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Shaw Group 10-K 2007 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
For the fiscal year ended August 31, 2006
Or
For the transition period from to .
Commission File Number 1-12227
THE SHAW GROUP INC.
(Exact name of registrant as specified in its charter)
(225) 932-2500
(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value, registered on the New York Stock Exchange.
Preferred Stock Purchase Rights with respect to Common Stock, no par value, registered on the 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 þ No o
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 file” 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
Exchange 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 $1.6 billion (computed by reference to the closing sale price of the
registrant’s common stock on the New York Stock Exchange on 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 October 26, 2006 was
80,489,113.
Table of Contents
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its Annual Meeting of Shareholders held
on January 30, 2007 are incorporated by reference into Part III of this Form 10-K/A.
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EXPLANATORY NOTE
On October 31, 2006, The Shaw Group Inc. (“Shaw”, “we”, “us”, and “our”) filed with the U.S.
Securities and Exchange Commission (“SEC”) our Annual Report on Form 10-K for the fiscal year ended
August 31, 2006 (“Original Form 10-K Filing”). In conjunction with a review of the Original Form
10-K Filing, the Staff of the SEC issued a series of comment letters in which, among other things,
the Staff commented on the presentation of certain items in our consolidated financial statements
and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As a result of the SEC comment letters, we decided to amend our Original Form 10-K Filing.
Additionally, on August 1, 2007, we filed a Current Report on Form 8-K stating that (1) we would be
amending our Original Form 10-K Filing to, among other things, correct an error on an ongoing U.S.
gulf coast Engineering, Procurement, and Construction (“EPC”) petrochemical project, (2) the
financial statements contained in our Original Form 10-K Filing should no longer be relied upon,
and (3) our earnings and press releases and similar communications should no longer be relied upon
to the extent that they are related to our 2006 financial statements.
We conducted a management review and a separate independent review requested by the Audit Committee
of our Board of Directors relating to the accounting for the ongoing EPC project. As a result of
these reviews, we concluded that the financial results for the fiscal year ended August 31, 2006
contained two offsetting errors relating to the EPC project, thus resulting in no financial
statement impact for the fiscal year ended August 31, 2006. Nevertheless, the items identified by
the SEC in their comment letters required that the Original Form 10-K Filing be amended.
Accordingly, adjustments have been made to the 2006, 2005 and 2004 consolidated financial and other
information contained in the Original Form 10-K Filing, which are reflected in this Amendment No. 1
on Form 10-K/A (“Amendment No. 1”) to restate for these items and certain other matters. The
changes impacting the financial statements included in Item 8 are explained in further detail in
Note 1 of the Notes to Consolidated Financial Statements included herein. In addition, this
Amendment No. 1 amends and restates information in Items 6, 7, and
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9A of Part II and Item 15 of
Part IV of the Original Form 10-K Filing, including, but not limited to, the following changes:
This Amendment No. 1 amends and restates only the information in Items 6, 7, 8 and 9A of Part II
and Item 15 of Part IV of the Original Form 10-K Filing, and no other information in the Original
Form 10-K Filing is amended hereby, with the exception of certain
minor typographical errors that have been corrected. Except for the foregoing amended and restated information, this
Amendment No. 1 continues to describe conditions as of the filing date of the Original Form 10-K
Filing, and the disclosures contained herein have not been updated to reflect events, results or
developments that have occurred after the date of the Original Form 10-K Filing, or to modify or
update those disclosures affected by subsequent events. Among other things, forward-looking
statements made in the Original Form 10-K Filing have not been revised to reflect events, results
or developments that have occurred or facts that have become known to us after the date of the
Original Form 10-K Filing (other than this Amendment No. 1), and such forward-looking statements
should be read in their historical context.
As a result of the discussions and adjustments described above and in Note 1 of the Notes to
Consolidated Financial Statements included herein, our management concluded, and informed the Audit
Committee of the Company’s Board of Directors of its conclusions, that (1) our previously issued
financial statements and any related reports of its independent registered public accounting firm
for the fiscal year ended August 31, 2006 should no longer be relied upon because of the
aforementioned presentation and classification errors in those financial statements, (2) our
earnings and press releases and similar communications should no longer be relied upon to the
extent that they relate to these financial statements, and (3) our financial statements for the
fiscal year ended August 31, 2006 should be restated to reflect the presentation changes discussed
above. Management has discussed these matters with KPMG LLP and Ernst & Young LLP, current and
former independent registered public accounting firms, respectively.
This Amendment No. 1 should be read in conjunction with our filings made with the SEC subsequent to
the Original Form 10-K Filing, including any amendments to those filings. We have not amended, and
do not intend to amend, our previously filed Annual Reports on Form 10-K or our previously filed
Quarterly Reports on Form 10-Q for the periods prior to August 31, 2006.
This
Amendment No. 1 had no impact on the calculations of our bank debt covenants for
any quarterly or annual period. However, this restatement has, in fact, contributed to the delay
in filing the fiscal 2007 quarterly reports on Forms 10-Q, which required us to obtain waivers from
our banks.
Prior Period Data Previously Restated
The financial statements included in this Amendment No. 1 for each of the fiscal years ended August
31, 2005 and 2004 reflect a prior restatement to correct for an error in the
accounting for share-based compensation expense relating to certain stock options awarded in 2000.
The net aggregate amount of share-based compensation expense for all fiscal years from 2001 through
2005 is approximately $21.3 million ($16.2 million net of tax). The financial statements for fiscal
years 2005 and 2004 also already reflect a restatement to correct for errors in the accounting for
periodic pension service cost in relation to the minimum liability for the unfunded accumulated
benefit obligation of Shaw UK’s (a foreign subsidiary of Shaw) defined benefit plan. The aggregate
amount of periodic pension service cost and net income for fiscal years from 2003 through 2005 is
approximately $2.5 million. These prior restatements resulted in a reduction of net income for each
year, and to previously reported shareholders’ equity for each subsequent period.
On October 30, 2006, we issued a press release announcing the planned restatement of our
consolidated financial
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statements for the years ended August 31, 2001 through 2005 to correct for
an error in the accounting for stock-based compensation expense relating to certain stock options
awarded in 2000. As previously announced in a press release dated October 3, 2006, we initiated an
internal evaluation of our stock option grant practices. In light of recent publicity involving
option grants at numerous companies, our management, along with the Audit Committee of our Board of
Directors, instructed our internal audit department to undertake a review of stock option awards to
ensure all awards were properly authorized by the Compensation Committee and the Board of
Directors. The internal audit department presented its findings at a meeting conducted on August
16, 2006, and concluded together with the Audit Committee and management that neither we nor any
employee engaged in “backdating” or “spring loading” activities with regard to past option grants.
Subsequent to the August 2006 Audit Committee meeting, on September 19, 2006, the Office of the
Chief Accountant of the SEC published clarifying staff guidance regarding the appropriate
measurement date for stock option grants pursuant to the requirements of Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). In order to ensure that
our accounting for stock option grants was compliant with this most recent staff guidance, we
undertook a further review of our accounting for stock option grants to ensure all awards reflected
the proper measurement date. While our recently completed review confirmed that no backdating or
spring loading of stock options occurred, we discovered that, with regard to our Fiscal 2000 stock
option awards, we did not use the proper measurement date for accounting purposes in accordance
with APB 25 and the recently released guidance.
On July 28, 2000, the Compensation Committee and our Board of Directors authorized a pool of
approximately one million shares (two million shares split-adjusted) at a strike price of $42 per
share, and vested discretion in management to award these options to key employees. The recently
released SEC guidance indicates that if management is granted discretion to allocate specific
awards to individual employees, the proper measurement date for the awards should be the date upon
which the list of the recipients and specific allocations was finalized, rather than the date that
the Compensation Committee initially approved the award. Our review determined that a final list of
option recipients and allocations was not completed as of the original measurement date used to
account for the awards.
As a result, management and the Audit Committee concluded on October 27, 2006 that the accounting
measurement dates for certain stock option awards during Fiscal 2000 were determined in error. The
correct measurement date should have been November 27, 2000 when the stock price was $71.76 per
share ($35.88 per share split-adjusted). We recorded a non-cash, stock-based compensation expense
over the awards’ four year vesting period of 2001-2004. The net aggregate amount of stock-based
compensation expense for all fiscal years from 2001 through 2005 was approximately $21.3 million
($16.2 million net of tax).
Also on October 30, 2006, we announced that we would restate our consolidated financial statements
for the years ended August 31, 2003 through 2005 to correct for errors in the accounting for
periodic pension service cost in relation to the minimum liability for the unfunded accumulated
benefit obligation of Shaw UK Limited’s (one of our foreign subsidiaries) defined benefit plan. In
connection with workforce reductions in 2003, 2004 and 2005, we offered certain terminated
employees an enhanced early retirement benefit that provided immediate retirement benefit payments.
However, these terminations and the related impact on our pension expense and pension liability
were not reflected in our consolidated financial statements. The aggregate amount of periodic
pension service cost and net income for fiscal years from 2003 through 2005 was approximately $2.5
million.
As a result of the above prior period restatements already incorporated in the Original Form 10-K
Filing, certain information in Items 6 and 8 of Part II was amended and restated for fiscal years
2005, 2004, 2003 and 2002, in each case, primarily as a result of and to reflect these
restatements, except for certain reclassifications that were also made to prior year information to
help conform to current year presentation. See Notes 1 and 25 of our consolidated financial
statement for additional information.
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PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain
forward-looking statements. We have made statements in this Annual Report on Form 10-K/A that may
constitute “forward-looking statements”. The words (“believe,” “expect,” “anticipate,” “plan,”
“intend,” “foresee,” “should,” “would,” “could,” or other similar expressions) are intended to
identify forward-looking statements. These forward-looking statements are based on our current
expectations and beliefs concerning future developments and their potential effects on us. 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. These forward-looking statements involve significant risks and uncertainties (some of
which are beyond our control) and assumptions. They are subject to change based upon various
factors, including but not limited to the risks and uncertainties mentioned in Item 1A. of this
Form-10-K/A. We urge you to carefully review our reports and registration statements at
www.shawgrp.com filed by us with the Securities and Exchange Commission (“SEC”). We undertake no
obligation to update or revise publicly any forward-looking statements.
Item 1. Business
General
The Shaw Group Inc. 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 federal agencies,
federally owned entities, state and local governments, large domestic and non-domestic commercial
customers and other private sector clients. Approximately 22,000 employees deliver our services
through a network of over 180 locations, including approximately 22 international locations and
approximately 22 fabrication and manufacturing facilities. Our fiscal 2006 revenues were
approximately $4.8 billion.
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, construction and consulting
services to the energy, chemical, environmental and infrastructure industries. When combined with
our existing pipe fabrication and construction capabilities, this acquisition transformed us into a
vertically-integrated provider of engineering, procurement and construction services. In May 2002,
we significantly increased our position in the environmental and infrastructure markets,
particularly in the federal services sector, through the acquisition of the assets of the IT Group.
This 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
energy and chemical EPC customers. We have acquired and developed significant intellectual
property, including downstream petrochemical technologies, induction pipe bending technology and a
number of environmental technologies related to decontamination. At August 31, 2006, our backlog of
approximately $9.1 billion was broadly diversified in terms of customer concentration, end markets
served and services provided. Approximately 60% of this backlog was comprised of “cost-plus”
contracts compared to 70% of “cost-plus” contracts comprising backlog at August 31, 2005.
Recent Developments
We announced the completion, in October 2006, of our acquisition of a 20% investment in
Westinghouse Electric Company, the world’s premier provider of power generating technology,
equipment, licensing expertise, fuel and services for nuclear plants. Toshiba Corporation, which
owns 77% of Westinghouse, is a technology leader and a diversified manufacturer of advanced
electronic and electrical products. The remaining 3% is held by Ishikawajima-Harima Heavy
Industries Co. Ltd. (IHI), one of Japan’s leading heavy equipment manufacturers and the supplier of
reactor pressure vessels for all the boiling water reactor nuclear power systems in Japan where
Toshiba was the prime contractor.
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In connection with the acquisition agreement, we will have obtained certain exclusive opportunities
to perform engineering, procurement and construction services and supply piping for future
Westinghouse advanced passive AP1000 nuclear projects. Combined with our leadership in the nuclear
industry for engineering, construction, procurement, maintenance, and pipe fabrication, we believe
this investment will solidify our position in the nuclear plant life cycle.
Shaw and Westinghouse have enjoyed a long and beneficial association. We collaborated to bring
about the nation’s first commercial nuclear power plant—the 260 megawatt reactor at Shippingport,
Pennsylvania. Since then, we have worked together on several nuclear projects in the U.S. and have
proposed four new reactors in China.
Westinghouse technology is the basis for approximately 60% of the nation’s and approximately 50% of
the world’s nuclear reactors; Westinghouse technology makes up three of the four designs certified
by the U.S. Nuclear Regulatory Commission and is proposed for 10 new domestic plants; we have
performed the architect-engineer role on 17 nuclear units in the U.S.; we are working on the
restart of TVA’s Browns Ferry Unit 1 in Alabama which to our knowledge is the largest nuclear
construction project underway in this Hemisphere; we currently provide maintenance services for
nearly 40% of the nuclear generating facilities in the U.S. We are certified to perform all
required construction activities for ASME nuclear components and supplied piping to more than half
of the nation’s 103 nuclear plants.
This acquisition was funded through the issuance of approximately $1.1 billion principal amount of
Japanese Yen — denominated bonds placed in the Japanese market.
Operating Segments
Segment revenue and profit information, additional financial data and commentary on recent
financial results for operating segments are provided in Note 15 to the consolidated financial
statements and in the Management Discussion and Analysis.
Operating businesses that are reported as segments include Environmental and Infrastructure (E&I),
Energy and Chemicals (E&C), Fabrication and Manufacturing (F&M), and Maintenance. A summary
description of each of our operating segments follows.
E&I Segment
The E&I segment provides services including the identification of contaminants in soil, air and
water and the subsequent design and execution of remedial solutions. This segment also provides
project and facilities management and other related services for non-environmental construction,
watershed restoration, emergency response services and outsourcing of privatization markets.
Infrastructure services provide program management, operations and maintenance solutions to support
and enhance domestic and global land, water and air transportation systems while meeting the
financial, operational, safety and security objectives of federal, state and local agency clients,
as well as those of commercial port and marine facilities.
Federal
Core Services. The core services of our federal business are the delivery of 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 Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) and the
Resource Conversation and Recovery Act of 1976, as amended (RCRA). Regulatory compliance activities
are centered on providing professional services to support customer compliance with the
requirements of the Clean Water Act, Clean Air Act, Toxic Substances Control Act and RCRA. For the
DOE, we are presently working on several former nuclear-weapons production facilities 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
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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 Department of the Army, we are working on the chemical demilitarization program at several
sites.
Unexploded Ordnance and Explosives (UXO). The DOD’s fiscal requirements for conventional ordnance
and explosives clean-up on closed military installations and ranges will exceed current government
funding. The Military Munitions Response Program will drive an increasing focus and ensure a steady
stream of funding for this DOD initiative. We continue to be awarded UXO clean up projects through
our existing environmental remediation contracts, and are pursuing new contracts for UXO
remediation scheduled for release in fiscal 2007. We intend to leverage capabilities gained from
UXO removal projects to pursue additional work in range operations and support.
Performance Based Contracting (PBC). The DOD continues to increase the use of performance based
contracts, including guaranteed fixed-price with environmental remediation insurance (GFPRI)
vehicles. Beginning in fiscal 2004, Shaw established a leadership position in this market, and is
well-positioned to increase our market share as traditional cost plus remediation contracting
vehicles are concluded.
Base Realignment and Closure (BRAC). As a result of the 2005 round of BRAC, there will be many
opportunities to restore contaminated properties once owned by the government. In conjunction with
our Environmental Liabilities Solutions business, we will pursue opportunities for commercial
development of such sites.
Facilities Management Services. 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.
Nuclear Services. 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. The DOD has stated 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. 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. We
continue to provide engineering and project leadership support to other DOE nuclear programs such
as Mixed Oxide Fuel Fabrication and Yucca Mountain.
Commercial, State and Local
Commercial, State and Local services provide environmental consulting, engineering and construction
services to private-sector and state and local government customers. Core services of the
Commercial Consulting and Engineering and Construction Groups include engineering, consulting and
turnkey management services. These services include complete life cycle management, construction
management, Operation and Maintenance (O&M) services, and environmental services including
emergency response and high hazard and toxic waste cleanups and on-site remedial activities.
