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  • 10-K (Oct 19, 2012)
  • 10-K (Oct 31, 2011)
  • 10-K (Oct 28, 2010)
  • 10-K (Oct 30, 2009)
  • 10-K (Oct 31, 2008)

 
Quarterly Reports

 
8-K

 
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Shaw Group 10-K 2007
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended August 31, 2007
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 1-12227
 
 
     
LOUISIANA   72-1106167
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
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:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock — no par value
  New York Stock Exchange
Preferred Stock Purchase Rights
with respect to Common Stock — no par value
  New York Stock Exchange
 
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).
 


 

 
 
                 
    3  
      Business     3  
      Risk Factors     17  
      Unresolved Staff Comments     33  
      Properties     34  
      Legal Proceedings     35  
      Submission of Matters to a Vote of Security Holders     35  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     35  
      Selected Financial Data     37  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     37  
      Quantitative and Qualitative Disclosures About Market Risk     65  
      Financial Statements and Supplementary Data     67  
      Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     186  
      Controls and Procedures     187  
      Other Information     190  
 
PART III
      Directors, Executive Officers and Corporate Governance     191  
      Executive Compensation     195  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     195  
      Certain Relationships and Related Transactions, and Director Independence     195  
      Principal Accounting Fees and Services     195  
 
PART IV
      Exhibits, Financial Statement Schedules     196  
 Specimen Common Stock Certificate
 Non-Employee Director Compensation Summary
 Employment Agreement - Richard F. Gill
 Employee Indemnity Agreement
 Employment Agreemeent - R. Monty Glover
 Code of Corporate Conduct
 Code of Ethics
 Insider Trading Policy
 Subsidiaries
 Consent of KPMG LLP
 Consent of Ernst & Young LLP
 Consent of Ernst & Young LLP
 Certification Pursuant to Section 302
 Certification Pursuant to Section 302
 Certifcation Pursuant to Section 906
 Certificaiton Pursuant to Section 906
 
 
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:
 
  •  Estimates of revenues and cost of revenues on contracts, including recognition of liquidated damages on a project, and allowances for uncollectible amounts resulting in changes to previously reported revenues and cost of revenues;
 
  •  Deferred costs deemed unrecoverable resulting in changes to previously reported cost of revenues;
 
  •  Compensation related matters, including vacation and benefit accruals, employment contracts, and stock-based compensation resulting in changes to costs of revenues, general and administrative expenses, other income and expense, and provision for income taxes; and
 
  •  Lease related items, including rent escalation provisions and amortization of leasehold improvements resulting in changes to costs of revenues and general and administrative expenses.
 
  •  Other errors resulting in other adjustments that are less significant and affect various other accounts.
 
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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PART I
 
 
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.
 
Item 1.   Business
 
 
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:
 
  •  Cost-plus contract — A contract under which we are reimbursed for allowable or otherwise defined costs incurred plus a fee or mark-up. The contracts may also include incentives for various performance criteria, including quality, timeliness, ingenuity, safety and cost-effectiveness. In addition, our costs are generally subject to review by our customers and regulatory audit agencies, which could result in costs being disputed as non-reimbursable under the terms of the contract.
 
  •  Target-price contract — A contract under which we are reimbursed for costs plus a fee which may be at risk if the target price is exceeded. As a result, we are generally able to recover cost overruns on these contracts from actual damages for late delivery or the failure to meet certain performance criteria. Target-price contracts also generally provide for sharing of costs in excess of or savings for costs less than the target. In some contracts, we may agree to share cost overruns in excess of our fee, which could result in a loss on the project.


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Our fixed-price contracts include the following:
 
  •  Firm fixed-price contract — May include contracts in which the price is not subject to any cost or performance adjustments and contracts where certain risks are shared with clients such as labor costs, commodity pricing changes, and/or cost escalation. As a result, we may benefit or be penalized from costs variations from our original estimates. However, these contract prices may be adjusted for changes in scope of work, new or changing laws and regulations and other events negotiated.
 
  •  Maximum price contract — A contract that provides at the outset for an initial target cost, an initial target profit and a price ceiling. The price is subject to cost adjustments incurred, but the adjustments generally do not exceed the price ceiling established in the contract. In addition, these contracts usually include provisions whereby we share cost savings with our clients.
 
  •  Unit-price contract — A contract under which we are paid a specified amount for every unit of work performed. A unit-price contract is essentially a firm fixed-price contract with the only variable being the number of units of work performed. Variations in unit-price contracts include the same type of variations as firm fixed-price contracts. We are normally awarded these contracts on the basis of a total price that is the sum of the product of the specified units and the unit prices.
 
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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Item 1A.   Risk Factors
 
 
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:
 
  •  contract costs and profits and application of the percentage-of-completion method of accounting;
 
  •  revenues recognized, and reduction of costs recognized, as a result of contract claims;
 
  •  recoverability of inventory and application of lower of cost or market accounting;
 
  •  provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, vendors and others;
 
  •  provisions for income taxes and related valuation allowances;
 
  •  recoverability of goodwill;
 
  •  recoverability of other intangibles and related estimated lives;
 
  •  valuation of assets acquired and liabilities assumed in connection with business combinations;
 
  •  valuation of defined benefit pension plans; and
 
  •  accruals for estimated liabilities, including litigation and insurance reserves.
 
