion method, measured by the percentage of
costs incurred to date on engineering services to total
estimated contract costs (primarily engineering cost and
estimated performance guarantee liability). Under such
agreements, revenue available for recognition on a
percentage-of-completion basis is limited to the agreement value
less a provision for contractually specified performance
guarantees. The provision for performance guarantees is recorded
in gross profit when, and if, the related performance testing is
successfully completed or an assessment indicates a reduction of
the liability provision is appropriate.
Nature
of Estimates Required
For most housing privatization projects we provide operations
management, development, and construction services through 50%
owned entities (the Privatization Subsidiaries). These services
are provided to the companies that hold the equity ownership in
the housing and related assets (the Privatization Entities).
Typically, the Privatization Subsidiary and the related military
branch each own a portion of the Privatization Entity during the
term of contract, which generally is 50 years. The
Privatization Subsidiary recognizes revenues from operations
management and related incentive fees as earned. The
Privatization Subsidiary
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recognizes revenues on development and construction service fees
on the percentage-of-completion method based on costs incurred
to date compared with total estimated contract costs.
Assumptions
and Approach Used
We defer our economic ownership percentage of development and
construction service fees and recognize those fees over the
useful lives of the related capitalized improvements. We
recognize earnings for our economic ownership percentage of the
net earnings of the Privatization Entity. Because the
Privatization Subsidiaries are unconsolidated subsidiaries, we
record their results in earnings from unconsolidated entities
(see Note 6 — Equity Method Investments and
Variable Interest Entities included in Part II,
Item 8 — Financial Statements and Supplementary
Data).
Nature
of Estimates Required
We are subject to various claims, lawsuits, environmental
matters and administrative proceedings that arise in the
ordinary course of business. Estimating liabilities and costs
associated with these matters requires judgment and assessment
based on professional knowledge and experience of our management
and legal counsel. The ultimate resolution of any such exposure
may vary from earlier estimates as further facts and
circumstances become known.
Assumptions
and Approach Used
In accordance with SFAS No. 5, “Accounting for
Contingencies,” amounts are recorded as charges to earnings
when we determine that it is probable that a liability has been
incurred and the amount of loss can be reasonably estimated.
Nature
of Estimates Required, Assumptions and Approach
Used
Deferred income taxes are provided on a liability method whereby
deferred tax assets/liabilities are established for the
difference between the financial reporting basis and the income
tax basis of assets and liabilities, as well as operating loss
and tax credit carryforwards and other tax credits. Deferred tax
assets are reduced by a valuation allowance when, in our
opinion, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the period in which
those temporary differences become deductible. We also consider
the reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment of such realization. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment. As of August 31, 2007,
we had deferred tax assets of $190.1 million, net of
valuation allowance, including $99.3 million related to net
operating losses and tax credit carryforwards. As of
August 31, 2007, we had a deferred tax asset valuation
allowance of $24.1 million (see Note 9 —
Income Taxes included in Part II, Item 8 —
Financial Statements and Supplementary Data).
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, 2007 was
approximately $514.0 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
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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.
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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.
We do not enter into derivative financial instruments for
trading, speculation or other purposes that would expose us to
market risk. In the normal course of business, we have exposure
to both interest rate risk and foreign currency exchange rate
risk.
We are exposed to interest rate risk due to changes in interest
rates, primarily in the U.S. and Japan. Our policy is to
manage interest rate risk through the use of a combination of
fixed and floating rate debt and short-term fixed rate
investments.
Our Credit Facility provides that both revolving credit loans
and letters of credit may be issued within the
$850.0 million limit of the Credit Facility. At
August 31, 2007, there were no revolving credit loans under
the Credit Facility. At August 31, 2007, the fixed interest
rate on our primary Credit Facility was 7.90% with an
availability of $119.0 million. See Note 8 —
Long-Term Debt and Revolving Lines of Credit included in
Part II, Item 8 — Financial Statements and
Supplementary Data for further discussion.
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As of August 31, 2007, excluding Westinghouse, we have no
variable rate debt. Including Westinghouse, we have outstanding
$653.1 million of variable rate Westinghouse bonds (face
value 78 billion JPY) with a coupon rate of 0.70% above the
sixth-month JPY LIBOR rate (1.07% as of August 31, 2007).
We have entered into an interest rate swap agreement through
March 15, 2013 which fixes our interest payments at 2.398%
to minimize our interest rate risk.
The table below provides information about our outstanding debt
instruments (including capital leases) that are sensitive to
changes in interest rates. The table presents principal cash
flows and related weighted average interest rates by expected
maturity dates. The information is presented in U.S. dollar
equivalents, which is our reporting currency. The
instrument’s actual cash flows are denominated in millions
of U.S. dollars ($US) and the table is accurate as of
August 31, 2007.
The calculated fair value of long-term debt (including capital
leases) incorporates the face value of the Westinghouse Bonds
and related foreign currency translation adjustments recognized
as of August 31, 2007.