Commercial, state and local provides full service capability, including site selection, permitting,
design, build, operation, decontamination, demolition, remediation and redevelopment. Our services
range from initial studies to designing and constructing in-water remediation projects, marine
terminals and navigation improvements. Our E&I segment offers complete life cycle management of
solid waste, employing capabilities that range from site investigation through landfill design and
construction to post-closure operations and maintenance or redevelopment.
Solid Waste Service. Through our solid waste service line, we provide a variety of services,
including engineering, permitting, design/build construction, equipment fabrication, landfill
products, sampling, monitoring, and facility and system operation and maintenance, principally to
the owners and operators of municipal solid waste landfills.
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Coastal and Natural Resource Restoration. We have performed wetland-related work in the Everglades,
Chesapeake Bay area, and other areas throughout the U.S., and we maintain the expertise and
resources to continue to benefit from this expanding segment. New opportunities are present in both
the federal and commercial markets for these types of projects. For example, the Coastal Wetlands
Planning Protection and Restoration Act provides federal funds to conserve, restore and create
coastal wetlands and barrier islands. We believe our E&I segment is well-positioned to capitalize
on upcoming wetlands and coastal restoration work in Louisiana and other locations throughout the
U.S.
Water Quality. We see growth opportunities across a range of developing and commercial
water-treatment technologies. Targeting public drinking water providers, municipal authorities and
industrial waste water treatment facilities, E&I provides testing, assessments and permitting
services and offers specialized equipment and water treatment systems to help meet regulatory
standards. We are actively pursuing several projects in these emerging service areas and are
well-positioned to participate in market opportunities as they arise.
Housing Privatization
Privatization of infrastructure assets by all levels of Government is continuing, led by the
Department of Defense (DOD). The DOD continues to move towards completing privatization of military
family housing and utility systems, commercial space and non-core mission critical assets through
Enhanced Use Leasing. Through joint ventures established to pursue these projects, we are engaged
in five projects to privatize approximately 8,000 housing units. Under the terms of these
contracts, the joint venture acquires property and/or enters into a long-term lease (generally 50
years with potential extensions), and is required to make improvements, including renovations or
replacement of the facilities, and to provide ongoing management and maintenance services. Initial
funding for these projects is typically provided through the contribution of equity from the joint
ventures and the issuance of long-term bonds, backed by project revenues which are non-recourse to
us. For its services, the joint venture is paid development and construction management fees.
Additionally, the joint venture receives regular rental income and associated fees for managing the
asset. Upon expiration of the lease, the military retains ownership of the site and the housing.
Over the next several years we anticipate that the trend to privatize non-core mission critical
assets will continue, providing opportunities for growth.
Infrastructure
Transportation. The Safe, Accountable, Flexible and Efficient Transportation Equity Act—A Legacy
for Users SAFETEA-LU legislation brings tremendous funding potential to the transportation market.
By leveraging Shaw’s corporate capabilities, we can participate in large scale and localized
infrastructure projects, by partnering with government agencies and with private entities. We offer
financing solutions and design-build and operations services to our clients, so that critical needs
arising from aging infrastructure, congestion and expansion requirements can be addressed. We see
growth prospects in intermodal and multi-modal connector projects and in transportation security
systems and expect to pursue work across the full range of transportation services offered by E&I.
Ports and Marine Facilities. We are pursuing growth 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, we recently acquired a maritime engineering and design firm to enhance our
portfolio of services to government and commercial port and marine facility clients. This
acquisition will expand our marine infrastructure planning services and will position us to provide
a full range of design, engineering and project management services to domestic and international
maritime clients.
Other Markets. We also participate in markets for clients who desire to transfer environmental
liabilities through two programs. 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 subsidiary, The LandBank Group,
Inc., purchases environmentally impaired properties with inherent value, purchases environmental
insurance, and then remediates and/or takes other steps to improve and increase the value of the
properties.
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Additionally, our Science and Technology Group utilizes technology to solve environmental problems
and these efforts are supported by three Company-operated laboratories. We also utilize bioreactor
systems technology and have expertise in the treatment of contaminated groundwater and wastewater.
Specific applications include contaminants such as perchlorate, MTBE, and high strength waste
streams from food, beverage and pharmaceutical industries.
E&C Segment
The E&C segment provides a range of project-related services, including design, engineering,
construction, procurement, technology and consulting services, primarily to the energy and chemical
industries.
Energy
We provide a full range of engineering, construction, procurement, and technology services to
energy projects on a global basis. Lack of capital expenditures over the last several years,
combined with load growth has created opportunities to upgrade or develop new power plants. We are
presently the market leader in Flue Gas Desulphurization (FGD) for sulfur dioxide emissions
control. Also, there has been a strong uplift in demand for new clean coal-fired power plants. In
addition, we expect that in the coming years our nuclear expertise will play an increasing role in
our backlog growth.
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 over 1800 megawatts of new nuclear generation to the grid. In addition, we are
currently serving as architect-engineer for the National Enrichment Facility and providing
engineering services in support of new nuclear plants in both Korea and Taiwan. Growth in the
global nuclear power sector is anticipated, driven in large part by China and India. Our support of
existing U.S. utilities coupled with our investment in Westinghouse in collaboration with Toshiba
is anticipated to result in increased activity in this sector. 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. Plans for nearly 30
new units are under development, with the Westinghouse advanced passive AP1000 design being
considered for at least 10 of them. Our existing base of nuclear services work coupled with our
collaboration with Westinghouse and the AP1000 design should position us to capitalize in this
sector.
Air Quality Control (AQC). Environmental regulations and the rising price of natural gas have
increased the need to retrofit existing coal-fired energy plants. We have been selected to provide
EPC retrofit services on many of the power plants requiring FGD for sulfur dioxide emissions
control, and are the current market leader. This market is approximately $12 billion that we expect
will continue to grow through 2011. The March 2005 Clean Air Interstate Rule (CAIR) issued by the
EPA, which reduces the allowable sulfur dioxide emissions by 70% by 2015 and reduces emissions of
nitrogen oxides by 60% by 2015 is a major driver for this market. Also, recent mercury regulations
proposed in many states exceed the requirements of the federal mercury regulations and is another
driver for this retrofit market. We believe we are also well-positioned and qualified to perform
the EPC on many of the power plants requiring mercury control retrofits. We will continue to seek
new opportunities in this market and believe our unique and recent experience in EPC execution will
allow us to maintain our status as an industry leader in the retrofit of AQC systems.
Clean Coal-Fired Generation. The rise in oil prices and wide fluctuations in natural gas prices has
prompted regulated energy companies in the U.S. to continue to focus on clean coal-fired plants. In
fiscal 2006, we signed an EPC contract for a 600-megawatt coal unit designed to use circulating
fluidized bed technology, and a second EPC contract for a 750-megawatt coal-fired unit utilizing
supercritical pulverized coal technology. We are currently providing engineering services in
support of the development of another 800-megawatt supercritical pulverized coal plant. We are
actively engaged in the proposal phase, and are performing capacity engineering studies for several
new coal projects and we expect additional project awards in the future. We expect that our
experience and expertise related to these coal plants positions us for an increasing share of this
market.
Gas-Fired Generation. In fiscal 2006, we completed construction of two 600-megawatt combined cycle
projects with final acceptance of both expected in early fiscal 2007. In fiscal 2007, we expect a
lower level of activity in the new gas-fired generation market due to the relatively high cost of
natural gas.
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Chemical
Our chemical work includes projects for customers primarily in the chemical, petrochemical and
refining industries. Demand in the chemical industries remains strong, fueled by the strong GDP
growth in China and India. Demand for oil remains strong driven by the growing middle class in
China and India. We are encouraged by increasing inquiry activity in the petrochemical and refining
industries. Key drivers include increasing demand for ethylene and propylene as well as the other
downstream petrochemical products. We believe capital expenditures by the major oil and
petrochemical companies will increase. Internationally, the Middle East and China continue to
expand their petrochemical capabilities. During fiscal 2006, we were awarded two petrochemical
projects in China — an ethylbenzene/styrene monomer project and a polystyrene project. Critical to
this expansion is additional ethylene capacity which is one of our core technologies. We were
awarded a letter of intent for an ethylene plant in Saudi Arabia in 2006 and our technology has
recently been selected for a new ethylene plant in the Middle East. We also expect new
petrochemical opportunities in the oil producing regions due to the higher than expected crude oil
prices and the availability of lower priced natural gas in the Middle East. This is particularly
true in the Kingdom of Saudi Arabia where the oil refining industry is beginning to expand into
petrochemicals.
We expect that actions by the major oil and petrochemical companies to integrate refining and
petrochemical facilities in order to improve profits will provide opportunities for us. In the
petrochemical field, we have extensive expertise in the construction of ethylene plants which
convert gas and/or liquid hydrocarbon feedstocks into ethylene, and derivative plants which provide
the source of many higher-value chemical products, including packaging, pipe, polyester,
antifreeze, electronics, tires and tubes. 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, high crude oil prices and refinery capacity constraints
are contributing to increasing activity in this market along with demand stimulated by clean fuels
and clean air legislation. While the refining process is largely a commodity activity, the
configuration of each refinery depends primarily on the grade of crude feedstock available, desired
mix of end-products and considerations of capital and operating costs. We also undertake related
work in the gas-processing field, including propane dehydrogenation facilities, gas treatment
facilities and liquefied natural gas plants.
Ethylene. The global demand for ethylene is growing at a rate of 4.3% per year (1.5 times GDP
growth). Approximately 53% of ethylene is produced from petroleum derived naphtha, but this is
changing due to the availability of low cost ethane feedstock in the Middle East region. This
feedstock cost advantage has seriously impacted the economic viability of gas feed steam crackers
in North America where feedstock price is controlled by natural gas pricing. New facilities will
mainly be gas feed crackers based on ethane extracted from natural gas. The expansion in ethylene
demand is being driven by the increased demand for polyethylene, polyesters, polystyrene and PVC,
mainly from China. We expect this increase to continue. With our estimated 35% of the existing
market share and only four ethylene technology licensor competitors, our Stone & Webster
subsidiaries are well-positioned to seize potential new opportunities.
Refining. The refining industry is searching for new value-added products that can be produced from
petroleum and is investigating integration into petrochemical facilities. We have an exclusive
agreement with RIPP/Sinopec to license a key technology that encourages the refiner’s entry into
the petrochemical arena. This technology is a high olefin yield, fluid catalytic cracker derived
process called Deep Catalytic Cracking (DCC). This technology is of increasing interest 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. The petrochemical industry is concerned about the future
supply of propylene. This is due to the predominant increase in ethane crackers which produce
ethylene and minimal amounts of propylene which leads to the increased interest in DCC. We have
licensed a large DCC unit to a confidential client in the Middle East and are in discussions with
other potential clients.
Services Offered
Engineering and Design. We provide a broad range of engineering, design and design-related services
to our customers. Our engineering capabilities include civil, structural, mechanical and
electrical. For each project, we identify the project requirements and then integrate and
coordinate the various design elements. Other critical tasks in the design process may include
value analysis and the assessment of construction and maintenance requirements.
Construction and Procurement. We provide construction and construction management services. We
often manage
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the procurement of materials, subcontractors and craft labor. We believe we have
significant expertise in effectively and efficiently managing these activities, vendors and labor.
Depending on the project, we may function as the primary contractor or 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.
Consulting. We provide technical and economic analysis and recommendations to owners, investors,
developers, operators and governments primarily in the global energy industry. Our services include
competitive market valuations, asset valuations, assessment of stranded costs, plant technical
descriptions and energy demand modeling. We have particular expertise in the electronic simulation
and analysis of energy transmission and distribution systems.
Technology. Our proprietary olefin and refinery technologies, coupled with ethylbenzene, styrene,
cumene and Bisphenol A technologies offered through our joint venture company Badger Licensing LLC
now 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 industry.
Maintenance Segment
Under operation and maintenance contracts, we perform routine and outage/turnaround maintenance
including restorative, repair, renovation, modification, predictive and preventative maintenance
services to customers in their facilities worldwide. Our Maintenance Division is well-positioned to
assist the industrial market by providing a full range of integrated asset life cycle capabilities
that complement our EPC services. We are able to provide our clients with reliability services,
turnarounds & outages, small project capital construction services, tank design construction &
maintenance, insulation, painting, and scaffolding services on a global basis. Our complete range
of services spanning from 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. has 103 operating nuclear reactors that
continue to require engineering and maintenance services to support operations and improve
performance. In addition to supporting operations and improving performance, plant restarts and new
plant construction provide opportunities for further expansion. Plant restarts are currently taking
place in the U.S., while new plant construction is ongoing in certain foreign countries and is
expected to occur in the U.S. in the future.
We also provide system-wide maintenance and modification services to 39 of the operating domestic
nuclear reactors. These projects can include upgrading emission control systems and redesigning
facilities to allow for the use of alternative fuels. We concentrate on more complicated,
non-commodity type projects where our technology, historical know-how and project management skills
can add value to the project. We believe we have a leading position in the decommissioning and
decontamination business for nuclear energy plants. This business consists of shutting down and
safely removing a facility from service while reducing the residual radioactivity to a level that
permits release of the property for unrestricted use and termination of the nuclear energy plant
license.
Fossil Plant Maintenance and Modifications. We are currently providing fossil plant maintenance
services for more than a dozen plants throughout North America. Potential opportunities for further
expansion into this market are very good as energy demand continues to increase and customers seek
longer run time and higher reliability.
Chemical. Our Maintenance segment began primarily as a chemical-focused business and has
diversified into all phases of the industrial market. We strive to be safety-driven with proactive
programs that have produced world-class safety results. Our Maintenance Segment is positioned to
assist the chemical industry by providing capabilities in conjunction with our EPC services.
Petrochemical, ethylene and clean fuels markets will provide the best chemical growth opportunities
for our Maintenance services.
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F&M Segment
We believe our expertise and proven capabilities to furnish complete piping systems on-budget and
on-time in this global market have established us as among the largest suppliers of fabricated
piping systems for energy generation facilities in the U.S. and also a leading supplier worldwide,
serving both Shaw business units and third parties. In chemical facilities, piping systems are the
critical path to convert raw or feedstock materials to products. We fabricate fully-integrated
piping systems and provide a full range of engineering, procurement, and construction services for
chemical customers around the world.
Piping system integration accounts for a significant portion of the total man-hours associated with
constructing an energy generation or a materials processing facility. We provide fabrication of
complex piping systems from raw materials including carbon steel, stainless steel, and other
alloys, such as nickel, titanium, and aluminum. We fabricate pipe by cutting it to lengths, welding
fittings on the pipe and bending the pipe, each to precise customer specifications. We currently
operate pipe fabrication facilities in Louisiana, South Carolina, Utah, the United Kingdom,
Venezuela, and through joint ventures in Bahrain and China. Our fabrication facilities are capable
of fabricating pipe ranging in diameter from 1/2 inch to 72 inches, with overall wall thicknesses
from 1/8 inch to 7 inches. We can fabricate pipe assemblies up to 100 feet in length and weighing
up to 45 tons. Our South Carolina facility is authorized to fabricate piping for nuclear energy
plants and maintains a nuclear piping 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 robotics program that we believe will result in
productivity and quality levels not previously attained in this industry. As of August 31, 2006,
the robotics program is nearing the end of development and beginning to produce significant savings
in labor and time in the cutting and welding processes. 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.
We operate a manufacturing facility in Shreveport, Louisiana, that sells its products to our E&C
segment’s operations and to third parties. Manufacturing our own pipe fittings and maintaining
considerable inventories of fittings and pipe enable us to realize greater efficiencies in the
purchase of raw materials, reduces overall lead times, and lowers total installed costs.
We also operate several distribution centers in the U.S., which distribute our products and
products manufactured by third parties. Demand for the segment’s products is typically dependent
upon capital projects in the energy and chemical industries.
Discontinued Operations
On August 31, 2004, we sold our hanger engineering and pipe support businesses that manufactured
and distributed specialty stainless, alloy, and carbon steel pipe fittings. The results of
operations for the hanger engineering and pipe support businesses are classified as discontinued
operations in the statements of operations for the year ended August 31, 2004.
During the fourth quarter of 2006 it was determined that the Shaw Robotics joint venture, which
performed robotic cleaning of tanks and ships, would be terminated and its assets would be disposed
by sale.
Financial Information about Segments and Geographic Areas
For detailed financial information regarding each business segment and export sales information,
see Note 15 in our consolidated financial statements in Item 8 of this Amendment No. 1.
In addition, see item 1A of this
Amendment No. 1 report for a discussion of the risks related to our
foreign operations.
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Backlog
The following table provides backlog in the following industry sectors and business segments,
geographic regions and status of contracts for the periods indicated.