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:
 
  •  incur additional indebtedness or contingent obligations;
 
  •  issue preferred stock;
 
  •  pay dividends or make distributions to our shareholders;
 
  •  repurchase or redeem our capital stock or subordinated indebtedness;
 
  •  make investments;
 
  •  create liens;
 
  •  enter into sale/leaseback transactions;
 
  •  incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us;
 
  •  make capital expenditures;
 
  •  enter into transactions with our shareholders and affiliates;
 
  •  sell and pledge assets; and
 
  •  acquire the assets of, or merge or consolidate with, other companies or transfer all or substantially all of our assets.
 
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:
 
  •  have less operating flexibility due to restrictions that could be imposed by our creditors, including restrictions on incurring additional debt, creating liens on our properties and paying dividends;
 
  •  have less success in obtaining new contracts if our sureties or our lenders limited our ability to provide new performance bonds or letters of credit for our projects;
 
  •  be required to dedicate a substantial portion of our cash flows from operations to the repayment of debt and the interest associated with that debt;


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  •  incur increased lending fees, costs and interest rates; and
 
  •  experience difficulty in financing future acquisitions and/or continuing operations.
 
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:
 
  •  requiring us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, which reduces the cash available for other business purposes;
 
  •  limiting our ability to obtain additional financing and creating additional liens on our assets;
 
  •  limiting our flexibility in planning for, and reacting to, changes in our business;
 
  •  placing us at a competitive disadvantage if we are more leveraged than our competitors;
 
  •  making us more vulnerable to adverse economic and industry conditions; and
 
  •  restricting us from making additional investments or acquisitions.
 
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:
 
  •  emissions into the air;
 
  •  discharges into waterways;
 
  •  generation, storage, handling, treatment and disposal of waste materials and hazardous substances; and
 
  •  health and safety.
 
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:
 
  •  our ability to obtain necessary permitting, land-use, building, occupancy and other required governmental permits and authorizations on a timely basis, which could result in increased development costs;
 
  •  the incurrence of construction costs related to new construction or renovations that exceed original estimates due to increased materials, labor or other costs, which costs could contribute to a lower than expected return;
 
  •  our ability to complete construction of a property on schedule and meet financial goals for development; and
 
  •  the incurrence of higher construction costs or experience in project delays if we are not successful in forming strategic alliances with key material suppliers and vendors.
 
Other risks directly associated with our military family housing privatization contracts with the DOD include:
 
  •  our ability to obtain the necessary levels of occupancy and rents, which could result in lower than expected returns and, in some cases, losses. Rents are determined by the U.S. Congress annually through appropriations for Basic Allowance for Housing (BAH) for all of the branches of the U.S. military. We cannot be assured that the appropriations each year will occur on a timely basis, or that the amount of BAH appropriations will be sufficient to keep up with escalations in the cost of living expenses. Congress may change the law and the DOD can revise its procedures at any time. We cannot be assured that such changes will not be made and, if changes are made, such changes may have a material adverse effect on the level of our income generated by our privatization projects, if rental income is not sufficient to cover project debt service requirements the joint venture may need to supplement income from fees or other sources; and
 
  •  our ability to guarantee that the military bases where we have military family housing projects will remain active or that their functions and/or staffing levels will not be materially reduced such that we will be unable to lease military family housing units to members of the U.S. military. The DOD has, from time to time, closed military bases and realigned and/or reduced the functions and staffing levels at certain bases under the Base Realignment and Closure (BRAC) initiative.
 
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:
 
  •  uncertain economic conditions in the foreign countries in which we make capital investments, operate and sell products and services;
 
  •  the lack of well-developed legal systems and less established or traditional business practices in some countries in which we operate and sell products and services, which could make it difficult for us to enforce our contractual rights;
 
  •  security and safety of employees and subcontractors;
 
  •  expropriation of property;
 
  •  restrictions on the right to convert or repatriate currency;
 
  •  political risks, including risks of loss due to civil strife, acts of war, guerrilla activities and insurrection;
 
  •  greater risk of uncollectible accounts and longer collection cycles;
 
  •  currency fluctuations;
 
  •  logistical and communications challenges;
 
  •  potential adverse changes in laws and regulatory practices, including embargoes, export license requirements, trade barriers, increased tariffs and taxes;
 
  •  changes in labor conditions;
 
  •  exposure to liability under the Foreign Corrupt Practices Act; and
 
  •  general economic and political conditions in foreign markets.
 
 
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.
 
Item 1B.   Unresolved Staff Comments
 
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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Item 2.   Properties
 
Our principal properties (those where we occupy over 35,000 square feet) at August 31, 2007 are as follows:
 
             
            Owned /
Location
 
Description
 
Segment Using Property
  Leased
 
Baton Rouge, LA
  Corporate Headquarters   Corporate   Leased
Addis, LA
  Fabrication Facility   F&M   Owned
Askar, Bahrain
  Office Building   F&M   Leased
Baton Rouge, LA
  Office Building   E&I   Leased
Cambridge, MA
  Office Building   E&C   Leased
Centennial, CO
  Office Building   Fossil & Nuclear/E&I   Leased
Charlotte, NC
  Office Building   Fossil & Nuclear   Leased
Cherry Hill, NJ
  Office Building   E&I/Fossil & Nuclear   Leased
Clearfield, UT
  Fabrication and Manufacturing   F&M   Leased
Concord, CA
  Office Building   E&I   Leased
Decatur, GA
  Warehouse   F&M   Leased
Delcambre, LA
  Manufacturing Facility   Maintenance   Owned
Derby, United Kingdom
  Manufacturing Facility   Fossil & Nuclear   Owned
El Dorado, AR
  Manufacturing Facility   F&M   Owned
Findlay, OH
  Office Building & Storage   E&I   Leased
Houston, TX
  Office Building   E&C   Leased
Houston, TX
  Pipe Fittings Distribution Facility   F&M   Leased
Irvine, CA
  Office Building   E&I   Leased
Knoxville, TN
  Office Building & Laboratory   E&I   Leased
Knoxville, TN
  Warehouse   E&I   Leased
LaPorte, TX
  Manufacturing Facility   Maintenance   Owned
Laurens, SC
  Pipe Fabrication Facility   F&M   Owned
Maracaibo, Venezuela
  Pipe Fabrication Facility   Maintenance   Owned
Milton Keynes,
           