During fiscal year 2007, we issued bonds denominated in JPY in
connection with our investment in Westinghouse. These bonds,
which have an aggregate face value of 128.98 billion JPY
(or $1.12 billion as of August 31, 2007), are revalued
at the end of each accounting period using period-end exchange
rates. A 1% increase in the value of the JPY against the
U.S. dollar will create a $11.2 million foreign
exchange loss in our income statement. Although the Put Option
associated with our investment in Westinghouse, if exercised,
could mitigate the amount of foreign exchange loss incurred with
respect to these bonds, a significant and sustained appreciation
in the value of the JPY versus the U.S. dollar could
significantly reduce our returns on our investment in
Westinghouse. See Note 2 — Acquisition of
Investment in Westinghouse and Related Agreements and
Note 8 — Long-Term Debt and Revolving Lines of
Credit included in Part II, Item 8 —
Financial Statements and Supplementary Data for more information
regarding these JPY-denominated bonds and our investment in
Westinghouse.
The majority of our transactions are in U.S. dollars;
however, some of our subsidiaries conduct their operations in
various foreign currencies. Currently, when considered
appropriate, we use hedging instruments to manage the risk
associated with our subsidiaries’ operating activities when
they enter into a transaction in a currency that is different
than their local currency. In these circumstances, we will
frequently utilize forward exchange contracts to hedge the
anticipated purchases
and/or
revenues. We attempt to minimize our exposure to foreign
currency fluctuations by matching revenues and expenses in the
same currency as our contracts. As of August 31, 2007, we
had a minimal number of forward exchange contracts outstanding
that were hedges of interest payments on the Westinghouse Bonds.
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Board of Directors and Shareholders
The Shaw Group Inc. and Subsidiaries
We have audited The Shaw Group Inc.’s internal control over
financial reporting as of August 31, 2007, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Shaw Group Inc.’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying 2007 Annual Report on
Form 10-K.
Our responsibility is to express an opinion on 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, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included 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
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.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weaknesses have been identified and
included in management’s assessment in Item 9A(b) of
the 2007 Annual Report on
Form 10-K:
• Control Environment over Financial Reporting
• Complex or Non-Routine Accounting Matters
• Period-End Financial Reporting Process
• Energy & Chemical Segment Control
Environment
• Energy & Chemical Segment Project Reporting
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of The Shaw Group Inc. and
subsidiaries as of August 31, 2007, and the related
consolidated statements of operations, shareholders’
equity, and cash flows. These
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material weaknesses were considered in determining the nature,
timing, and extent of audit tests applied in our audit of the
2007 consolidated financial statements, and this report does not
affect our report dated December 3, 2007, which expressed
an unqualified opinion on those consolidated financial
statements.
In our opinion, because of the effect of the aforementioned
material weaknesses on the achievement of the objectives of the
control criteria, The Shaw Group Inc. has not maintained
effective internal control over financial reporting as of
August 31, 2007, based on criteria established in Internal
Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We do not express an opinion or any other form of assurance on
management’s statements referring to corrective actions
taken after August 31, 2007, relative to the aforementioned
material weaknesses in internal control over financial reporting.
/s/ KPMG
LLP
Baton Rouge, Louisiana
December 3, 2007
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Board of Directors and Shareholders
The Shaw Group Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
The Shaw Group Inc. and subsidiaries as of August 31, 2007
and the related consolidated statement of operations,
shareholders’ equity and cash flows for the year ended
August 31, 2007. 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 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 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 audit provides 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 The Shaw Group Inc. and subsidiaries as of
August 31, 2007, and the results of their operations and
their cash flows for the year ended August 31, 2007, 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
Shaw Group Inc. and subsidiaries internal control over financial
reporting as of August 31, 2007, 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 December 3, 2007, expressed an adverse opinion on the
effectiveness of the Company’s internal control over
financial reporting.
As discussed in Note 1 and Note 16 to the consolidated
financial statements, effective August 31, 2007, the
Company adopted Statement of Financial Accounting Standards
No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans.
/s/ KPMG
LLP
Baton Rouge, Louisiana
December 3, 2007
Table of Contents
Board of Directors and Shareholders
The Shaw Group Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
The Shaw Group Inc. and subsidiaries (the Company) as of
August 31, 2006, and the related consolidated statements of
operations, shareholders’ equity, and cash flows for the
years ended August 31, 2006 and 2005. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of The Shaw Group Inc. and subsidiaries at
August 31, 2006, and the consolidated results of their
operations and their cash flows for the years ended
August 31, 2006 and 2005, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the consolidated financial statements have been
restated. As also discussed in Note 1 to the consolidated
financial statements, effective September 1, 2005, the
Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment.
/s/ Ernst &
Young LLP
New Orleans, Louisiana
October 27, 2006, except for the effects of the restatements described in paragraphs 1, 2, and 3 of Note 1, as to which the date is November 29, 2007
Table of Contents
THE SHAW
GROUP INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
THE SHAW
GROUP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Years Ended August 31, 2007, 2006 and 2005 (In thousands, except per share amounts)
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
THE SHAW
GROUP INC. AND SUBSIDIARIES
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