Business Segments
Backlog by industry sector and segment is as follows:
Our backlog represents management’s estimate of the amount of awards that we expect to result in
future revenues. Backlog 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 being cancelled.
We estimate that approximately 45% of our backlog at August 31, 2006 will be completed in fiscal
2007.
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, 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. See Item 7 of this Form 10-K/A.
E&I Segment — Our E&I segment’s backlog includes the value of awarded contracts and the estimated
value of unfunded work of our consolidated subsidiaries and our proportionately consolidated joint
venture entities. The unfunded backlog generally represents various government (federal, state and
local) project awards for which the project funding has been at least partially authorized or
awarded by the relevant government authorities (e.g., authorization or an award has been provided
for only the initial year or two 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
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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 our experience with similar awards,
similar customers and our knowledge and expectations relating to the given award. Generally the
unfunded component of new contract awards are added to backlog at 75%. The programs are monitored
and estimates are reviewed periodically and appropriate adjustments are made to the amounts
included in backlog and in unexercised contract options to properly reflect our amount estimate of
total contract value in the E&I backlog. Our 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.
E&C Segment — We define our backlog in the E&C segment to include projects for which we have
received a commitment from our customers of our consolidated subsidiaries and proportionately
consolidated joint venture entities. This commitment typically takes the form of a written contract
for a specific project, a letter of intent, 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
revenues, often based on engineering and design specifications that have not been finalized and may
be revised over time.
Maintenance Segment — We define our backlog in the Maintenance segment to include projects for
which we have received a commitment from our customers of our consolidated subsidiaries and
proportionately consolidated joint venture entities. This commitment typically takes the form of a
written contract for a specific project, a letter of intent, 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 revenues. Our backlog for maintenance work is derived from maintenance contracts and
our customers’ historic maintenance requirements.
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 letter of intent, 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.
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.
Types of Contracts
Our work is performed under fixed-price contracts and cost-reimbursable contracts, both of which
may be modified by 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 a different contract type. We focus our
engineering, procurement and construction activities on cost-reimbursable and negotiated
fixed-price work, as defined below. We believe these types of contracts reduce our exposure to
unanticipated and unrecoverable cost overruns. Fixed-price contracts are generally obtained by
direct negotiation rather than by competitive bid. When we negotiate any type of contract, we
usually are required to accomplish the scope of work in the time allotted; otherwise we could be
assessed damages which in some cases are agreed-upon liquidated damages.
At August 31, 2006, approximately 60% of our backlog was comprised of cost-reimbursable contracts
and 40% were fixed-price contracts.
Our fixed-price contracts include the following:
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Our cost-reimbursable contracts include the following:
U.S. government contracts are typically awarded through competitive bidding or negotiations
pursuant to federal acquisition regulations and may involve several bidders or offerors. Government
contracts also typically have annual funding limitations and are limited by public sector budgeting
constraints. Government contracts may be terminated at the discretion of the government agency with
payment of compensation only for work performed and commitments made at the time of termination. In
the event of termination, we generally receive some allowance for profit on the work performed.
Many of these contracts are multi-year 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.
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 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.
Also, 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
convenience. 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.
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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
energy, 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.
Customers and Marketing
Our customers are principally major multi-national industrial corporations, regulated utilities,
independent and merchant energy providers, governmental agencies and equipment manufacturers.
For the year ended August 31, 2006, we had revenues from five commercial customers of approximately
$759.8 million, which represented 16% of our total revenues. We also had total revenues from U.S.
government agencies or entities owned by the U.S. government of approximately $1.9 billion (40% of
our total revenues) that included E&I segment revenues totaling approximately $1.7 billion (80% of
E&I segment revenues).
Additionally, as of August 31, 2006 approximately 31% of our total backlog and approximately 89% of
the E&I segment’s backlog is with U.S. government agencies or entities owned by the U.S.
government. Contracts with nine separate commercial customers of the E&C segment represent
approximately 42% of total backlog and 82% of E&C backlog at August 31, 2006.
For the year ended August 31, 2006, we had revenues from one customer (non-governmental) of
approximately $128.9 million, which represented approximately 9% of our E&C segment’s revenues and
3% of our total revenues.
We conduct our marketing efforts principally with an in-house sales force. In addition, we engage
independent contractors as agents 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 which may also include a monthly retainer.
Raw Materials and Suppliers
For our engineering, procurement and construction services, we often rely on third party equipment
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 level of activity in many of our markets is generating higher
demand for labor, materials and equipment that we rely on to execute our contracts. We expect the
current tight market for these inputs to continue in 2007.
Our principal raw materials for our pipe fabrication operations are carbon steel, stainless steel
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 our relationships with
suppliers are strong. Certain types of raw materials, however, are available from only one or a few
specialized suppliers. Our inability to obtain materials from these suppliers could jeopardize our
ability to timely complete a project or realize a profit.
We purchase directly from other manufacturers, or manufacture on our own, 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 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.
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Industry Certifications
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 required American Society of Mechanical Engineers (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.
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 & N3 stamped nuclear components.
The Laurens, South Carolina facility also maintains a nuclear piping ASME certification (NPT stamp)
and is authorized to fabricate piping for nuclear energy 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).
Patents, Trademarks and Licenses and Other Intellectual Property
We have several items that we believe constitute valuable intellectual property. We consider our
computerized project control system, SHAW-MAN™, and our web-based earned value application,
SHAWTRAC™, 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, we have now expanded our proprietary technology licensing business
through the recent acquisition of the Shell Heritage Bisphenol A technology from Resolution
Performance Products. Badger Licensing LLC, our joint venture with ExxonMobil Chemical, is now in a
leading position to supply proprietary ethylbenzene, 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
area of both gas-to-liquids and coal-to-liquids.
Through our acquisition of the assets of the IT Group, 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 fiscal 2003, we acquired Envirogen, Inc. which had certain patents and trademarks. Envirogen’s
patented technologies include processes for the control of biomass in Fluidized Bed Reactors which
processes 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 reducing operating costs and downtime associated with membrane
cleaning for water treatment.
Competition
The markets served by both our E&C and E&I segments are highly competitive and for the most part
require
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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. Further, we are a recent
entrant into certain areas of these businesses, and certain competitors possess substantially
greater experience, market knowledge and customer relationships.
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 us.
Employees
At August 31, 2006, we employed approximately 22,000 employees, and approximately 2,115 of these
employees were represented by labor unions pursuant to collective bargaining agreements. We also
employ union labor from time to time 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.
At August 31, 2006, approximately 585 of our employees worked in our wholly-owned subsidiary in
Canada and approximately 1,281 in the United Kingdom.
Environmental Laws and Regulations
We are subject to environmental laws and regulations, including those concerning emissions into the
air, discharges into waterways, generation, storage, handling, treatment and disposal of hazardous
materials and wastes and health and safety.
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 cannot
assure you that we will not incur material environmental costs or liabilities in the future.
Available Information
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, 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 450 Fifth Street, NW, Washington, D.C. 20549 or on their 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.
Certifications
We will timely provide the annual certification of our Chief Executive Officer to the New York
Stock Exchange. We filed last year’s certification in our 2005 Summary Annual Report. In addition,
our Chief Executive Officer and Interim Chief Financial Officer each have signed and filed the
certifications under Section 302 of the Sarbanes-Oxley Act of 2002 with this Amendment No. 1.
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Item 1A. Risk Factors
Risks related to our investment in Westinghouse Electric Company could have an adverse effect on
us.
Although the Westinghouse Electric Company (Westinghouse) acquisition is very significant to us,
Westinghouse was part of British Nuclear Fuels Ltd. and was not separately audited, accordingly, we
do not have audited financial information for the Westinghouse business. We expect to have audited
historical information and pro forma financial statements available within 75 days of closing.
However, we can’t give any assurance as to what those financials will show, or whether, if
available now, they would affect investment decisions relating to our securities. If we don’t get
financial statements when required, we may be prevented from using Form S-3 which could impact our
ability to access the capital markets. We will incur significant interest cost on the bonds that we
sold to finance this acquisition. We can’t assure that we will receive dividends in an amount
sufficient to cover these costs.
We will have very limited control rights with respect to our investment. We will have a member on
the board of Westinghouse acquisition companies, but generally will not have any rights to control
the outcome of material decisions and activities related to the Westinghouse business. In addition,
we will have limited access to and ability to disclose the details of the Westinghouse business and
its operations. We can’t assure that this information, if disclosed, would not be material.
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 Shaw or NEH goes
bankrupt. In addition, when the financing for our investment matures in 2013 (or earlier in the
event of certain defaults), we would 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 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’t give any
assurance that we will obtain significant business from this arrangement.
Demand for our products and services is cyclical and vulnerable to downturns in the industries to
which we market our products and services.
The demand for our products and services depends on conditions in the environmental and
infrastructure industry and the energy industry, which accounted for approximately 30% and 49%,
respectively, of our backlog as of August 31, 2006, and, to a lesser extent, on conditions in the
petrochemical, chemical and refining industries. These industries 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.
The dollar amount of our backlog, as stated at any given time, is not necessarily indicative of our
future earnings.
As of August 31, 2006, our backlog was approximately $9.1 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 in scope may occur with respect to
contracts reflected in our backlog.
Our backlog consists of projects for which we have signed contracts or commitments from customers
but does not include projects that we expect will be performed in more than five years after the
date of our financial statements. Commitments may be in the form of written contracts for specific
projects, letters of intent, purchase orders, or indications of the amounts of time and materials
we need to make available for customers’ anticipated projects. Backlog includes expected revenue
based on engineering and design specifications that may not be final and could be revised over
time. Backlog includes revenues for maintenance contracts that may not specify actual dollar
amounts of maintenance work to be performed. For these contracts, backlog is based on an estimate
of work to be performed based on our knowledge of customers’ historic maintenance requirements. The
amount of future actual awards may be more or less than our estimates.
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Reductions in backlog due to cancellation by a customer or for other reasons adversely affect,
potentially to a material extent, the revenues we actually receive from contracts included in
backlog. 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 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
could be significantly adversely affected.
Backlog estimates are reviewed periodically and adjustments are made to the amounts included in
backlog. Our backlog does not include any projects (funded or unfunded) that we expect will be
performed more than five years after the date of our financial statements. The amount of future
actual projects may be more or less than our estimates.
Our projects may encounter difficulties that may result in additional costs to us, reductions in
revenues, claims, disputes or the payment of damages.
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, and 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 vendor, subcontractor or other third-party, we may not be able to
recover all of these costs in all circumstances.
In addition, certain 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. Our EPC
project contracts generally require the customer to compensate us for additional work or expenses
incurred due to customer requested change orders or failure of the customer to provide us with
specified design or engineering information or equipment. 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.
Our use of the percentage-of-completion accounting method could result in a reduction or
elimination of previously reported profits.
As is more fully discussed in Item 7 and in the notes to our consolidated financial statements in
this report, a substantial portion of our revenues are recognized using the
percentage-of-completion, or POC, method of accounting, which is a standard method for engineering,
procurement and construction, or EPC, contracts. The POC 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-
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reimbursable contracts is generally limited, it is possible that 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, it is
possible that such adjustments could be material to our operating results.
Actual results could differ from the estimates and assumptions that we use to prepare our financial
statements.
To prepare financial statements in conformity with generally accepted accounting principles,
management is required to make estimates and assumptions, as of the date of the financial
statements, which affect the reported values of assets and liabilities and revenues and expenses
and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our
management include, among other things:
Our actual results could differ from these estimates.
Non-compliance with covenants in our Credit Facility, without waiver or amendment from the lenders
of the Credit Facility, could adversely affect our ability to borrow under the Credit Facility.
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, the defined terms used
in calculating the financial covenants, in accordance with the Credit Facility, require us to
follow generally accepted accounting principles, 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. See 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 cannot assure you that we will be able
to obtain the necessary waivers or amendments. In the event of any default not waived, the lenders
under our credit facility are not required to lend any additional amounts to us and could elect to
declare all 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 our
borrowings 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 the indebtedness under our Credit Facility is accelerated,
we cannot assure you that our assets would be sufficient to repay such indebtedness in full. As of
August 31, 2006, we had $145.5 million outstanding borrowings under the Credit Facility
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with
outstanding letters of credit inclusive of both domestic financial and domestic performance of
approximately $319.1 million and indebtedness under our Senior Notes of $15.1 million.
In addition, although our Senior Notes contain no cross-default provisions, 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 cannot assure you that we would be successful in
obtaining any such amendment or waiver.
Restrictive covenants in our Credit Facility may restrict our ability to pursue our business
strategies.
Our Credit Facility restricts on our ability to, among other things:
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 impair our ability to engage in favorable business activities and our
ability to finance future operations or capital needs.
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. See Risk Factor, “Non-compliance with
covenants in our Credit Facility, without waiver or amendment from the lenders of the Credit
Facility, could adversely affect our ability to borrow under the Credit Facility.”
Our borrowing levels and debt service obligations could adversely affect our financial condition
and impair our ability to fulfill our obligations under our Senior Notes and our Credit Facility.
As of August 31, 2006, we had total outstanding indebtedness of approximately $185.1 million,
approximately $158.4 million of which was secured indebtedness, including obligations under capital
leases. In addition, as of August 31, 2006, letters of credit, domestic and foreign, issued for our
account in an aggregate amount of $323.2 million were outstanding and we had borrowings of $145.5
million under our Credit Facility. Our indebtedness could have important consequences, including
the following:
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To the extent that new debt is added to our currently anticipated debt levels, the substantial
leverage risks described above would increase.
We are currently the subject of an informal inquiry by the SEC.
On June 1, 2004, we were notified by the staff of the Securities and Exchange Commission, or 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 primarily relate to the purchase method of
accounting for various acquisitions. We have been cooperating with the SEC, including providing
documents and responding to requests for voluntary production, as well as conducting a detailed
review of our accounting for our acquisitions. Subsequent to an internal review which led to the
restatement of our financial statements for the second quarter of 2006, as reflected in a press
release we announced on July 10, 2006, with a Current Report on Form 8-K, 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.
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 potentially members of our management.
Responding to such actions or proceedings have been and could continue to be costly and could
divert the efforts and attention of our management team, including senior officers. If any such
action or proceeding is resolved unfavorably to us or any of them, 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.
Lawsuits and regulatory proceedings could adversely affect our business.
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 14 of
our consolidated financial statements. Although it is not possible at this early 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. See Notes 14 and 20
to our consolidated financial statements in this report.
Downgrades by rating agencies may require us to modify existing bonding facilities or obtain new
bonding facilities.
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 cash collateral to obtain these surety bonds, which would reduce
our available cash or availability under our Credit Facility. Any new or modified bonding
facilities might not be on terms as attractive as those we have currently and we could also be
subject to increased costs of capital and interest rates.
The nature of our contracts could adversely affect us.
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Approximately 60% of our backlog as of August 31, 2006 was from cost-reimbursable contracts and the
remaining 40% 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. A significant number of our
domestic piping contracts, and substantially all of our international piping contracts, are
fixed-price. In addition, a number of the contracts we assumed in the Stone & Webster and IT Group
acquisitions were fixed-price contracts, and we will continue to enter into these types of
contracts in the future. Under fixed-price contracts, we agree to perform the contract for a
fixed-price and, as a result, benefit from costs savings and earnings from approved change orders;
but we are generally unable to recover any cost overruns to the approved contract price. Under
maximum 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 assumptions regarding future
economic conditions. If these estimates prove inaccurate or circumstances change, cost overruns
could have a material adverse effect on our business and results of our operations. 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 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 against the
customer’s more credit-worthy parent company. 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 are subject to the risks associated with being a government contractor.
We are a major provider of services to 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 year ended August
31, 2006, 31% of backlog was generated from U.S. governmental agencies. 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 our contracts. 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.
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.
As a result of our government contracting business, we are the subject of audits, cost reviews and
investigations by contracting oversight agencies. During the course of an audit, the oversight
agency may disallow costs. Such cost disallowances may result in adjustments to previously reported
revenues.
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In addition, our failure to comply with the terms of one or more of our government contracts, other
government agreements, 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 which could have a
material adverse effect on our business.
Our failure to meet schedule or performance requirements of our contracts could adversely affect
us.
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 additional costs, and the amount of such additional
costs could exceed projected profits. These additional costs include 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 20 of our consolidated financial statements.
Our dependence on subcontractors and equipment manufacturers could expose us to the risk of loss.