United Kingdom
  Office Building   E&C   Leased
Monroeville, PA
  Office Building & Storage   E&I   Leased
New Brunswick, NJ
  Manufacturing Facility   F&M   Leased
New York, NY
  Office Building   E&I   Leased
Norwood, OH
  Office Building   E&I   Owned
Prairieville, LA
  Pipe Fabrication Facility   F&M   Owned
Shreveport, LA
  Manufacturing Facility   F&M   Owned
Shreveport, LA
  Piping Components & Manufacturing Facility   F&M   Owned
Stoughton, MA
  Office Building   Fossil & Nuclear/E&C   Leased
Toronto, Canada
  Office Building   E&C   Leased
Trenton, NJ
  Office Building   Fossil & Nuclear/E&I   Leased
Tulsa, OK
  Pipe Fabrication Facility   F&M   Owned
Walker, LA
  Office Building & Warehouse   F&M   Owned
Walker, LA
  Pipe Fabrication Facility   F&M   Owned
West Monroe, LA
  Pipe Fabrication Facility   F&M   Owned


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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.
 
Item 3.   Legal Proceedings
 
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.
 
Item 4.   Submission of Matters to Vote of Security Holders
 
None.
 
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
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.
 
                 
    High     Low  
 
Fiscal year ended August 31, 2006
               
First quarter
  $ 29.43     $ 19.88  
Second quarter
    36.08       28.27  
Third quarter
    35.45       25.32  
Fourth quarter
    28.40       19.55  
Fiscal year ended August 31, 2007
               
First quarter
  $ 29.93     $ 22.39  
Second quarter
    35.73       28.87  
Third quarter
    41.25       28.60  
Fourth quarter
    61.56       37.59  
Fiscal year ending August 31, 2008
               
First quarter (through November 26, 2007)
  $ 77.20     $ 57.55  
 
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
 
(PERFORMANCE GRAPH)
 
                                                             
      8/02     8/03     8/04     8/05     8/06     8/07
The Shaw Group Inc. 
      100.00         52.90         61.43         125.97         150.21         298.81  
S&P Smallcap 600
      100.00         122.70         140.93         178.27         190.98         218.24  
Peer Group
      100.00         126.12         134.35         209.21         273.33         416.76  
                                                             
 
* 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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Item 6.   Selected Financial Data
 
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.
 
                                         
    Year Ended August 31,  
(In millions, except per share amounts)   2007     2006     2005     2004(1)(4)     2003(2)(5)  
          (Restated)     (Restated)     (Restated)     (Restated)  
 
Consolidated Statements of Operations
                                       
Revenues
  $ 5,723.7     $ 4,775.6     $ 3,267.7     $ 3,016.3     $ 3,238.0  
                                         
Income (loss) from continuing operations
  $ (19.0 )   $ 50.2     $ 17.1     $ (28.2 )   $ 16.2  
                                         
Diluted income (loss) per common share from continuing operations
  $ (0.24 )   $ 0.63     $ 0.25     $ (0.49 )   $ 0.42  
                                         
Consolidated Balance Sheets
                                       
Total assets
  $ 3,874.9     $ 2,537.4     $ 2,095.4     $ 2,052.6     $ 2,006.9  
                                         
Long-term debt and capital lease obligations, net of current maturities(3)
  $ 1,096.8     $ 173.5     $ 65.4     $ 261.2     $ 251.7  
                                         
Cash dividends declared per common share
  $     $     $     $     $  
                                         
 
 
(1) Includes the acquisition of certain assets of Energy Delivery Services, Inc., Coastal Engineering and Environmental Consultants Inc. and LFG&E International, Inc. in fiscal year 2004.
 
(2) Includes the acquisition of certain assets of Badger Technologies, Envirogen, Inc. and LFG&E International, Inc. in fiscal year 2003.
 
(3) Fiscal year 2003 excludes $260.0 million of current maturities of long-term debt consisting primarily of the LYONs convertible debt of $251.5 million.
 
(4) Includes restatements for accounting errors primarily related to under accrual of lease expenses and incorrect accounting for employment agreements. The correction of these errors resulted in a reduction of previously reported net income of approximately $0.7 million.
 
(5) Includes restatements for accounting errors primarily related to under accrual of lease expenses and incorrect accounting for employment agreements resulting in a reduction of previously reported net income of approximately $0.3 million.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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
 
 
                         
    For the Year Ended August 31,  
(Dollars in millions)   2007     2006     2005  
          (Restated)     (Restated)  
 
Amount
  $ 5,723.7     $ 4,775.6     $ 3,267.7  
$ Change from prior period
    948.1       1,507.9          
% Change from prior period
    19.9 %     46.1 %        
 
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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    For the Year Ended August 31,  
(Dollars in millions)   2007     2006     2005  
          (Restated)     (Restated)  
 
Amount
  $ 375.4     $ 321.0     $ 292.8  
$ Change from prior period
    54.4       28.2          
% Change from prior period
    17.0 %     9.6 %        
 
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:
 
  •  Our Fossil & Nuclear segment recorded a reduction in gross profit of $20.6 million on one substantially complete major EPC project due to settlements of claims and disputed amounts with the owner and major subcontractors and other cost increases;
 
  •  Our E&C segment recorded a reduction in gross profit of $11.3 million on a substantially complete refinery project due to settlement on claims with the owner and other cost increases;
 
  •  Our Maintenance segment reduced gross profit estimates on a completed major domestic power project as a result of disputes with the owner over project incentives, and separately increased loss accruals on two substantially complete offshore production platform projects resulting in a combined reduction in gross profit of $14.4 million; and
 
  •  Our E&I segment recognized significant increases in the estimated costs to complete three projects resulting in a $12.8 million reduction in gross profit.
 