We rely on third-party equipment manufacturers as well as third-party subcontractors to complete
our projects. To the extent that we cannot engage subcontractors or acquire equipment or materials,
our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount
we are required to pay for these goods and services exceeds the amount we have estimated in bidding
for fixed-price work, we could experience losses in the performance of these contracts. In
addition, if a subcontractor or a manufacturer is unable to deliver its services, equipment or
materials according to the negotiated terms for any reason, including the deterioration of its
financial condition, we may be required to purchase the services, equipment or materials from
another source at a higher price. This may reduce the profit to be realized or result in a loss on
a project for which the services, equipment or materials were needed.
Possible cost escalation associated with our fixed-price contracts could negatively affect our
profitability.
We estimate total contract costs in pricing our fixed-price contracts by incorporating assumptions
to address inflation and fluctuations in market price for materials. However, we can not 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.
Our results of operations depend on new contract awards and the timing for performing these
contracts.
A substantial portion of our revenues is directly or indirectly derived from large-scale domestic
and international projects. 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 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.
Our ability to obtain adequate bonding and, as a result, to bid on new work could have a material
adverse effect on our future revenues and business prospects.
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 indemnify the customer if we fail to perform our
obligations under the contract. If a bond is required for a particular project and we are unable to
obtain an appropriate bond, we cannot pursue that project. We have a bonding facility but, as is
typically the case, the issuance of bonds under that facility is at the surety’s sole
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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 will continue to be available to us on reasonable terms.
The uncertainty of our contract award timing can also present difficulties in matching workforce
size with contract needs. In some cases, we maintain and bear the cost of a ready workforce that is
larger than called for under existing contracts in anticipation of future workforce needs for
expected contract awards. If an expected contract award is delayed or not received, we could incur
costs that could have a material adverse effect on us. Further, our significant customers vary
between years, and the loss of any one or more of our key customers could have a material adverse
impact on us.
Our environmental and infrastructure operations may subject us to potential contractual and
operational costs and liabilities.
Many of our E&I segment customers attempt to shift financial and operating risks to the contractor,
particularly on projects involving large scale cleanups 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 pressure contractors to 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.
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 resulting from 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 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 may be affected should our detection and remediation prove
less effective than anticipated. Because anthrax and similar contamination is so recent, 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.
We are exposed to certain risks associated with our integrated environmental solutions businesses.
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, The LandBank Group, Inc., (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. 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 such 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 cannot assure you 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
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of cleanup at a particular project, underestimation
could significantly adversely affect us. Further, the continued growth of this type of business is
dependent upon the availability of environmental and cost cap insurance or other risk management
products. We cannot be assured or provide assurance that such products will continue to be
available to us in the future or, if it is available, at an economically feasible cost. 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 limitation or the modification of the Price-Anderson Act’s indemnification authority could
adversely affect our business.
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 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 is not applicable, our business could be
adversely affected by either a refusal of operations of new facilities to retain us or our
inability to obtain commercially adequate insurance and indemnification.
Environmental factors and changes in laws and regulations could increase our costs and liabilities
and affect the demand for our services.
In addition to the environmental risks described above relating to the businesses acquired from IT
Group and our environmental remediation business, our operations are subject to environmental laws
and regulations, including those concerning:
Our projects often involve highly regulated materials, including hazardous and nuclear materials
and wastes. Environmental laws and regulations generally impose limitations and standards for
regulated materials and require us to obtain a permit and comply with various other requirements.
The improper characterization, handling, 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.
In addition, under CERCLA and comparable state laws, we may be required to investigate and
remediate regulated materials. 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. The principal
federal environmental, health and safety legislation affecting our operations and the operations of
our clients include the National Environmental Policy Act; the RCRA; the Clean Air Act; the
Occupational Safety and Health Act; the Toxic Substances Control Act; the Federal Water Pollution
Control Act; CERCLA; and the Superfund Amendments and Reauthorization Act, as each has been amended
from time to time. Our foreign operations are also subject to similar governmental controls and
restrictions relating to environmental protection.
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We could also incur environmental liability at sites where we have been hired by potentially
responsible parties (PRPs) to remediate contamination of the site. Such PRPs have sought to expand
the reach of CERCLA, RCRA and similar state statutes to make the remediation contractor responsible
for cleanup costs. These companies claim 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 under the
Comprehensive Environmental Response, Compensation and Liability Act, as amended, or CERCLA, and
similar projects.
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 recently acquired 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 cannot assure you that our operations will continue to comply with future laws and
regulations and that such noncompliance would not significantly adversely affect us.
The level of enforcement of these laws and regulations also affects the demand for many of our
services. The perception that enforcement of current environmental laws and regulations has been
reduced has decreased 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.
Development and construction risks and other risks associated with our military family housing
privatization contracts could impact our profitability and a loss of our investment.
Development and construction activities conducted through various joint ventures with one strategic
partner expose us to risks including:
Other risks directly associated with our dependence on the U.S. military include:
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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 2006, we contributed $5.6 million to these housing privatizations.
Our working capital requirements may increase as a result of our work associated with the military
family housing privatization market.
These privatization contracts require initial capital contributions in the early stages of the
project and ultimately permanent financing from a third party lender. As of August 31, 2006, we
were not scheduled to make any significant equity contributions during fiscal 2007. 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 that property.
If our partners fail to perform their contractual obligations on a project, we could be exposed to
loss of reputation and additional financial performance obligations that could result in reduced
profits or, in some cases, significant losses.
We often enter into various 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 of 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.
Our dependence on one or a few customers could adversely affect us.
Due to the size of many engineering and construction projects, one or a few clients have
historically and may in the future, contributed to a substantial portion of our consolidated
revenues. For example, in fiscal 2006, approximately 51% of our revenues were generated from 10
major customers, including governments. Similarly, our backlog frequently reflects multiple
projects for individual clients; therefore, one major customer may comprise a significant
percentage of our backlog at a point in time. Backlog from the U.S. government or U.S.
government-owned entities accounted for 31% of backlog at August 31, 2006.
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 purchases at any time. The loss of business from any one of such
customers could have a material adverse effect on our business or results of operations.
If we experience delays and/or defaults in customer payments, we could be unable to recover all
expenditures.
Because of the nature of our contracts, at times we commit resources to projects prior to receiving
payments from the customer in amounts sufficient to cover expenditures on projects as they are
incurred. Delays in customer
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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
resources, it could have a material negative effect on our results of operations.
Our projects expose us to potential professional liability, product liability, warranty and other
claims.
We engineer, construct and perform services in large industrial facilities in which 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 cost overruns, 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. In addition, once our construction is
complete, we may face claims with respect to the performance of these facilities.
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We face substantial competition in each of our business segments.
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, 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 the environmental and infrastructure segment to be competitive.
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 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 concerns, 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 certain of our
customers. The markets that we serve require substantial resources and particularly highly skilled
and experienced technical personnel.
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.
Political and economic conditions in foreign countries in which we operate could adversely affect
us.
Approximately 12% of our fiscal 2006 revenues were attributable to projects in international
markets, some of which are subject to political unrest and uncertainty. The services we provide to
our customers in Iraq and other Middle East countries have created several challenges, including
identifying and retaining the appropriate subcontractors, the recruiting of qualified personnel and
the ability to retain them, the safety of our employees and subcontractors and the increased
working capital demands. It is possible that our employees 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 in the Middle East, international contracts,
operations and expansion expose us to risks inherent in doing business outside the U.S., including:
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Work stoppages and other labor problems could adversely affect us.
Some of our employees in the U.S. and abroad 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 give any assurance that we will not experience
additional union activity in the future.
Because of the capital-intensive nature of our business, we are vulnerable to reductions in our
liquidity.
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 include 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:
Foreign exchange risks may affect our ability to realize a profit from certain projects or to
obtain projects.
We generally attempt to denominate our contracts in U.S. dollars. However, from time to time 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,
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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.
Foreign exchange controls may also adversely affect us. For instance, foreign exchange controls
were instituted in Venezuela on February 6, 2003. These controls may limit our ability to
repatriate profits from our Venezuelan subsidiaries or otherwise convert local currency into U.S.
dollars. Further, our ability to obtain international contracts is impacted by the relative
strength or weakness of the U.S. dollar to foreign currencies.
We may incur unexpected liabilities associated with the Stone & Webster and IT Group acquisitions,
as well as other acquisitions.
In July 2000, we acquired substantially all of the operating assets and assumed certain liabilities
of Stone & Webster, Inc., and during fiscal 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.
If we write off a significant amount of intangible assets or long-lived assets, our earnings will
be negatively impacted.
Because we have grown in part through acquisitions, goodwill and other acquired intangible assets
represent a substantial portion of our assets. Goodwill was approximately $506.6 million as of
August 31, 2006. 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 $206.5 million as of August 31, 2006, 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.
Difficulties integrating our acquisitions could adversely affect us.
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. If we are unable to complete acquisitions we have identified, our business could be
materially adversely affected. In addition, we may encounter difficulties integrating our future
acquisitions and in successfully managing the growth we expect from the acquisitions. In addition,
our expansion into new business areas may 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, we 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.
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Our failure to attract and retain qualified personnel, including key officers, could have an
adverse effect on us.
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.
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.
Changes in technology could adversely affect us, and our competitors may develop or otherwise
acquire equivalent or superior technology.
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 provide competitive advantages. The advantages currently provided by this software could
be at risk if competitors were to develop superior or comparable technologies.
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 know-how, 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.
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. As a result, investors could lose confidence in our
financial reporting, which would harm our business and the trading price of our stock.
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 ever required, would ensure that we
implement and maintain adequate controls over our financial reporting processes and related Section
404 reporting requirements if changes are made. 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.
Terrorists’ actions have and could continue to negatively impact the U.S. 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 or that terrorist attacks, or responses from the U.S., will not lead
to further acts of terrorism and civil disturbances in the U.S. or elsewhere, which may further
contribute to economic instability in the U.S. 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
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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.
Other risks may negatively affect our business.
All or any of these matters could place us at a competitive disadvantage compared to competitors
with more liquidity and could have a negative impact upon our financial condition and results of
operations.
Item 1B. Unresolved Staff Comments
We have previously disclosed that we are the subject of an informal inquiry by the SEC 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 primarily relate
to the purchase method of accounting for various acquisitions. We have been cooperating with the
SEC, including providing documents and responding to requests for voluntary production, as well as
conducting a detailed review of our accounting for our acquisitions. Subsequent to an internal
review which led to the restatement of our financial statements for the second quarter of 2006, as
reflected in a press release we announced on July 10, 2006, with a Current Report on Form 8-K, 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.
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Item 2. Properties
Our principal properties at August 31, 2006 are as follows:
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 14 and Note 20 of our consolidated financial statements in Item 8 of this Amendment No. 1.
Item 4. Submission of Matters to Vote of Security Holders
None.
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PART II
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 New York Stock Exchange (NYSE) under the symbol
“SGR.” The following table sets forth, for the quarterly periods indicated, the high and low sale
prices per share for the common stock as reported by the NYSE for our two most recent fiscal years
and for the current fiscal year to date.
The closing sales price of our common stock on October 26, 2006, as reported on the NYSE, was
$26.90 per share. On October 26, 2006, we had 577 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.
See Item 12 of this report with respect to information to be incorporated by reference regarding
equity compensation plans.
Item 6.
Selected Financial Data (Restated)
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 as adjusted for discontinued
operations. The selected historical consolidated financial data for each of the five fiscal years
in the period ended August 31, 2006 presented below has been derived from our audited consolidated
financial statements. Ernst & Young LLP, independent registered public accounting firm, audited our
consolidated financial statements for each of the five fiscal years ended August 31, 2006. Such
data should be read in conjunction with the Consolidated Financial Statements and related notes
thereto included in Item 8 of this report. Data for the years ended August 31, 2005, 2004, 2003 and
2002 already reflect a prior period restatement; such data was previously included in the Original
Form 10-K Filing. See the Explanatory Note on page 3 of this report for a discussion of the
restatements. The restatements resulting in this Amendment No. 1, as described under “Explanatory Note”
on page 3, had no impact on the selected financial data in the following table.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Restated)
The following analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements, including 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 Item 1A of this
report.
Results of Operations
The comments and tables that follow compare revenues, gross profit (loss), gross profit (loss)
percentages and backlog by operating segment and a discussion of other items, including general and
administrative costs, interest expense and income, income from unconsolidated subsidiaries and
income taxes at the consolidated level for years ended August 31, 2006, 2005 and 2004 based on the
following comparisons:
Selected summary financial information (restated) for our operating segments, for the periods
indicated (in millions, except for percentages):
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Our revenues by industry sector were as follows:
The following tables present our revenues by geographic region:
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Backlog by industry sector and segment is as follows:
Backlog by status of contract:
Our backlog represents management’s estimate of the amount of awards that we expect to result in
future revenues. Backlog 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 being cancelled.
(1). The Explanatory Note to this Amendment No. 1 and Notes 1 and 25 to our consolidated financial
statements in Item 8 of this report address 1) the impact of the restatements associated with this
Amendment No. 1 and 2) the impact of the restatements associated with our financial statements for
fiscal years 2005 and 2004 that were previously included in the Original Form 10-K Filing.
Fiscal 2006 Compared to Fiscal 2005 (Restated)
Executive Summary
The need for disaster relief, emergency response and recovery services in the Gulf Coast area of
the U.S. as a result of hurricanes Katrina and Rita, increased activity in the energy markets,
consistent demand for clean air and fuels, garrison support services and transmission and
distribution services have contributed to our overall revenue growth for the fiscal year ended
August 31, 2006.
Gross profit for the fiscal year ended August 31, 2006, increased compared to the same period for
fiscal 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 2006 as compared to 2005 resulting from increased
volume of capital construction services for chemical industry customers and growth in worldwide
demand for piping systems, respectively. The E&C segment’s gross profit declined, primarily due to
estimated cost increases on certain refinery projects and on one power project and the unfavorable
ruling on litigation related to our Wolf Hollow project.
General and administrative expenses increased by $36.0 million, or 18.9%, during fiscal 2006
compared to fiscal 2005 in order to support the increased revenue base and level of business
activity. Despite the increase in G&A
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expenses, G&A expenses as a percentage of revenues was 4.7%
for fiscal 2006 compared to 5.8% for fiscal 2005. Specific items that contributed to the increase
in G&A expenses during fiscal 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, and hurricane related costs. Also contributing to higher G&A in 2006 were 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 Electric Company and
an increase in employee compensation expense for the cost of stock options now accounted for under
SFAS 123(R).
Other expenses decreased due to lower interest expenses and the $47.8 million loss on retirement of
our Senior Notes during fiscal 2005. Our effective tax rate decreased to 23% in fiscal 2006 from
46% in fiscal 2005, primarily due to a $6.9 million increase in the deferred tax valuation
allowance in fiscal 2005, which was reversed in 2006 related to U.K. net operating losses. Minority
interest expense increased $8.4 million primarily due to the change in accounting as a result of
the previously described misapplication of GAAP and to the consolidation of a previously
unconsolidated entity due to our acquisition of one of our joint venture partners. As a result of
all the above, income from continuing operations increased by $35.4 million to $53.0 million in
fiscal 2006 from $17.6 million in fiscal 2005.
Industry Trends
The 2005 hurricane season resulted in increased spending in our fiscal 2006 by FEMA and other
governmental agencies on hurricane-relief efforts in the areas affected. We participated
extensively by performing over $1.0 billion in hurricane projects in fiscal 2006 compared to $25.3
million in 2005. Spending on hurricane-relief efforts and by our other major governmental clients
has declined from the levels we experienced in the first half of fiscal 2006 and is expected to
contribute significantly less to revenues in fiscal 2007 as a result of the nominal hurricane
activity experienced in the 2006 storm season.
The Safe, Accountable, Flexible and Efficient Transportation Equity Act — A Legacy for Users
(SAFETEA-LU), enacted in 2005, dedicates appropriations of over $286 billion to federal highway,
transit and safety programs, and Shaw is well-positioned to work in concert with public agencies at
federal, state and local levels to accomplish the large and complex infrastructure projects that
will receive funding under SAFETEA-LU. There is funding earmarked for emergency relief repairs
resulting from natural disasters, for regional programs targeting areas where E&I has a presence
and for corridor, border and port infrastructure improvement and enhanced homeland security
projects of national interest. By working within a public/private partnership framework, E&I has
the opportunity to pursue contracts important to our business, while at the same time allowing
public infrastructure improvement objectives to move forward. The SAFETEA-LU funding, which will
continue through 2009, creates strong business opportunities and E&I is prepared to leverage our
historic capabilities as well as strengthen our developing homeland security services in the areas
of ports, cargo and transportation security in a market where demand for infrastructure services
has the potential to grow.
Power demand is generally dependent on economic growth; therefore, continued spending in the power
generation sector has increased. The growth is coming from companies’ spending on scrubber retrofit
in order to comply with new emission standards introduced in 2005 as well as from the upgrade and
expansion of T&D grid. Although a few utilities have already announced plans to invest in new power
generation facilities, there is a lengthy decision and approval process. The mid-to-long-term
prospects for capital expenditures in utilities will be dictated by large investments in new power
plants. A significant economic slowdown in the U.S. or in other key international markets would
negatively impact long-term power projects.
Projected capital spending growth in the chemical sector is primarily driven by capacity additions
in China and the Middle East. Chemical sector capital spending has increased as a result of rising
demand and prices, and chemical producers have been directing more funds for internal growth
through capacity expansion. The majority of the new plants are being built in developing countries
such as China to meet increasing local demand. The Middle East is another area of growth due to
cheap feed-stock. Chemical spending in the U.S. has also been solid, albeit the capacity increase
was on a much smaller scale. A significant economic slowdown in the U.S. or in other key
international markets could lead to private clients cutting costs and termination of proposed
and/or existing projects. A higher share of fixed-price contracts and exposure to contracts in
high-risk geographical areas could impact revenue growth and gross profit.
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Oil prices also have an impact on the level of engineering and construction services provided to
oil and gas infrastructure development. A sustained high oil price environment can lead to
increased capital spending from oil companies. We may benefit from rising oil company capital
expenditures and a capacity constrained market. Additionally, with natural gas prices relatively
high, U.S. utilities are increasingly planning to build new coal-fired power plants with clean air
scrubbers from which we may benefit as well.
Segment Analysis
The analysis below has been restated to add the Sections “Income (loss) before minority interest,
earnings (losses) from unconsolidated entities and income (loss) from discontinued operations)
and “Pre-tax income (loss) before other items” for each segment.
E&I Segment
We provided disaster relief, emergency response and recovery services to federal, state and local
governmental entities as well as to not-for-profit and private entities in the hurricane damaged
areas of the United States’ Gulf Coast. Each of our segments contributed management, personnel and
use of assets to help meet the needs of this work. However, because emergency response and
governmental services are contracted through our E&I segment, all revenues and costs are included
in our E&I segment.
Revenues
The increases in revenues of $999.2 million or 89% for fiscal 2006 as compared to fiscal 2005 was
primarily attributable to:
The increase in revenues for fiscal 2006 was partially offset by decreases in revenues attributed
to:
Gross Profit and Gross Profit Percentage
Gross profit for fiscal 2006 was $199.2 million or 9.4% as compared to $116.9 million or 10.4% for
fiscal 2005. The change in gross profit and related gross profit percentage is due primarily to:
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The increases in gross profit and related gross profit percentage are partially offset by:
Income (loss) before minority interest, earnings (losses) from unconsolidated entities and
income (loss) from discontinued operations (“Pre-tax income (loss) before other items”)
Pre-tax income (loss) before other items for fiscal year 2006 was $126.8 million or 6.0% of
revenues as compared to $54.6 million or 4.9% of revenues for fiscal year 2005. The $72.2 million
increase is due primarily to the changes in gross profit addressed above, partially offset by
incremental costs incurred as a result of growth in the segment needed to meet the demands of
hurricane-related work.
Backlog
Backlog for the E&I segment as of August 31, 2006 is $2.8 billion, compared to $2.2 billion as of
August 31, 2005. The increase in backlog is attributable to significant contract awards from FEMA,
the U.S. Army Corps of Engineers, the Air Force Center for Environmental Excellence (AFCEE), the
Department of Energy (DOE) and state and local jurisdictions, augmented by recurring project awards
from long-term commercial clients. These awards have offset backlog reductions in the Middle East
where opportunities for the near term have been less than anticipated as funding shifted to
domestic project opportunities under global government contracts. Contract work executed throughout
fiscal 2006 was in line with expectations adjusted for disaster relief, emergency response, and
recovery services provided by E&I. We expect backlog to remain sensitive to the levels of funding
on awards related to disaster relief, emergency response, and recovery services projects during
fiscal 2007, but could also be impacted by awards under global contracts during fiscal 2007. We
believe E&I is well-positioned to capitalize on opportunities in core and emerging markets with
both historic and developing services and the E&I backlog will rest on our ability to win new
contract awards in this highly competitive environment.
As of August 31, 2006, contracts with government agencies or entities owned by the U.S. government
and state government agencies are a predominant component of the E&I backlog, accounting for $2.5
billion or 89% of the $2.8 billion in backlog.
In fiscal 2007 we expect E&I revenues will stabilize at less than fiscal 2006 levels as such
current awarded disaster recovery work nears completion; however we expect that fiscal 2007 revenue
levels will be well in excess of levels earned in 2005 with increases in federal and mission
support services, supported by several DOE projects and from commercial, state and local project
work, bolstered by awards from clients in both the public and private sectors. We expect gross
profit for fiscal 2007 to be less than that earned in 2006 as we do not anticipate the significant
disaster recovery work that was earned in the current fiscal year.
Gross profit percentage is expected to be lower in fiscal 2007 than in fiscal 2006, reflecting the
impact of lower revenues to absorb indirect costs, lower than historical gross profit anticipated
on the continuing disaster relief, emergency response and recovery related awards, the changing
composition of work, including expanded services provided by our consolidated joint ventures and
the competitive nature of work won in this industry sector.
E&C Segment (Restated)
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Revenues
Segment revenues for fiscal 2006 were $1,438.7 million as compared to $1,181.9 million in 2005. The
$256.8 million increase or 21.7% is primarily attributable to:
The increase in revenues for fiscal 2006 was partially offset by:
Gross Profit and Gross Profit Percentage
Gross profit for the fiscal 2006 was $30.2 million or 2.1% of revenues compared to $107.0 million
or 9.1% of revenues for fiscal 2005. This decrease is primarily attributable to:
The decrease in gross profit and gross profit percentage for fiscal 2006 as compared to fiscal 2005
was partially offset by:
Our E&C segment has recorded revenues to date of $62.4 million related to our significant
unapproved change orders and claims as of August 31, 2006 on a percentage of completion basis.
Substantially all of this revenue was recorded during fiscal 2006. The amounts included in our
estimated total revenues at completion for these applicable projects are estimated to be a combined
$82.3 million. These unapproved change orders and claims relate to delays and costs attributable to
others as well as force majeure provisions under the contracts. 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. For further description of our accounting policy with regard to
unapproved change orders and claims see “Critical Accounting Policies and Related Estimates That
Have a Material Effect on Our Consolidated Financial Statements” contained in Item 7 of this Amendment No. 1.
Pre-tax income (loss) before other items
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Pre-tax income (loss) before other items for fiscal year 2006 was ($8.3) million or (0.6%) of
revenues as compared to $70.2 million or 5.9% of revenues for fiscal year 2005. The $78.5 million
decrease 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, as well as, a decrease
in gains related to the sale of PTI in 2005.
Backlog
Backlog for the E&C segment as of August 31, 2006 is $4.7 billion, as compared to $3.1 billion as
of August 31, 2005. Included in backlog at August 31, 2006, is $872 million of customer furnished
material which does not have any associated gross profit. The increase in backlog is primarily a
result of new major coal power and FGD projects. This was partially offset by scheduled progress on
major projects and the conversion of a fixed price contract to a reimbursable services contract. We
anticipate fiscal 2007 revenue and gross profit to increase due to increased activity on our EPC
FGD projects, major coal power projects and a major international petrochemical project.
At August 31, 2006, nine customers account for approximately $3.8 billion or 82% of backlog for the
E&C segment.
Maintenance Segment
Revenues
The increase of $165.4 million or 23% during fiscal 2006 compared to fiscal 2005 was primarily
attributable to:
The increase in revenues for fiscal 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
Gross profit for fiscal 2006 was $32.8 million or 3.6% compared to $27.4 million or 3.7% for fiscal
2005. The increase in gross profit 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
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.
Pre-tax income (loss) before other items
Pre-tax income before other items for fiscal year 2006 was $21.7 million or 2.4% of revenues as
compared to $18.4 million or 2.5% of revenues for fiscal year 2005. The $3.3 million increase is
primarily attributable to the changes in gross profit addressed above offset by an increase in
general and administrative expenses to support our business growth.
Backlog
Backlog increased $19.4 million since August 31, 2005. The increase in backlog was due to two new
awards in the chemical industry for capital construction services and two new awards in the energy
industry to provide
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maintenance, modifications, and construction services partially offset by
progress on our other domestic energy and chemical projects.
At August 31, 2006, five customers account for $0.7 billion or 54% of the $1.3 billion in backlog
for Maintenance.
We anticipate fiscal 2007 revenues to be consistent with fiscal 2006 levels as we continue to
provide additional services for current and new customers in the energy and chemical industries. We
also expect our gross profit to continue at current levels in fiscal 2007, with a higher volume of
capital construction services expected to be performed in fiscal 2007 offsetting our anticipated
completion of a major nuclear project in 2007.
F&M Segment (Restated)
Revenues
The increase in revenues of $91.9 million or 40% during fiscal 2006 as compared to fiscal 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
Gross profit for fiscal 2006 was $67.3 million or 21.1% compared to $41.3 million or 18.2% for
fiscal 2005. The increase in gross profit 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.
Pre-tax income (loss) before other items
Pre-tax income before other items for fiscal year 2006 was $48.5 million or 15.2% of revenues as
compared to $21.8 million or 9.6% of revenues for fiscal year 2005. The $26.7 million increase is
due primarily to the changes in gross profit addressed above as well as a decrease in general and
administrative expenses primarily due to legal and professional fees related to a customer-related
claim.
Backlog
Backlog for the F&M segment as of August 31, 2006 was $408.9 million, as compared to $130.0 million
as of August 31, 2005. The increase in backlog includes approximately $437.5 million in new
contracts and increases in scope during the twelve months ended August 31, 2006. Based on our
market outlook, we expect revenues to increase and gross profit to remain near current levels for
fiscal 2007 given the increased demand resulting from expected new contract awards and the
continued shortage of materials available in the manufacturing and distribution markets worldwide.
Corporate
Pre-tax income (loss) before other items
The $25.2 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 general and administrative expenses.
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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 2005, which was partially
offset by interest due to borrowings on our Credit Facility. Fiscal 2005 included a loss of $47.8
million on the retirement of debt.
General and administrative expenses increased by $26.7 million, or 47.2%, during fiscal 2006
compared to fiscal 2005 in order to support the increasing revenue base and level of business
activity. Specific items that contributed to the increase in G&A expenses during fiscal 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 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).
We expect our general and administrative expenses to be higher in fiscal 2007 than fiscal 2006 as a
result of anticipated additional costs required to support significant growth in many of our
markets.
General and administrative expenses for fiscal 2006 also 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 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 certain due diligence costs). A portion of the costs related to due diligence was
deferred as of August 31, 2006, and will be reflected in our accounting for the acquisition of our
investment in Westinghouse, which closed in October 2006.
Unconsolidated Entities, Income Taxes and Discontinued Operations
During fiscal 2006, we recognized earnings of $1.5 million as compared to earnings of $3.8 million
for fiscal 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 23% and 46% for fiscal 2006 and 2005, respectively. During fiscal 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 36%. The decrease in the effective rate for
fiscal 2006 is primarily due to utilization of foreign Net Operating Losses (NOL) previously
reserved.
The losses from discontinued operations of $2.1 million, net of taxes for fiscal 2006, as compared
to a loss of $1.6 million, net of taxes for fiscal 2005, reflect discontinued operations and
impairment charges associated with the decision to discontinue our Robotics paint stripping
business and to make the productive assets available for sale compared to discontinued operations,
contract termination costs, and other costs associated with the sale of Roche Limited, Consulting
Group (Roche) and the sale of our hanger engineering and pipe support businesses during fiscal
2005. We also had a gain of $0.4 million, net of tax, on the sale of Roche in fiscal 2005.
Fiscal 2005 Compared to Fiscal 2004 (Restated)
Executive Summary
Increased activity in the energy and chemical markets, consistent demand for clean air and fuels
and transmission and distribution services, garrison support services, and disaster relief and
construction services in the Southeast region of the U.S. in the first quarter of fiscal 2005
contributed to our overall revenue growth for fiscal 2005.
Gross profit for fiscal 2005 significantly increased compared to fiscal 2004, which included a
charge of $39.3 million related to NEG power projects. Excluding the NEG charge, gross profit for
fiscal 2005 increased by $32.8
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million as the result of increased construction activity in our
energy and chemical projects, increased maintenance services for our energy and chemical customers,
and increased profits on our manufacturing and distribution products. However, our E&I segment
experienced a decrease in gross profit in fiscal 2005 due to a decline in the volume of its
commercial services and of its federal project and environmental remediation services.
For fiscal 2005, general and administrative expense were 5.8% of revenues as compared to 6.2% for
fiscal 2004, however there was a charge of $29.4 million in fiscal 2004 related to the accelerated
depreciation of certain software assets which, when factored in, resulted in, general and
administrative expense as a percentage of revenues for fiscal 2005 were relatively consistent with
fiscal 2004.
In addition, other income and expenses for fiscal 2005 included a loss on the retirement of debt of
$47.8 million and a decrease in interest expense of approximately $9.0 million for fiscal 2005
resulting from the repurchase of our Senior Notes during the third quarter of fiscal 2005 (see Note
9 of our consolidated financial statements). Our effective tax rate for fiscal 2005 also reflects a
$6.9 million increase in our deferred tax asset valuation allowance (see Note 10 of our
consolidated financial statements).
During fiscal 2005 and 2004, we sold two of our non-core businesses. Roche Ltd., Consulting Group,
which was part of our E&I segment, was sold on June 24, 2005. Our hanger engineering and pipe
support businesses, which were included in our F&M segment, were sold on August 31, 2004. Both are
presented in discontinued operations in our consolidated financial statements.
Between August 31, 2004 and August 31, 2005, our backlog has increased approximately $936.4 million
or 16.2%. A significant portion of the increase is due to the growth of our fossil fuel EPC
projects for multiple customers and chemical projects such as an ethylene plant and clean fuel
projects in our E&C segment. New contracts for natural gas separation and a compression plant in
our F&M segment accounted for a percentage of the increase; however, there were offsetting
decreases due to steady execution of existing contracts without increases in scopes of current
work, a minimal amount of new contract awards in our E&I segment and progress on existing contracts
in our Maintenance segment.
Segment Analysis
The analysis below has been restated to add the Section “Pre-tax income (loss) before other
items” for each segment.
E&I Segment
Revenues
The decrease of $148.2 million or 11.7% for fiscal 2005 as compared to fiscal 2004 was primarily
attributable to:
These decreases in revenues were partially offset by increased garrison support and logistic
support services for the U. S. Army and revenues earned providing disaster relief and construction
services to federal customers in hurricane damaged areas.
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Gross Profit and Gross Profit Percentage
Gross profit for fiscal 2005 was $116.9 million or 10.4% as compared to $158.0 million or 12.5% for
fiscal 2004.
The decrease in gross profit and gross profit percentage is due primarily to:
The revised government indirect rates discussed above increased fiscal 2005 gross profit by $15.9
million. This compares to a $3.0 million increase in gross profit in fiscal 2004 resulting from
other matters impacting indirect rates. Of the amounts recognized in fiscal 2005 and fiscal 2004,
$14.3 million and $0.4 million, respectively, were reductions of accruals recorded in the
acquisition of the IT Group in fiscal 2002
Our E&I segment recorded gross profit on a single major environmental remediation fixed-price
contract of $19.2 million in fiscal 2005 and $15.1 million in fiscal 2004. The gross profit
percentage recorded on this major project was significantly higher than the gross profit percentage
reflected on other major E&I contracts in these periods. This project was completed in fiscal 2005.
Gross profit and gross profit percentage for fiscal 2005 and fiscal 2004 reflect a decrease in cost
of revenues of $6.8 million and $8.2 million, respectively, for amortization of contract
adjustments related to contracts acquired in the IT Group acquisition, and a $9.0 million decrease
in cost of revenues for fiscal 2004 for the reduction of accrued contract losses related to
contracts acquired in the IT Group acquisition.
Pre-tax income (loss) before other items
Pre-tax income (loss) before other items for fiscal year 2005 was $54.6 million or 4.9% of revenues
as compared to $86.9 million or 6.9% of revenues for fiscal year 2004. The $32.3 million decrease
is due primarily to the changes in gross profit addressed above, partially offset by an increase in
other income items.
Backlog
Backlog for the E&I segment was $2.2 billion as of August 31, 2005 compared to $2.9 billion as of
August 31, 2004. The decrease in the E&I segment backlog since August 31, 2004 is primarily due to
steady execution of existing contracts without commensurate increases in scope of work or new
contract awards.