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.
 
 
                         
    For the Year Ended August 31,  
(Dollars in millions)   2007     2006     2005  
          (Restated)     (Restated)  
 
Amount
  $ 274.5     $ 225.6     $ 190.4  
$ Change from prior period
    48.9       35.2          
% Change from prior period
    21.7 %     18.5 %        
 
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).
 
 
                         
    For the Year Ended August 31,  
(Dollars in millions)   2007     2006     2005  
          (Restated)     (Restated)  
 
Amount
  $ 43.4     $ 19.2     $ 29.1  
$ Change from prior period
    24.2       (9.9 )        
% Change from prior period
    126.0 %     (34.0 )%        
 
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.
 
 
                         
    For the Year Ended August 31,  
(Dollars in millions)   2007     2006     2005  
          (Restated)     (Restated)  
 
Amount
  $ 10.7     $ 17.6     $ 17.4  
$ Change from prior period
    (6.9 )     0.2          
% Change from prior period
    (39.2 )%     1.1 %        
 
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.
 
 
                         
    For the Year Ended August 31,  
(Dollars in millions)   2007     2006     2005  
          (Restated)     (Restated)  
 
Amount
  $ (23.7 )   $ 2.1     $ 3.8  
$ Change from prior period
    (25.8 )     (1.7 )        
% Change from prior period
    NM       (44.7 )%        
 
 
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.
 
 
                         
    For the Year Ended August 31,  
(Dollars in millions)   2007     2006     2005  
          (Restated)     (Restated)  
 
Amount
  $ (19.0 )   $ 50.2     $ 15.7  
$ Change from prior period
    (69.2 )     34.5          
% Change from prior period
    (137.9 )%     219.7 %        
 
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):
 
                         
    Fiscal Year Ended August 31,  
    2007     2006     2005  
          (Restated)     (Restated)  
 
Revenues:
                       
Fossil & Nuclear
  $ 1,635.6     $ 849.0     $ 810.7  
E&I
    1,469.3       2,115.3       1,121.0  
E&C
    1,063.9       587.6       372.1  
Maintenance
    1,081.5       904.0       736.8  
F&M
    472.8       319.7       227.1  
Corporate
    0.6              
                         
Total revenues
  $ 5,723.7     $ 4,775.6     $ 3,267.7  
                         


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    Fiscal Year Ended August 31,  
    2007     2006     2005  
          (Restated)     (Restated)  
 
Gross profit:
                       
Fossil & Nuclear
  $ 75.0     $ 4.6     $ 79.0  
E&I
    94.7       197.1       116.9  
E&C
    70.2       22.6       28.8  
Maintenance
    19.9       29.4       26.5  
F&M
    115.0       67.3       41.4  
Corporate
    0.6             0.2  
                         
Total gross profit
  $ 375.4     $ 321.0     $ 292.8  
                         
Gross profit percentage:
                       
Fossil & Nuclear
    4.6 %     0.5 %     9.7 %
E&I
    6.5       9.3       10.4  
E&C
    6.6       3.8       7.7  
Maintenance
    1.8       3.3       3.6  
F&M
    24.3       21.1       18.2  
Corporate
    NM              
                         
Total gross profit percentage
    6.6 %     6.7 %     9.0 %
                         
Income (loss) before income taxes, minority interest, earnings (losses) from unconsolidated entities and income (loss) from discontinued operations:
                       
Fossil & Nuclear
  $ 42.3     $ (18.1 )   $ 56.4  
E&I
    18.3       124.7       54.9  
E&C
    35.2       7.0       14.6  
Maintenance
    9.3       18.1       17.4  
F&M
    91.2       48.2       21.8  
Investment in Westinghouse
    (66.7 )            
Corporate
    (96.4 )     (99.5 )     (127.2 )
                         
Total Income (loss) before income taxes, minority interest, earnings (losses) from unconsolidated entities and income (loss) from discontinued operations
  $ 33.2     $ 80.4     $ 37.9  
                         
 
 
NM — Not meaningful.
 
Our revenues by industry were as follows:
 
                                                 
    Fiscal Year Ended August 31,  
    2007     2006     2005  
                (Restated)     (Restated)  
Industry
  (In millions)     %     (In millions)     %     (In millions)     %  
 
Environmental and Infrastructure
  $ 1,469.3       26     $ 2,115.3       44     $ 1,121.0       34  
Power Generation
    2,336.2       41       1,424.0       30       1,391.5       43  
Chemicals
    1,758.0       31       1,103.6       23       695.8       21  
Other
    160.2       2       132.7       3       59.4       2  
                                                 
Total revenues
  $ 5,723.7       100 %   $ 4,775.6       100 %   $ 3,267.7       100 %
                                                 

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Our revenues by geographic region were as follows:
 
                                                 
    Fiscal Year Ended August 31,  
    2007     2006     2005  
                (Restated)     (Restated)  
Geographic Region
  (In millions)     %     (In millions)     %     (In millions)     %  
 
United States
  $ 4,525.1       79     $ 4,197.8       88     $ 2,847.1       87  
Asia/Pacific Rim countries
    224.3       4       161.4       3       234.4       7  
Middle East
    789.4       14       293.3       6       80.9       3  
United Kingdom and other European Countries
    133.8       2       73.7       2       59.4       2  
South America and Mexico
    22.4       1       24.9       1       20.3       1  
Canada
    15.2             17.3             15.5        
Other
    13.5             7.2             10.1        
                                                 
Total revenues
  $ 5,723.7       100 %   $ 4,775.6       100 %   $ 3,267.7       100 %
                                                 
 
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:
 
  •  an increase in activity and commencement of work on our Air Quality Control Systems’ (AQCS) FGD on domestic U.S. projects that were awarded during fiscal years 2006 and 2007;
 
  •  an increase in activity on two major clean coal power projects as these projects reached peak progress levels in fiscal year 2007; and
 
  •  an increase in revenues from our nuclear division due to our China nuclear power plant award, domestic support of advanced passive AP1000 site specific design and evaluation as well as other engineering design work.
 
The increase in revenues was partially offset by:
 
  •  substantial completion in fiscal year 2006 of two major fossil power projects;
 
  •  a reduction in spending by key clients on transmission and distribution projects and lower revenues from storm restoration projects in fiscal year 2007.
 
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:
 
  •  an increase in gross profit results on several AQCS FGD projects and two major coal power projects; and
 
  •  the fiscal year 2006 Wolf Hollow adverse litigation ruling resulting in $48.2 million reduction of revenue and gross profit in fiscal year 2006.


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The increase in gross profit and gross profit percentage was partially offset by:
 
  •  tentative and final settlements reached on claims and disputed amounts with the owner and major subcontractors on one substantially complete major EPC fossil power project contributing to the reduction in gross profit of $25.3 million during fiscal year 2007;
 
  •  a reduction of gross profit contributed from a major AQCS FGD project as it approached completion during fiscal year 2007;
 
  •  a decrease in distribution system activity by key clients, reduction in storm restoration projects, losses on transmission bid projects, and expected losses on certain long-term distribution contracts; and
 
  •  an increase in facilities costs, proposal costs and supervisory management labor due to growth in business activities in the Fossil & Nuclear segment.
 
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:
 
  •  activity from two consolidated joint ventures providing services to the DOE;
 
  •  services provided to commercial customers in the gulf and southeast regions of the U.S.;
 
  •  a recently consolidated military housing privatization joint venture; and
 
  •  domestic environmental services performed for U.S. government customers.
 
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:
 
  •  significantly lower levels of disaster relief, emergency response and recovery services in fiscal year 2007 compared to the significant amount of work performed in fiscal year 2006;
 
  •  the negative impact in fiscal year 2007 of additional estimated costs to complete certain fixed unit price projects and reversal of previously recognized revenue;
 
  •  a loss recognized in fiscal year 2007 of $11.2 million on a fixed price project in Asia;
 
  •  a decrease in gross profit percentage earned on our consolidated joint ventures for the DOE; and
 
  •  a decrease in gross profit percentage resulting from recording no gross profit on the recently consolidated military housing privatization joint venture loss contracts now being recognized at break-even.
 
The decreases were partially offset by:
 
  •  an increase in demand for services to commercial customers in the gulf and southeast regions of the U.S. and improved gross profit percentage earned on these services;
 
  •  an increase in gross profit and related gross profit percentage in federal environmental services; and
 
  •  the positive impacts from proposed final indirect billing rates for fiscal year 2006 and increased estimated billing rates resulting from negotiations relating to a prior fiscal year.
 
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:
 
  •  an increase in number of petrochemical projects in progress in fiscal year 2007 as compared to fiscal year 2006;
 
  •  an increase in volume of proprietary technology-related engineering work; and
 
  •  an increase in customer furnished materials ($423 million and $67 million for the fiscal years ended August 31, 2007 and 2006, respectively) on a major international petrochemical project that was in the start-up phase in fiscal year 2006. No gross profit is recognized from customer furnished materials.
 
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:
 
  •  contract activity on a major international petrochemical project due to the project working near peak activity level for the entire 2007 fiscal year;
 
  •  an increase in the number of other petrochemical projects in progress;
 
  •  an increase in volume of proprietary technology-related engineering work; and
 
  •  recognition, in fiscal year 2006 (prior comparative period), of losses on three refining projects totaling $21.0 million.
 
These increases in gross profit were offset by the following:
 
  •  a charge of $11.3 million in fiscal year 2007 primarily related to an adjustment of a previously recorded claim and other cost increases on a completed contract; and
 
  •  contract losses of approximately $9.6 million recorded in fiscal year 2007 on a U.S. Gulf Coast EPC furnace contract.
 
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.
 
   Maintenance Segment
 
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.
 
   Revenues
 
The increase in revenues of $177.5 million or 19.6% during fiscal year 2007 compared to fiscal year 2006 was primarily attributable to:
 
  •  increased market demand for capital construction services in the petrochemical industry,
 
  •  increased market demand in the power generation industry due to increased scopes of services for existing customers,
 
  •  major capital modifications at existing customer facilities and
 
  •  customers’ schedules of nuclear refueling outages (nuclear reactor units generally undergo refueling after 18 to 24 months; as a result, revenues in certain fiscal years are impacted by the timing of these refueling cycles).


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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.
 
   Gross Profit and Gross Profit Percentage
 
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.
 
   F&M Segment
 
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.
 
   Revenues
 
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.
 
   Gross Profit and Gross Profit Percentage
 
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.
 