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Subsequent to August 31, 2005, in the aftermath of Hurricane Katrina, E&I received awards under
contracts with FEMA and the U.S. Army, and expanded capacity on the Army Corps of Engineers
Disaster Relief Blue-Roof contract, to provide a full range of services supporting hurricane
clean-up and recovery efforts. There is no significant revenue in our backlog estimates for the
contracting activity that occurred as a result of Hurricane Katrina as of August 31, 2005.
E&C Segment (Restated)
Revenues
The increase of $142.8 million or 13.7% in segment revenues for fiscal 2005 compared to fiscal 2004
is due to several factors including:
Gross Profit and Gross Profit Percentages
The increase in gross profit and gross profit percentage for fiscal 2005 compared to fiscal 2004 is
due to increased project activity and profitability on major energy projects. The first quarter of
the fiscal 2004 period reflects the loss recorded on the Covert and Harquahala EPC energy projects.
Increases in gross profit were partially offset by the scheduled completion of the ethylene plant
in China in spring 2005, the sale of PTI in December 2004 and an impairment charge recorded in the
fourth quarter of fiscal 2005 related to the Pike equipment that had been received in settlement of
claims during fiscal 2004.
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Our gross profit for 2005 was positively impacted by $6.2 million reduction of accruals recorded in
the acquisition of Stone & Webster due to favorable progress on a dispute with our customer on a
major EPC project that was substantially completed prior to fiscal 2005. The positive impact of
this event was offset by negative adjustments in 2005 of approximately $4 million to amounts
expected to be recovered on our claims on major projects.
Gross profit and gross profit percentage for fiscal 2005 and fiscal 2004 reflect an increase
(decrease in cost of revenues) of $2.7 million and $5.2 million, respectively, for amortization of
contract adjustments related to contracts acquired in the fiscal 2000 Stone & Webster acquisition,
and $2.9 million and $0.5 million for fiscal 2005 and fiscal 2004, respectively for the recognition
of accrued losses related to contracts acquired in the Stone & Webster acquisition.
Pre-tax income (loss) before other items
Pre-tax income (loss) before other items for fiscal year 2005 was $70.2 million or 5.9% of revenues
as compared to ($55.4) million or (5.3%) of revenues for fiscal year 2004. The $125.6 million
increase is primarily due to the change in gross profit discussed
above. Additionally, other income in 2005 also included a
$2.6 million gain on the sale of PTI and an increase in interest
income on a higher average restricted cash balance in 2005. Business development costs, travel-related expenses and professional
fees recorded in general and administrative expenses decreased compared to the prior year. These decreases were partially offset by an
increase of approximately $1.5 million in stock-based compensation.
Backlog
E&C segment’s backlog has increased $1.8 million from August 31, 2004 due to growth in both our
fossil fuel EPC and our chemical backlog. The fossil fuel backlog increased substantially due to
awards relating to Flue Gas Desulphurization (FGD) for multiple customers, and a 600 megawatt coal
unit designed to use circulating fluidized bed technology. Chemical backlog increased primarily as
a result of a letter of intent for an ethylene plant in Saudi Arabia, and clean fuel projects in
North America. This was offset by the result of scheduled progress on major gas-fired energy EPC
projects in New York and Utah and completion of two chemical projects including the ethylene plant
in China.
Maintenance Segment
Revenues
The increase of $215.9 million or 41.7% during fiscal 2005 compared to fiscal 2004 was primarily
attributable to:
Gross Profit and Gross Profit Percentage
Gross profit for fiscal 2005 was $27.4 million or 3.7% compared to $31.3 million or 6.1% for fiscal
2004. The increase in gross profit was due primarily to:
The increase in gross profit during fiscal 2005 was partially offset by our agreement to perform
additional tasks related to a major domestic energy project that were previously not included in
our scope of work. These additional tasks increased the contract value for the project by
approximately 43% and added gross profit to our original project estimate. Due to the increase in
the scope of the work on the project, our calculated percentage-of-completion at November 30, 2004
decreased as compared to the percentage-of-completion calculated as of August
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31, 2004, which
resulted in the temporary reversal of performance incentive revenues and gross profit in the first
quarter of our fiscal 2005 that were previously recognized.
On a major domestic energy project, we record material performance incentives based primarily on
schedule and cost savings on the project that will be ultimately determined and paid at the
completion of the project which we anticipate will occur in fiscal 2007. We record the estimated
amount of performance incentives that we expect to be paid in revenue and unbilled receivables on
the percentage-of-completion method of accounting based on costs incurred to date as a percentage
of estimated total project costs at completion of the project. Due to the increase in the scope of
work on the project, the incentive revenues are being recognized over larger estimated total
project costs at completion, which is lowering the gross profit percentage on the project as
compared with the prior year. However, the performance incentive revenues and gross profit amount
reversed will be recognized as costs are incurred over the remaining contract term. Additionally,
in conjunction with the increase in our scope of work, we reduced our estimate of the total
performance incentives expected to be earned on the project resulting in a reversal of revenues and
gross profit previously recognized. Although these reversals were offset by progress in
percentage-of-completion achieved during the period, we recognized a net reduction in revenues and
gross profit on the project of $4.5 million related to the performance incentive in the first
quarter of fiscal 2005.
Pre-tax income (loss) before other items
Pre-tax income before other items for fiscal year 2005 was $18.4 million or 2.5% of revenues as
compared to $19.1 million or 3.7% of revenues for fiscal year 2004. The $0.7 million decrease is
primarily attributable to the changes in gross profit addressed as well as an increase in general
and administrative expenses to support our business growth.
Backlog
Backlog decreased $222.1 million since August 31, 2004. The decrease in backlog is due to progress
on existing contracts primarily offset by the additional scope of work on the TVA nuclear restart
project as discussed above and other project awards in the nuclear energy and chemical industries.
F&M Segment (Restated)
Revenues
The increase of $37.1 million or 19.5% during fiscal 2005 compared to fiscal 2004 was due to:
Segment revenues exclude intersegment revenues of $27.4 million for fiscal 2005 compared to $10.9
million in fiscal 2004.
Gross Profit and Gross Profit Percentage
Gross profit for fiscal 2005 was $41.3 million or 18.2% compared to $30.6 million or 16.1% for
fiscal 2004. The increase in gross profit and gross profit percentage was due to:
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Pre-tax income (loss) before other items
Pre-tax income before other items for fiscal year 2005 was $21.8 million or 9.6% of revenues as
compared to $10.2 million or 5.4% of revenues for fiscal year 2004. The $11.6 million increase is
due primarily to the changes in gross profit addressed above. There was an increase in general and
administrative expenses primarily due to legal and professional fees related to a customer-related
claim; however, the increase was offset by an increase in other income items and a decrease in
other expense items.
Backlog
Backlog increased from $115.8 million as of August 31, 2004 to $130.0 million as of August 31,
2005. The increase in backlog reflects approximately $28 million in new contracts for an oil and
gas customer for natural gas separation and a compression plant in Qatar. The increase in backlog
was partially offset by work performed under existing contracts during the twelve months ended
August 31, 2005.
Corporate
The $29.9 million increase in pre-tax loss before other items is due to an increase in loss on the
retirement of debt partially offset by a decrease in interest expense. Other income and expense for fiscal 2005 included a loss of $47.8 million
on the retirement of debt compared to $1.3 million in fiscal 2004.
Interest expense was approximately $24.6 million for fiscal 2005, compared to approximately $35.4
million for fiscal 2004. The decrease from the prior year reflects the decrease in our debt since
fiscal 2004, which resulted from the repurchase of our Senior Notes during the third quarter of
fiscal 2005 (see Note 9 of our consolidated financial statements). Interest income for fiscal 2005
increased primarily as a result of interest earned on a larger restricted and escrowed cash account
compared to fiscal 2004.
General and administrative expenses were approximately $56.4 million in fiscal 2005 compared with
approximately $56.1 million in fiscal 2004. Our general and administrative expenses for fiscal 2004
included amortization expense of $29.4 million related to the acceleration of amortization of
certain retired software assets in the first quarter of fiscal 2004 as a result of a successful
implementation of new software systems. The $0.3 million increase during fiscal 2005, excluding the
$29.4 million of amortization in fiscal 2004, is due to an increase in the accrual of employee
bonuses, an increase in costs supporting our Sarbanes-Oxley compliance initiatives and an increase
in the legal and consulting fees associated with the informal inquiry by the SEC, class action
litigation and contract disputes and stock-based compensation expense.
Unconsolidated Entities, Discontinued Operations, Change in Exchange Rates, Other Comprehensive
Income and Income Taxes
During fiscal 2005, we recognized earnings of $3.8 million as compared to earnings of $2.6 million
for fiscal 2004 from operations of unconsolidated entities, including joint ventures, which are
accounted for using the equity method. The increased earnings in fiscal 2005 reflect the increased
activity in several of our unconsolidated entities related to military family housing
privatization, maintenance services and environmental services.
Other comprehensive income (loss) changed from fiscal 2004 to fiscal 2005 as the result of a
significant change in the minimum pension liability and the gain on our foreign currency
transactions. The increase in minimum pension liability was primarily due to an adjustment in the
mortality rate of the participants of our pension plans and a decrease in discount rate assumptions
during fiscal 2005, while the change in our foreign currency transactions was caused by a
fluctuating valuation of the U.S. dollar as primarily compared to the EURO and Great Britain’s
Pound.
The losses from discontinued operations of $1.6 million, net of taxes for fiscal 2005, as compared
to a loss of $5.6 million, net of taxes for fiscal 2004, reflect discontinued operations, contract
termination costs, and other costs associated with the sale of Roche Limited, Consulting Group
(Roche) and the sale of our hanger engineering and pipe support businesses during fiscal 2005 and
fiscal 2004. We also had a gain of $0.4 million, net of tax, on the sale of Roche in fiscal 2005
and a $3.0 million impairment charge, net of tax, during fiscal 2004 in connection with the
classification of our hanger engineering and pipe support businesses as assets held for sale. Our
effective tax rate was 46% and (42)% for fiscal 2005 and 2004, respectively.
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During the third quarter of fiscal 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. SFAS No. 109,
“Accounting for Income Taxes,” requires that deferred tax assets be reduced by a valuation
allowance, if based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. This expense has no impact on cash
tax paid or our ability to deduct the related expenses to reduce future cash tax payable in the
U.K. Currently, U.K. tax laws do not provide an expiration date for net operating loss
carryforwards; therefore these deductions can be carried forward indefinitely and used to offset
future taxable income that we generate in the U.K.
Although the deferred tax assets related to these pension liabilities were recorded to
shareholder’s equity (through other comprehensive income) the accounting rules require that
valuation allowances against those deferred tax assets be recognized as a charge through income tax
expense.
Excluding the $6.9 million valuation allowance discussed above, our effective tax rate for 2005 was
36%. The increase over 2004 is due to the mix of foreign (including foreign export revenues) versus
domestic work, and our assessment of our potential inability to utilize certain net operating
losses in the foreseeable future that are being generated by some of our foreign subsidiaries.
Liquidity and Capital Resources
Cash Flow for Fiscal 2006, 2005 and 2004
Executive Summary
Our liquidity position is impacted by cash generated from operations, customer advances and
underbillings of costs incurred (a condition that often accompanies projects with claims and
unapproved change orders or loss projects) on contracts in progress and access to capital financial
markets. As customer advances are reduced through project execution, if not replaced by advances on
new projects, our cash position will be reduced. Cash is used to fund operations, capital
expenditures, acquisitions and service debt.
Cash flows from operations were negative during fiscal 2006 as compared to fiscal 2005 as the
hurricane disaster recovery work has increased the amounts due from U.S. government clients and
agencies owned by the U.S. government, primarily FEMA and the U.S. Army Corps of Engineers. While
we have a significant history of recovering amounts related to work performed for the U.S.
government, the current circumstances increase the uncertainties in estimating the amounts we will
actually recover under existing contracts for work we have already performed. If our estimated
amounts recoverable on these projects differ from the amounts ultimately collected, those
differences will be recognized as income or loss and our earnings and cash flows could be
materially impacted.
As of August 31, 2006, we had cash and cash equivalents of $154.8 million, restricted and escrowed
cash of $43.4 million, and $236.4 million of availability under our $750.0 million Credit Facility
(amended subsequent to August 31, 2006, see discussion of Westinghouse acquisition below) to fund
operations. We also have a shelf registration statement with $236.1 million available for the
issuance of any combination of equity or debt securities if needed. Management believes cash
generated from operations, available borrowings under our Credit Facility, and if necessary,
available sales of equity or debt under our shelf registration will be sufficient to fund
operations for the next twelve months.
The following table sets forth the cash flows (in thousands) (Restated):
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Note (1): As part of this Amendment No. 1, we reclassified within the statement of cash flows
approximately $20 million of net cash outflows for fiscal 2006 and $11 million for fiscal 2005 from
cash used in financing activities to cash used in operating activities, which relates primarily to
(i) a return on investment to a minority partner interest in a joint venture that is more
reflective of cash used in operating activities and (ii) payments of financed insurance premiums
which are more reflective of cash used in operating activities. We also reclassified within the
statement of cash flows approximately $1.6 million of net cash outflows for fiscal 2006 from cash
used in operating activities to cash used in financing activities, which reclassification relates
primarily to cash used to purchase treasury stock for federal income tax withholding associated
with stock based compensation. The Explanatory Note on page 3 of this Amendment No. 1 and Notes 1
and 25 to our consolidated financial statements in Item 8 of this report addresses the impact of
the changes associated with this Amendment No. 1.
Note (2): The financial statements included in this Amendment No. 1, for each of the fiscal years
ended August 31, 2005 and 2004, include a restatement previously
reflected in the Original Form 10-K Filing to
correct for an error in the accounting for share-based compensation expense relating to certain
stock options awarded in 2000. The financial statements included in this Amendment No. 1, for each
of the fiscal years ended August 31, 2005 and 2004, also include a restatement previously reflected
in the Original Form 10-K Filing to correct for errors in the accounting for periodic pension service cost in
relation to the minimum liability for the unfunded accumulated benefit obligation of Shaw UK’s (a
foreign subsidiary of The Shaw Group Inc.) defined benefit plan. The Explanatory Note on page 3
of this Amendment No.1 and Notes 1 and 25 to our consolidated financial statements in Item 8 of
this Amendment No.1 addresses the impact of the changes, on fiscal years 2005 and 2004, associated
with the restatement of our financial statements for fiscal years 2005 and 2004 that were
previously included in the original filing of the 2006 Form 10-K.
Operating Cash Flow (Restated)
Net operating cash flows decreased by $152.1 million during the year ended August 31, 2006 compared
to the same period in fiscal 2005. The decrease is due primarily to providing hurricane disaster
recovery work. Subsequent to August 31, 2006, we received payments from our customers related to
hurricane disaster recovery work totaling $198.3 million. 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 have experienced significantly slower
historical receipts for our services as final contract terms are 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 have resulted in a use of cash and reduction in operating cash flows during
the fiscal year. The decrease in net operating cash flows in fiscal 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 in our E&C segment
which will not result in cash inflows until those projects are completed and the final contractual
terms are mutually agreed. Partially offsetting these decreases were cash receipts related to
claims recovery of approximately $67.7 million.
We expect that the terms negotiated on new major EPC projects will 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.
Net operating cash flows increased by $80.4 million from fiscal 2004 to fiscal 2005. The increase
in fiscal 2005 was primarily due to net income, losses on retirement of debt and significant cash
that was provided by settlements on various claims and the receipt of proceeds from a domestic
energy project partially offset by a decrease in advanced billings and billings in excess of costs
and estimated earnings on uncompleted contracts.
Investing Cash Flow
Cash provided by investing activities increased $193.7 million from fiscal 2005 to fiscal 2006.
Significant cash was deposited into restricted and escrowed cash accounts, primarily to set aside
funding for one project in the U.S.
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during the first half of fiscal 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 2006.
Cash utilized by investing activities increased $94.0 million from fiscal 2004 to fiscal 2005.
Significant cash was used in fiscal 2005, primarily to fund the restricted and escrowed cash
account associated with our EPC project to build a combined-cycle energy plant in Astoria, New
York, which was partially offset by the sale of certain assets. Net activity of our marketable
securities of $49.9 million and cash received from restricted and escrowed cash of $38.5 million
helped to provide net cash inflows during fiscal 2003.
Financing Cash Flow (Restated)
Net financing cash flows increased $97.6 million from fiscal 2005 fiscal 2006. Higher amounts of
cash were provided by net proceeds from our revolving credit agreements during the first half of
fiscal 2006 as compared to the first half of fiscal 2005.
Net financing cash flows increased $54.7 million from fiscal 2004 to fiscal 2005. Significant
amounts of cash were provided by our stock offerings that occurred during fiscal 2005 and fiscal
2004, which were used to redeem a majority of our Senior Notes and LYONs during fiscal 2005 and
2004, respectively. We also had proceeds of $41.2 million from our credit facilities during fiscal
2005.
Credit Facilities and Revolving Lines of Credit
Subsequent to August 31, 2006, we entered into Amendment IV to our Credit Agreement, which
increased our Credit Facility from $750.0 million to $850.0 million and increased our sublimits 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 amendments retained the original
maturity of the agreement of April 25, 2010.
The following is a discussion of our credit facilities and revolving lines of credit as of August
31, 2006, prior to Amendment IV discussed above. Amounts outstanding under credit facilities and
revolving lines of credit consisted of the following (in millions):
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Primary Revolving Line of Credit
On October 3, 2005, we entered into Amendment I to our Credit Agreement to increase our Credit
Facility from $450.0 million to $550.0 million and increased our sublimits for revolving credit and
financial letters of credit from $200.0 million to $225.0 million. On February 27, 2006 we entered
into Amendment II, which increased our Credit Facility from $550.0 million to $750.0 million, and
increased our sublimits for revolving credit and financial letters of credit from $325.0 million to
$425.0 million.
See Note 9 to our consolidated financial statements in Item 8 of this Amendment No. 1
report for a more
detailed description of our Credit Facility.
The following table presents our available credit under our amended Credit Facility as of August
31, 2006 (in millions), which is subject to a borrowing base calculation as mentioned in Note 9 of
the notes to our consolidated financial statements in Item 8 of this Amendment No. 1.
The Credit Facility will be used, from time to time, for working capital needs including funding
disaster relief, emergency response and recovery services and to fund fixed asset purchases,
acquisitions and investments in joint ventures. During fiscal 2006, we periodically borrowed under
our Credit Facility for our working capital needs and general corporate purposes.
The interest rates for revolving credit loans under the Credit Facility may be in a range of (i)
LIBOR plus 1.50% to 3.00% or (ii) the defined base rate plus 0.00% to 0.50%. On August 31, 2006,
the weighted-average interest rate on the outstanding balance of the Credit Facility was 7.35%,
compared with a weighted-average interest rate of 6.75% on August 31, 2005. As of August 31, 2006,
we had outstanding letters of credit under the Credit Facility of approximately $319.1 million as
compared to $243.6 million as of August 31, 2005. The total amount of fees associated with these
letters of credit under the Credit Facility was approximately $4.7 million, $6.2 million and $5.5
million for fiscal 2006, 2005, and 2004, respectively.
As of August 31, 2006, we were in compliance with the covenants contained in the Credit Facility.
See Note 9 to our consolidated financial statements in Item 8 of this Amendment No. 1 for a more
detailed description of our covenants.
Foreign Revolving Lines of Credit
The following table sets forth the outstanding letters of credit and short-term revolving lines of
credit for our foreign subsidiaries, excluding our Variable Interest Entities (VIEs) (in thousands,
except percentages):
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As of August 31, 2006, borrowings under the short-term revolving lines of credit and term loan of
one of our consolidated VIEs were $5.5 million and $1.2 million, respectively, with no outstanding
performance bonds. Interest rates under this credit facility vary and ranged from 7.7% to 8.0% as
of August 31, 2006. We also have a 50% guarantee related to this credit facility. As of August 31,
2005, this VIE had borrowings under the short-term revolving line of credit and term loan of $6.3
million and $1.2 million, respectively, with no outstanding performance bonds. Interest rates under
this credit facility vary and ranged from 6.25% to 6.50% as of August 31, 2005.
On March 21, 2006, one of our foreign subsidiaries entered into a $27.0 million unsecured standby
letter of credit facility with a bank. On July 6, 2006, this standby letter of credit facility
increased to $32.0 million. The term of the facility is one year, renewable on an annual basis.
Quarterly fees are calculated using a base rate of 2% plus local bank charges. As of August 31,
2006, there were $4.7 million letters of credit outstanding under this facility.
As of August 31, 2006, we had cash and cash equivalents of $154.8 million, restricted and escrowed
cash of $43.4 million, and $236.4 million of availability under our $750.0 million Credit Facility
to fund operations. In addition, as discussed above, in October 2006 we amended our Credit Facility
to add additional capacity. We also have a shelf registration statement with $236.1 million
available for the issuance of any combination of equity or debt securities if needed. Management
believes that cash generated from operations, the sale of certain non-core or under performing
assets, available borrowings under Credit Facilities and, if necessary, available sales of equity
or debt under our shelf registration will be sufficient to fund operations for the next twelve
months.
Westinghouse Acquisition
We announced on October 4, 2006 that we joined with Toshiba Corporation (Toshiba) in the
acquisition of Westinghouse Electric Company (Westinghouse). Our 20% interest in Westinghouse was
acquired by our 100% owned special purpose acquisition subsidiary, Nuclear Energy Holdings, L.L.C.
(NEH). On October 13, 2006, NEH closed the private placement of Japanese Yen-denominated bonds (the
Bonds) with an approximate principal amount of $1.08 billion. On October 16, 2006, the proceeds
from this placement funded NEH’s acquisition. In connection with the acquisition, NEH has a
Japanese Yen-denominated option (the Option) to sell all or part of our 20% ownership interest in
Westinghouse to Toshiba prior to the maturity of the Bonds for not less than 97% of the original
purchase price of the shares. The Option is exercisable during the period from March 31, 2010
through September 30, 2012 (subject to extensions), or earlier in the event of certain Toshiba
credit events. The Bonds will be secured by the assets of and 100% of the membership interests in
NEH, its shares in Westinghouse, the Option, a $36 million letter of credit established by Shaw for
the benefit of NEH related to principal on the Bonds (Principal LC) and one or more letters of
credit for the benefit of NEH related to interest on the Bonds (Interest LC). The Bonds have no
further recourse to Shaw or its other subsidiaries. The Bonds were issued in two tranches, a
floating-rate tranche and a fixed-rate tranche; and will mature March 15, 2013. Repayment of the
Bonds upon call or maturity is expected to be funded by cash flows generated by our investment in
Westinghouse or from the proceeds upon exercise of the Option.
The initial Interest LC is approximately $113 million in the aggregate to cover interest until the
beginning of the option period. Other than the Principal LC and the Interest LC delivered at the
closing of the Bonds and an agreement to reimburse Toshiba for amounts related to possible changes
in tax treatment, Shaw is not required to provide any additional letters of credit or cash to or
for the benefit of NEH.
We amended our revolving credit agreement to allow for the investment in Westinghouse and to allow
for an increase in the facility from its current $750 million to up to $1 billion. We made
effective $100 million of the approved increase, thus increasing the capacity of the facility to
$850 million, in conjunction with this amendment. Subject to outstanding amounts, the entire credit
facility, as amended, would be available for performance letters of credit, and up to $525 million
would be available for revolving credit loans and financial letters of credit until November 30,
2007, and $425 million thereafter. The amendment and increase will be effective upon closing of the
Westinghouse transaction.
The shareholders agreements contemplate that Westinghouse will distribute agreed percentages of net
income to its shareholders as dividends, and the shares to be owned by NEH will be entitled to
limited preferences with respect to dividends to the extent that targeted minimum dividends are not
distributed.
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Off Balance Sheet Arrangements
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 our maximum potential exposure is the remaining cost of the work to be
performed by or on behalf of third parties 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.
During fiscal 2005, we entered into a guaranty agreement with a third party to guarantee the
performance of one of our unconsolidated entities, American Eagle Northwest, LLC, related to the
development and construction phase of the Pacific Northwest Communities, LLC military family
housing privatization which is scheduled to be completed in calendar year 2009. Our maximum
exposure under this performance guarantee at the time we entered into this guarantee was estimated
to be $81.7 million. As of August 31, 2006, the maximum exposure amount has decreased to $52.4
million due to development and construction services already executed, and our exposure will
continue to be reduced over the contract term as further project services are provided. We would
also be able to recover a portion of this exposure through surety bonding provided by our general
contractor. We have also committed to fund $6.0 million of the total project costs for which
proceeds from the sale of real estate obtained in connection with the contract will be used to
fulfill this guarantee. During the fourth quarter of fiscal 2006, our obligation under the
guarantee was reduced to $4.4 million by net proceeds from the sale of one of the properties
applied against the total commitment. As of August 31, 2006, we have recorded a $0.5 million
liability and corresponding asset related to this guarantee.
During the third quarter of fiscal 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. Our maximum exposure
under this performance guarantee at the time we entered into this guarantee was estimated at $1.8
million. As of August 31, 2006, we had recorded an immaterial liability and corresponding asset
related to this guarantee.
During the fourth quarter of fiscal 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 2005. Our maximum exposure under this guarantee
at the time we entered into this guarantee was estimated at $2.3 million. As of August 31, 2006, we
had recorded a liability and corresponding asset related to this guarantee.
Commercial Commitments
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, 2006, we had both letter of credit commitments
and bonding obligations, which were generally issued to secure performance and financial
obligations on certain of our construction contracts, which expire as follows (in millions):
Of the amount of outstanding letters of credit at August 31, 2006, $276.0 million were issued to
customers in connection with contracts (performance letters of credit). Of the $276.0 million, five
customers held $206.7 million or 75% of the outstanding letters of credit. The largest letter of
credit issued to a single customer on a single project is $58.9 million. There were no draws under
these letters of credit for fiscal 2006.
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As of August 31, 2006 and 2005, we had total surety bonds of $438.2 million and $420.8 million,
respectively. However, based on our percentage of completion on contracts covered by these surety
bonds, our estimated potential liability as of August 31, 2006 and August 31, 2005 was $310.8
million and $123.1 million, respectively. The $187.7 million increase is due primarily to required
surety bond coverage on one of our large projects during the second fiscal quarter of 2006 as well
as additional required coverage for our disaster relief, emergency response and recovery services.
Fees related to these commercial commitments were $17.8 million for fiscal 2006 as compared to
$10.6 million for fiscal 2005 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 Notes 9
and 14, respectively, to our consolidated financial statements in Item 8 of this Amendment No. 1.
Aggregate Contractual Obligations
As of August 31, 2006 we had the following contractual obligations (in millions):
See Note 9, Note 13, and Note 14 of our consolidated financial statements for a discussion of
long-term debt, leases, and contingencies.
Also see Note 12 of our consolidated financial statements for a discussion of contingencies.
Critical Accounting Policies and Related Estimates That Have a Material Effect on Our Consolidated
Financial Statements
This section is restated to add the content under Revenue Recognition – EPC Contract Segmenting
below.
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 accounting 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 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 the notes to our consolidated financial statements.
Engineering, Procurement and Construction Contract and Environmental and Infrastructure Revenue
Recognition and Profit and Loss Estimates Including Claims
Nature of Estimates Required
A substantial portion of our revenue is derived from engineering, procurement and 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.
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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 accounting method discussed
above for our contracts.
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Claims are included in costs and estimated earnings in excess of billings on the balance sheet (see
Note 18 of our consolidated financial statements for further discussion of our significant claims).
Assumptions and Approach Used
We use accounting principles set forth in American Institute of Certified Public Accountants, or
AICPA, Statement of Position 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 reasonably assured. 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 – EPC Contract Segmenting
Certain EPC 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 American Institute of Certified Public Accountants Statement of Position
81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP
81-1”). Revenues recorded in our F&M segment under this policy are based on our current prices and
terms for such services to third party customers. This policy may result in different 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.
Other Revenue Recognition and Profit and Loss Estimates
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.
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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 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.
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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 of our consolidated financial statements).
Litigation, Commitments and Contingencies
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.
Income Taxes
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, 2006, we had gross deferred tax assets of $138.4 million, net of valuation allowance, including
$96.9 million related to net operating losses and tax credit carryforwards. As of August 31, 2006,
we had a deferred tax asset valuation allowance of $13.2 million (see Note 10 of our consolidated
financial statements).
Acquisitions — Fair Value Accounting and Goodwill Impairment
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, 2005 was approximately $506.6
million; most of which related to the Stone & Webster acquisition in fiscal 2000 and the IT Group
acquisition in fiscal 2002 (see Note 8 to our consolidated financial statements). Our estimates of
the fair values of the tangible and intangible assets and liabilities we acquire in acquisitions
are determined by reference to various internal and external data and judgments, including the use
of third party experts. These estimates can and do differ from the basis or value (generally
representing the acquired entity’s actual or amortized cost) previously recorded by the acquired
entity for its assets and liabilities. Accordingly, our post-acquisition financial statements are
materially impacted by and dependent on the accuracy of management’s fair value estimates and
adjustments. Our experience has been that the most significant of these estimates are the values
assigned to construction contracts, production backlog, customer relationships, licenses and
technology. These estimates can also have a positive or negative material effect on future reported
operating results. Further, our future operating results may also be positively or negatively
materially impacted if the final values for the assets acquired or liabilities assumed in our
acquisitions are materially different from the fair value estimates which we recorded for the
acquisition.
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Assumptions and Approach Used
We completed our annual impairment test during the third quarter of fiscal 2006 in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets,” and determined that goodwill at March 1, 2006
was not impaired. 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 2007 unless indicators of impairment occur prior to that time.
Retirement Benefits
Nature of Estimates Required, Assumptions and Approach Used
Assumptions used in determining projected benefit obligations and the fair value of plan assets for
our pension plans are regularly evaluated by management in consultation with outside actuaries who
are relied upon as experts. In the event that we determine that changes are warranted in the
assumptions used, such as the discount rate, expected long-term rate of return on investments, or
future salary costs, our future pension benefit expenses could increase or decrease. As of August
31, 2006, we had a minimum pension liability recorded of $28.0 million. This liability will likely
require us to increase our future cash contributions to the plans.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans” (FAS 158). FAS 158 requires employers to fully recognize the
obligations associated with single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The provisions of FAS 158 are effective as of
the end of the fiscal year ending August 31, 2007. We are currently evaluating the impact of the
provisions of FAS 158.
In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair
Value Measurements” (FAS 157). FAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and expands disclosures
about fair value measurements. The provisions of FAS 157 are effective for the fiscal year
beginning September 1, 2008. We are currently evaluating the impact of the provisions of FAS 157.
Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive
guidance on the consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. We will be required to initially
apply SAB No. 108 during fiscal year 2007. We are assessing the impact, if any; the adoption of SAB
No. 108 will have on our financial position and results of operations.
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In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s
financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN
48 prescribes that a company should use a more-likely-than-not recognition threshold based on the
technical merits of the tax position taken. Tax positions that meet the more-likely-than-not
threshold should be measured in order to determine the tax benefit to be recognized in the
financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. We
are currently evaluating the impact of FIN 48 on our results of operations, financial position and
cash flows.
In June 2006 the FASB ratified the consensuses of Emerging Issues Task Force (EITF) Issue No. 06-3,
“How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-3). EITF 06-3 indicates
that the income statement presentation on either a gross basis or a net basis of the taxes within
the scope of the Issue is an accounting policy decision. Our accounting policy is to present the
taxes within the scope of EITF 06-3 on a net basis. The adoption of EITF 06-3 in the first fiscal
quarter of 2007 did not result in a change to our accounting policy and, accordingly, did not have
a material effect on our condensed consolidated financial statements.
In April 2006, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FIN
46(R)-6 (FSP FIN 46(R)-6), which addresses how a reporting enterprise should determine the
variability to be considered in applying FASB Interpretation No. 46 (revised December 2003),
“Consolidation of Variable Interest Entities” (FIN 46(R)). The variability that is considered in
applying FIN 46(R) affects the determination of (a) whether the entity is a variable interest
entity, (b) which interests are variable interests in the entity and (c) which party, if any, is
the primary beneficiary of the variable interest entity. That variability will affect any
calculation of expected losses and expected residual returns, if such a calculation is necessary.
FSP FIN 46(R)-6 provides additional guidance to consider for determining variability. FSP FIN
46(R)-6 is effective beginning the first day of the first reporting period beginning after June 15,
2006. We are currently in the process of evaluating the impact that the adoption of FSP FIN 46(R)-6
will have on our financial position, results of operations and cash flows.
In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156, “Accounting for
Servicing of Financial Assets — an amendment of FASB Statement No. 140” (SFAS No. 156). SFAS No.
156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities,” with respect to accounting for separately recognized servicing
assets and servicing liabilities. SFAS No. 156 is effective for fiscal years that begin after
September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year.