   Investment in Westinghouse Segment
 
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:
 
  •  legal and professional fees including costs incurred to obtain audited financial statements of Westinghouse in connection with the acquisition of $0.3 and $2.9 million, respectively;
 
  •  interest expense on the Westinghouse Bonds including discount accretion, letter of credit fees and deferred financing cost amortization of approximately $8.6 million and $30.6 million, respectively; and
 
  •  foreign currency translation losses on the Westinghouse Bonds and the interest payment forwards, net, of approximately $51.7 million and $33.2 million, respectively.
 
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:
 
  •  an increase in activity on FGD projects; and
 
  •  an increase in activity relating to major coal power projects.
 
The increase in revenues for fiscal year 2006 was partially offset by:
 
  •  the Wolf Hollow litigation ruling resulting in $48.2 million reduction of revenue for fiscal year 2006; and
 
  •  a decrease in activities due to substantial completion of two power projects and a chemical project.
 
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 Wolf Hollow litigation ruling reducing gross profit by $48.2 million during fiscal year 2006; and
 
  •  loss provisions on certain refinery projects, gross profit reduction on a power project, 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 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:
 
  •  increase in project revenues of $974.9 million associated with providing hurricane recovery and restoration work during fiscal year 2006;


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  •  revenues of $109.7 million from two recently consolidated joint ventures providing services to the DOE; and
 
  •  increases in environmental and logistic support services for the U.S. government customers of $18.1 million.
 
The increase in revenues for fiscal year 2006 was partially offset by decreases in revenues attributed to:
 
  •  domestic federal environmental remediation due to a reallocation of federal environmental funding to disaster relief funding, less work being awarded under existing contracts and/or delays in funding under existing contracts and property management services;
 
  •  the substantial completion of a major fixed price contract in fiscal year 2005; and
 
  •  project services provided to U.S. government customers in Iraq due to a competitive bid environment arising from changes in government contracting vehicles to more fixed price opportunities.
 
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:
 
  •  an increase in gross profit of $84.4 million associated with providing hurricane recovery and restoration work which was performed at a lower gross profit percentage than our historical services;
 
  •  an increase in gross profit from two recently consolidated joint ventures providing services to the DOE; and
 
  •  an increase in gross profit and related percentage on non-hurricane related work resulting from overhead costs being allocated to an increasing number of contracts.
 
The increases in gross profit and related gross profit percentage are partially offset by:
 
  •  the positive impact in fiscal year 2005 of an adjustment to the estimated costs to complete a major fixed price contract, which resulted from cessation of certain operations on the project;
 
  •  the application of revised estimated governmental indirect rates to contract direct costs for fiscal year 2006 offset by the fiscal year 2005 positive impact of gross profit from the submission of fiscal year indirect rates, negotiation of restructuring cost proposals and other indirect rates to contract direct costs;
 
  •  lower gross profit and gross profit percentage from domestic federal environmental remediation work being awarded and executed this fiscal year as compared to last fiscal year, together with lower gross profit percentage earned on our consolidated joint ventures for the DOE and a higher volume of mission support services work compared to the lower volume of federal remediation work earning a higher gross profit percentage; and
 
  •  a decrease in project services supporting the U.S. government customers in Iraq.
 
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:
 
  •  the commencement of a major international petrochemical project, including $67.0 million of customer furnished materials;
 
  •  the progress on a refinery project; and
 
  •  an increase in proprietary technology sales and related services.
 
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:
 
  •  an increase in gross profits related to the commencement of a major international petrochemical plant project; and
 
  •  an increase in volume of proprietary technology sales and related engineering and a change in fiscal year 2006 of our estimates for liability provisions related to contractual performance guarantees on sales of technology license agreements (see “Performance Guarantees” in 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.
 
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:
 
  •  revenues related to capital construction services for three customers in the chemical industry;
 
  •  an increase in activity and increased scope for one major nuclear project in the U.S.; and
 
  •  an increase in maintenance services for several new clients in the energy and chemical industries.
 
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):
 
                         
    Year Ended August 31,  
    2007     2006     2005  
          (Restated)     (Restated)  
 
Cash flow provided by (used in) operations
  $ 461,026     $ (94,549 )   $ 55,613  
Cash flow provided by (used in) investing
    (1,142,362 )     67,040       (126,462 )
Cash flow provided by (used in) financing
    865,725       122,972       23,984  
Cash (to) from variable interest entities
    (167 )     2,290       1,343  
Effects of foreign exchange rate changes on cash
    1,725       2,156       (1,201 )
 
 
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):
 
                                         
    Amounts of Commitment Expiration by Period  
          Less Than
                   
Commercial Commitments(1)
  Total     1 Year     1-3 Years     3-5 Years     After 5 Years  
 
Letters of Credit -Domestic and Foreign
  $ 752.3     $ 64.7     $ 475.7     $ 211.9     $  
Surety bonds
    875.2       539.8       227.8       78.0       29.6  
                                         
Total Commercial Commitments
  $ 1,627.5     $ 604.5     $ 703.5     $ 289.9     $ 29.6  
                                         
 
 
(1) Commercial Commitments exclude any letters of credit or bonding obligations associated with outstanding bids or proposals or other work not awarded prior to September 1, 2007.
 
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):
 
                                         
    Payments Due by Period  
          Less Than
                   
Contractual Obligations
  Total     1 Year     1-3 Years     4-5 Years     After 5 Years  
 
Long-term debt obligations
  $ 1,100.5     $ 5.6     $ 6.1     $ 1.4     $ 1,087.4  
Capital lease obligations
    4.2       2.3       1.8       0.1        
Operating lease obligations
    346.7       77.9       133.0       74.0       61.8  
Purchase obligations(a)
    16.1       9.7       6.4              
Pension obligations(b)
    82.2       7.1       14.9       15.9       44.3  
                                         
Total contractual cash obligations
  $ 1,549.7     $ 102.6     $ 162.2     $ 91.4     $ 1,193.5  
                                         
 
 
(a) Purchase obligations primarily relate to IT technical support and software maintenance contracts. Commitments pursuant to subcontracts and other purchase orders related to engineering and construction contracts are not included since such amounts are expected to be funded under contract billings.
 
(b) Pension obligations, representing amounts expected to be paid out from plans, noted under the heading “After 5 years” are presented for the years 2013-2017.
 
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:
 
                                 
    August 31,  
    2007     2006  
Segment
  In millions     %     In millions     %  
 
Fossil & Nuclear
  $ 6,768.9       47     $ 3,238.4       35  
E&I
    2,589.2       18       2,765.1       30  
E&C
    2,550.8       18       1,412.3       16  
Maintenance
    1,691.6       12       1,250.9       14  
F&M
    713.8       5       408.9       5  
                                 
Total backlog
  $ 14,314.3       100 %   $ 9,075.6       100 %
                                 
 
                                 
    August 31,  
    2007     2006  
Industry
  In millions     %     In millions     %  
 
Environmental and Infrastructure
  $ 2,589.2       18     $ 2,765.1       30  
Energy
    8,417.5       59       4,359.8       48  
Chemical
    3,253.8       23       1,857.8       21  
Other
    53.8             92.9       1  
                                 
Total backlog
  $ 14,314.3       100 %   $ 9,075.6       100 %
                                 
 


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    August 31,  
    2007     2006  
Geographic Region
  In millions     %     In millions     %  
 
Domestic
  $ 11,228.1       78     $ 7,330.5       81  
International
    3,086.2       22       1,745.1       19  
                                 
Total backlog
  $ 14,314.3       100 %   $ 9,075.6       100 %
                                 
 
                                 
    August 31,  
    2007     2006  
Contract Status
  In millions     %     In millions     %  
 
Signed contracts and commitments
  $ 14,291.5       100     $ 7,285.2       80  
Letters of intent
    22.8             1,790.4       20  
                                 
Total backlog
  $ 14,314.3       100 %   $ 9,075.6       100 %
                                 
 
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

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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.
 
  •  Revenues and gross profit from cost-reimbursable, contracts can be significantly affected by contract incentives/penalties that may not be known or finalized until the later stages of the contracts. Substantially all of our revenues from cost-reimbursable contracts are based on costs incurred plus mark-up fees and/or incentives, where applicable. Applying the standards included in SOP 81-1, we recognize revenue on these types of contracts as work is performed and costs are incurred. Incentives and/or penalties are also recognized based on the percentage of completion when it is probable that the incentives will be earned and/or penalties incurred.
 
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.
 
  •  We have fixed-price contracts, for which the accuracy of gross profit is dependent on the accuracy of cost estimates and other factors.
 
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.
 
  •  Revenues and gross profit on contracts can be significantly affected by change orders and claims that may not be ultimately negotiated until the later stages of a contract or after a contract is completed. When estimating the amount of total gross profit or loss on a contract, we include claims related to our customers as adjustments to revenues and claims related to vendors, subcontractors and others as adjustments to cost of revenues when the recovery of such amounts is probable and the amounts can be reasonably estimated. Recording claims ultimately increases the gross profit (or reduces the loss) that would otherwise be recorded without consideration of the claims. Our claims against others are recorded up to the amount of costs incurred and include no gross profit until such time as they are finalized and approved. In most cases, the claims included in determining contract gross profit are less than the actual claim that will be or has been presented.
 
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.
 
   Share-Based Compensation
 
  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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   Pension Plans
 
  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.
 
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
 
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.
 
   Interest 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.
 
                                                                 
    Expected Maturity Dates     Fair
 
    2008     2009     2010     2011     2012     Thereafter     Total     Value  
 
Long-term debt
                                                               
Fixed rate
  $ 7.7     $ 5.8     $ 2.1     $ 1.5     $     $ 426.9     $ 444.0     $ 457.4  
Average interest rate
    8.1 %     8.3 %     8.3 %     8.3 %     %     2.2 %                
Variable rate
                                $ 653.1     $ 653.1     $ 673.5  
Average interest rate
                                  2.398 %                
 
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.
 
   Foreign Currency Exchange Rate Risk
 
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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Item 8.   Financial Statements and Supplementary Data
 
 
     
Reports of Independent Registered Public Accounting Firm:
   
  68
  70
  71
  72
  73
  74
  75
  77
 
INDEX TO COMBINED FINANCIAL STATEMENTS OF TOSHIBA NUCLEAR ENERGY
HOLDINGS (US), INC. AND TOSHIBA NUCLEAR ENERGY HOLDINGS (UK) LTD.
  155
  156
  157
  158
  159
  160


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
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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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
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


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
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


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THE SHAW GROUP INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
As of August 31, 2007 and 2006
(Dollars in thousands)
 
                 
    2007     2006  
          (Restated)  
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 341,359     $ 155,412  
Restricted and escrowed cash
    19,266       43,409  
Accounts receivable, including retainage, net
    771,806       718,721  
Inventories
    184,371       114,436  
Costs and estimated earnings in excess of billings on uncompleted contracts, including claims
    398,131       470,708  
Deferred income taxes
    79,146       85,085  
Prepaid expenses
    23,576       8,781  
Other current assets
    34,435       83,312  
                 
Total current assets
    1,852,090       1,679,864  
Investments in and advances to unconsolidated entities, joint ventures and limited partnerships
    41,227       53,173  
Investment in Westinghouse
    1,094,538        
Property and equipment, at cost
    418,514       345,369  
Less accumulated depreciation
    (198,662 )     (167,121 )
                 
Property and equipment, net
    219,852       178,248  
Goodwill
    513,951       506,592  
Intangible assets
    27,356       31,108  
Deferred income taxes
    22,155        
Other assets
    103,683       88,369  
                 
    $ 3,874,852     $ 2,537,354  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 553,273     $ 481,351  
Accrued salaries, wages and benefits
    119,219       101,621  
Other accrued liabilities
    200,500       125,430  
Advanced billings and billings in excess of costs and estimated earnings on uncompleted contracts
    572,435       331,650  
Short-term debt and current maturities of long-term debt
    7,687       11,688  
                 
Total current liabilities
    1,453,114       1,051,740  
Long-term debt, less current maturities
    9,337       173,534  
Japanese Yen-denominated long-term bonds secured by Investment in Westinghouse, net
    1,087,428        
Deferred income taxes
          18,664  
Interest rate swap contract on Japanese Yen-denominated bonds
    6,667        
Other liabilities
    62,960       41,678  
Minority interest
    18,825       13,408  
Contingencies and commitments (Note 13)
               
Shareholders’ equity:
               
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding
           
Common stock, no par value, 200,000,000 shares authorized; 86,711,957 and 85,866,727 shares issued, respectively; and 81,197,473 and 80,475,928 shares outstanding, respectively
    1,104,633       1,072,589  
Retained earnings
    273,602       292,602  
Accumulated other comprehensive loss
    (36,666 )     (25,363 )
Treasury stock, 5,514,484 and 5,390,799 shares, respectively
    (105,048 )     (101,498 )
                 
Total shareholders’ equity
    1,236,521       1,238,330  
                 
    $ 3,874,852     $ 2,537,354  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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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)
 
                         
    2007     2006     2005  
          (Restated)     (Restated)  
 
Revenues
  $ 5,723,712     $ 4,775,649     $ 3,267,702  
Cost of revenues
    5,348,295       4,454,629       2,974,899  
                         
Gross profit
    375,417       321,020       292,803  
General and administrative expenses
    274,490       225,575       190,362  
                         
Operating income
    100,927       95,445       102,441  
Interest expense
    (12,811 )     (19,177 )     (29,107 )
Interest expense on Japanese Yen-denominated bonds including accretion and amortization
    (30,577 )            
Interest income
    13,785       5,939       5,571  
Loss on retirement of debt
    (1,119 )           (47,772 )
Foreign currency translation losses on Japanese Yen-denominated bonds, net
    (33,204 )            
Other foreign currency transaction gains (losses), net
    (5,275 )     (865 )     823  
Other income (expense), net
    1,440       (933 )     5,979  
                         
Income before income taxes, minority interest, earnings (losses) from unconsolidated entities and loss from discontinued operations
    33,166       80,409       37,935  
Provision for income taxes
    10,747       17,600       17,436  
                         
Income before minority interest, earnings (losses) from unconsolidated entities and loss from discontinued operations
    22,419       62,809       20,499  
Minority interest
    (17,699 )     (14,725 )     (7,180 )
Income from 20% Investment in Westinghouse, net of income taxes
    2,176              
Earnings (losses) from unconsolidated entities, net of income taxes
    (25,896 )     2,142       3,791  
                         
Income (loss) from continuing operations
    (19,000 )     50,226       17,110  
Loss from discontinued operations, net of income taxes
                (1,439 )
                         
Net income (loss)
  $ (19,000 )   $ 50,226     $ 15,671  
                         
Net income (loss) per common share:
                       
Basic:
                       
Income (loss) from continuing operations
  $ (0.24 )   $ 0.64     $ 0.25  
Loss from discontinued operations, net of income taxes
                (0.02 )
Net income (loss)
  $ (0.24 )   $ 0.64     $ 0.23  
Diluted:
                       
Income (loss) from continuing operations
  $ (0.24 )   $ 0.63     $ 0.25  
Loss from discontinued operations, net of income taxes
                (0.02 )
Net income (loss)
  $ (0.24 )   $ 0.63     $ 0.22  
Weighted average shares outstanding:
                       
Basic
    79,857       78,791       68,673  
Diluted
    79,857       80,289       69,792  
 
The accompanying notes are an integral part of these consolidated financial statements.


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THE SHAW GROUP INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except share amounts)
 
                                                                 
                                  Accumulated
             
    Common
                Treasury
    Unearned
    Other
          Total
 
    Stock
    Treasury
    Common
    Stock
    Stock-Based
    Comprehensive
    Retained
    Shareholders’
 
    Shares     Stock Shares     Stock Amount     Amount     Compensation     Income (Loss)     Earnings     Equity  
 
Balance, August 31, 2004, as previously reported
    69,101,493       (5,331,655 )   $ 772,077     $ (99,913 )   $ (6,072 )   $ (15,157 )   $ 229,136     $ 880,071  
Cumulative effect of accounting errors
                (340 )                       (2,431 )     (2,771 )
                                                                 
Balance, August 31, 2004, (Restated)
    69,101,493       (5,331,655 )     771,737       (99,913 )     (6,072 )     (15,157 )     226,705       877,300  
Net income
                                        15,671       15,671  
Other comprehensive income (loss):
                                                               
Foreign currency translation adjustments
                                  (3,872 )