We do not have any servicing assets or servicing liabilities and, accordingly, the adoption of SFAS
No. 156 will not have any effect on our results of operations, financial condition or cash flows.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments — an
amendment of FASB Statements No. 133 and 140” (SFAS No. 155), which changes the financial reporting
of certain hybrid financial instruments by eliminating exemptions to allow for a more uniform and
simplified accounting treatment for these instruments. This Statement will be effective for all
financial instruments acquired or issued after the beginning of an entity’s first fiscal year that
begins after September 16, 2006. SFAS No. 155 will be effective for our 2008 fiscal year. Adoption
of this standard is not expected to have a material impact on our consolidated financial position
or results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—A replacement
of APB Opinion No 20 and FASB Statement No. 3” (SFAS 154). SFAS 154 replaces APB Opinion No. 20,
“Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
Statements,” and changes the requirements for the accounting for, and reporting of, a change in
accounting principles. This statement applies to all voluntary changes in accounting principles and
changes required by an accounting pronouncement in the unusual instance that the pronouncement does
not include specific transition provisions. Under previous guidance, changes in accounting
principle were recognized as a cumulative affect in the net income of the period of the change.
SFAS 154 requires retrospective application of changes in accounting principle, limited to the
direct effects of the change, to prior periods’ financial statements, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. Additionally,
this Statement requires that a change in depreciation, amortization or depletion method for
long-lived, nonfinancial assets be accounted for as a change in accounting estimate affected by a
change in accounting principle and that correction of errors in previously issued
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financial
statements should be termed a “restatement.” The provisions in SFAS 154 are effective for
accounting changes and correction of errors made in fiscal years beginning after December 15, 2005,
which is effective with our first quarter of our fiscal 2007. We intend to adopt the disclosure
requirements upon the effective date of the pronouncement. We do not believe that the adoption of
this pronouncement will have a material effect on our consolidated financial position, results of
operations or cash flows.
FSP SFAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision
within the American Jobs Creation Act of 2004”, provides enterprises more time (beyond the
financial-reporting period during which the Act took effect) to evaluate the Act’s impact on the
enterprise’s plan for reinvestment or repatriation of certain foreign earnings for purposes of
applying FASB Statement. The Act provides for a special one-time tax deduction of 85% dividends
received deduction on certain foreign earnings repatriated in fiscal 2005 or 2006. The deduction
would result in an approximate 5.25% federal tax on a portion of the foreign earnings repatriated.
State, local and foreign taxes could apply as well. To qualify for this federal tax deduction, the
earnings must be reinvested in the U.S. pursuant to a domestic reinvestment plan. Certain other
criteria in the Jobs Act must be satisfied as well. We studied the provisions of the Act related to
the repatriation of earnings and did not repatriate any earnings as of August 31, 2006.
Effective September 1, 2005, we adopted Statement of Financial Accounting Standards No. 123
(revised), “Share-Based Payment” (SFAS 123(R)) utilizing the modified prospective approach. As a
result of adopting SFAS 123(R) on September 1, 2005, our income before taxes, net income and basic
and diluted income per share for the year ended August 31, 2006, were $9.5 million, $7.5 million,
$0.09 and $0.09 lower, respectively, than if we had continued to account for share-based
compensation under APB Opinion No. 25 for our stock option grants. Prior to the adoption of SFAS
123(R), we accounted for stock option grants in accordance with Accounting Principles Board (APB)
Opinion No. 25, “Accounting for Stock Issued to Employees” (the intrinsic value method), and
accordingly, recognized no compensation expense for stock option grants.
Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were
outstanding on September 1, 2005 as well as those that are subsequently modified, repurchased or
cancelled. Under the modified prospective approach, compensation cost recognized during fiscal 2006
includes compensation cost for all share-based payments granted prior to, but not yet vested as of
September 1, 2005, based on the grant-date fair value estimated in accordance with the original
provisions of SFAS 123. Prior periods were not restated to reflect the impact of adopting the new
standard. Differences in assumptions in estimating fair value under SFAS 123(R) versus SFAS 123 to
options include adjustments to patterns of employees with respect to expected future exercise
patterns and the implied volatility of our stock price.
Upon adoption of SFAS 123(R), we also recorded an immaterial cumulative effect of a change in
accounting principle as a result of our change in policy from recognizing forfeitures as they occur
to one where we recognize expense based on our expectation of the amount of awards that will vest
over the requisite service period for our restricted stock awards. At August 31, 2006 there was
$14.8 million of unrecognized compensation cost related to share-based payments for stock option
awards which is expected to be recognized over a weighted-average period of 2.6 years. As of August
31, 2006, we have unrecognized compensation expense of $18.6 million associated with restricted
stock awards.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to interest rate risk due to changes in interest rates, primarily in the U.S. Our
policy is to manage interest rates through the use of a combination of fixed and floating rate debt
and short-term fixed rate investments. We currently do not use any derivative financial instruments
to manage our exposure to interest rate risk. The table below provides information about our future
maturities of principal for outstanding debt instruments (including capital leases) and fair value
at August 31, 2006 (in millions):
At August 31, 2006, the interest rate on our primary Credit Facility was 7.35% with an availability
of $236.4 million (see Note 9 of our consolidated financial statements for further discussion of
our Credit Facility).
The estimated fair value of long-term debt and capital leases as of August 31, 2006 and 2005 was
approximately $35.0 million and $24.0 million, respectively. The fair value of the Senior Notes as
of August 31, 2006 was based on current market prices of such debt and based on the assumption that
the recorded balance approximates fair value.
Foreign Currency Risks
The majority of our transactions are in U.S. dollars; however, certain of our subsidiaries conduct
their operations in various foreign currencies. Currently, when considered appropriate, we use
hedging instruments to manage our risks associated with our operating activities when an operation
enters into a transaction in a currency that is different from its 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 our revenues and expenses in the same currency for our contracts. As of August 31, 2006,
we had minimal forward exchange contracts outstanding that were hedges of certain commitments of
foreign subsidiaries. The exposure from these commitments is not material to our results of
operations or financial position (see Notes 1 and 19 of our consolidated financial statements).
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Item 8. Financial Statements and Supplementary Data (Restated)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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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 management’s assessment, included in the accompanying Management’s Annual
Report on Internal Control Over Financial Reporting, that The Shaw Group Inc. and subsidiaries (the
Company) did not maintain effective internal control over financial reporting as of August 31,
2006, because of the effect of material weaknesses in internal control over financial reporting as
described below, based on criteria established in Internal Control
— Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company’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. Our responsibility is to express an opinion on management’s assessment and an opinion on
the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
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 control deficiency, or combination of control deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a
timely basis.
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The following material weaknesses have been identified and included in management’s assessment. The
Company identified a misapplication of generally accepted accounting principles pursuant to the
requirements of Accounting Principles Board Opinion No. 25 whereby the Company’s controls to
determine the initially recognized measurement date for stock options issued in 2000 did not detect
during the financial statement close process that all criteria for a measurement date had not been
met resulting in a restatement of prior periods, a calculation error in revenue recognition for a
contract whereby an input error in a contract worksheet was not detected in the financial statement
close process resulting in a restatement of prior periods, and a misapplication of generally
accepted accounting principles pursuant to the requirements of Financial Accounting Standards Board
Interpretation No. 46(R) whereby the minority interest of a consolidated entity was misstated,
resulting in a restatement of prior periods.
Subsequent to our report dated October 27, 2006, the following additional material weaknesses have
been identified and included in management’s assessment. The Company identified a material weakness
arising from the internal control over financial reporting within its E&C segment, which resulted
from a lack of emphasis on internal controls and procedures and from inadequate communication of
project concerns on a timely basis, a material weakness resulting from the insufficient design of
policies and procedures to ensure reasonable estimates are maintained and reported on contracts
within its E&C segment with total revenue of less than $50 million, and a material weakness
resulting from insufficient accounting resources to properly analyze, record, and disclose
accounting matters that caused the restatement of the Company’s consolidated statements of cash
flows and certain disclosures included in the accompanying Form 10-K/A for the year ended August
31, 2006.
All of the material weaknesses described above were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2006 financial statements, and this report
does not affect our report dated October 27, 2006, except for the effects of the restatements to
the consolidated statements of cash flows and as described in paragraphs 4, 5, and 6 of
Note 1, as to which the date is September 13, 2007, on those financial statements.
In our opinion, management’s assessment that The Shaw Group Inc. and subsidiaries did not maintain
effective internal control over financial reporting as of August 31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, because of the effect of the
material weaknesses described above on the achievement of the objectives of the control
criteria, The Shaw Group Inc. and subsidiaries have not maintained effective internal control
over financial reporting as of August 31, 2006, based on the COSO criteria.
In our previous report dated October 27, 2006, we expressed an unqualified opinion on management’s
previous assessment that The Shaw Group Inc. and subsidiaries did not maintain effective internal
control over financial reporting as of August 31, 2006, and an adverse opinion on internal control
over financial reporting as of August 31, 2006, because of the effects of the material
weaknesses described above and in management’s previous assessment.
/s/ Ernst & Young LLP
New Orleans, Louisiana
October 27, 2006, except for the effects of the material weaknesses described in the seventh paragraph above, as to which the date is September 13, 2007 73
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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 sheets of The Shaw Group Inc. and
subsidiaries (the Company) as of August 31, 2006 and 2005, and the related consolidated
statements of operations,
shareholders’ equity, and cash flows for each of the three years in the period ended August 31,
2006. 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 2005, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended August 31, 2006 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.
We also have audited, in accordance with the Standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of The Shaw Group Inc. and
subsidiaries’ internal control over financial
reporting as of August 31, 2006, based on criteria established
in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated October 27, 2006, except for the effects of the
material weaknesses described in the seventh paragraph, as to which the
date is September 13, 2007, expressed an unqualified opinion on
management’s assessment of, and
an adverse opinion on, the effectiveness of internal control over financial reporting.
/s/ Ernst & Young LLP
New Orleans, Louisiana
October 27, 2006, except for the effects of the restatements to the consolidated statements of cash flows and as described in paragraphs 4, 5 and 6 of Note 1, as to which the date is September 13, 2007 74
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THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of August 31, 2006 and 2005
(Dollars in thousands)
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, 2006, 2005 and 2004
(In thousands, except per share amounts)
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)
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 CASH FLOWS
For the Years Ended August 31, 2006, 2005 and 2004
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
Note 1 — Summary of Significant Accounting Policies
Restatement of historical financial statements
On October 31, 2006, The Shaw Group Inc. (“Shaw”, “we”, “us”, and “our”) filed with the U.S.
Securities and Exchange Commission (“SEC”) our Annual Report on Form 10-K for the fiscal year ended
August 31, 2006 (“Original Form 10-K Filing”). In conjunction with a review of the Original Form
10-K, the Staff of the SEC issued a series of comment letters in which, among other things, the
Staff commented on the presentation of certain items in our consolidated financial statements and
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As a result of the SEC comment letters, we decided to amend our Original Form 10-K Filing.
Additionally, on August 1, 2007, we filed a Current Report on Form 8-K stating that (1) we would be
amending our Original Form 10-K Filing to, among other things, correct an error on an ongoing U.S.
gulf coast Engineering, Procurement, and Construction (“EPC”) petrochemical project, (2) the
financial statements contained in our Original Form 10-K Filing should no longer be relied upon,
and (3) our earnings and press releases and similar communications should no longer be relied upon
to the extent that they are related to our 2006 financial statements.
We conducted a management review and a separate independent review requested by the Audit Committee
of our Board of Directors relating to the accounting for the ongoing EPC project. As a result of
these reviews, we concluded that the financial results for the fiscal year ended August 31, 2006
contained two offsetting errors relating to the EPC project, thus resulting in no financial
statement impact for the fiscal year ended August 31, 2006. Nevertheless, the items identified by
the SEC in their comment letters required that the Original Form 10-K Filing be amended.
Accordingly, adjustments have been made to the 2006, 2005 and 2004 consolidated financial and other
information contained in the Original Form 10-K Filing, which are reflected in this Amendment No. 1
on Form 10-K/A (“Amendment No. 1”) to restate for these items and certain other matters.
Our previously reported financial statements in our Original Form 10-K Filing have been adjusted
for certain items summarized as follows:
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The impact of this restatement on our previously reported consolidated statements of cash flows for
the years ended August 31, 2006, 2005 and 2004 are indicated in the table below (in thousands):
Certain disclosures in the Notes to Consolidated Financial Statements have also been restated to
reflect the following changes:
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This
Amendment No. 1 had no impact on the calculations of our bank debt covenants for
any quarterly or annual period. However, this restatement has, in fact, contributed to the delay
in filing the fiscal 2007 quarterly reports on Forms 10-Q, which required us to obtain waivers from
our banks.
Except for the foregoing amended and restated information, there have been no changes to the
consolidated financial statements and notes. The disclosures contained herein have not been updated
to reflect events, results or developments that have occurred after the date of the Original Form
10-K Filing, or to modify or update those disclosures affected by subsequent events.
Prior Period Data Previously Restated
The financial statements included in this Amendment No. 1, for each of the fiscal years ended
August 31, 2005 and August 31, 2004, reflect a prior restatement to correct for an error in the
accounting for share-based compensation expense relating to certain stock options awarded in 2000
and to reflect a restatement to correct for errors in the accounting for periodic pension service
cost in relation to the minimum liability for the unfunded accumulated benefit obligation of Shaw
UK’s (a foreign subsidiary of The Shaw Group Inc.) defined benefit plan. The impact of these errors
are as follows:
The prior restatement is discussed in detail in Note 25, including the specific amounts and
accounts restated each year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of The Shaw Group Inc. (a
Louisiana corporation) (Shaw), our consolidated subsidiaries, consolidated variable interest
entities, and in some cases the proportionate share of our investments in joint ventures. All
material intercompany accounts and transactions have been eliminated in these consolidated
financial statements. Effective May 31, 2004, we adopted Financial Accounting Standard Board (FASB)
Interpretation No. 46(R), “Consolidation of Variable Interest Entities (VIEs) (revised December
2003) — an interpretation of ARB No. 51” (FIN 46(R)), for entities created prior to January 31,
2003 (see Note 7 to our consolidated financial statements).
During fiscal 2006, we discontinued our Shaw Robotics Environmental Services, LLC business, part of
our Maintenance segment, and in fiscal 2005, we discontinued our Roche Ltd., Consulting Group
business, part of our Environmental & Infrastructure (E&I) segment. The gain (impairment) on the
disposal of these businesses and the results of their operations are presented as discontinued
operations in our consolidated financial statements.
Certain reclassifications have been made to the prior period’s financial statements in order to
conform to the current period’s presentation. The major reclassifications are as follows:
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Fiscal Year-End
We define our fiscal year as the period from September 1 to August 31.
Use of Estimates
In order to prepare financial statements in conformity with accounting principles generally
accepted in the U.S., our 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. Actual results could differ from those estimates. Areas requiring
significant estimates by our management include the following:
Nature of Operations, Operating Cycle and Types of Contracts
We are a global provider of services to the energy, chemical, and environmental and infrastructure
industries. We are a vertically-integrated provider of comprehensive technology, engineering,
procurement, construction, maintenance, pipe fabrication and consulting services to the energy and
chemical industries. We are also a leader in the environmental, infrastructure and homeland
security markets, providing consulting, engineering, construction, remediation and facilities
management services to governmental and commercial customers.
We operate primarily in the U.S., with foreign operations worldwide. Our services and products
include consulting, project design, engineering and procurement, piping system fabrication,
industrial construction and maintenance, facilities management and environmental remediation. Our
operations are conducted primarily through 100 percent
owned subsidiaries and joint ventures.
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Most of our work is performed under fixed-price contracts and cost-reimbursable contracts both of
which may be modified by 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 a different contract type. Assets
and liabilities have been classified as current under the operating cycle concept whereby all
contract-related items are regarded as current regardless of whether cash will be received or paid
within a twelve month period except for certain equipment acquired in settlement of a project
related claim.
Our fixed-price contracts include the following:
Our cost-reimbursable contracts include the following:
On any of the above contract types, we could also be assessed actual or liquidated damages for late
delivery or failure to meet performance criteria.
Cash and Cash Equivalents
Highly liquid investments are classified as cash equivalents if they mature within three months of
the purchase date.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements (including interest costs
for construction of certain long-lived assets) are capitalized. Maintenance and repair expenses are
charged to income as incurred. The cost of property and equipment sold or otherwise disposed of and
the related accumulated depreciation are eliminated from the property and related accumulated
depreciation accounts, and any gain or loss is credited or charged to other income (expense).
Depreciation is generally provided over the following estimated useful service lives:
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The straight-line depreciation method is used for all assets. Assets acquired under capital leases
are amortized over the shorter of the respective lease term or the estimated useful lives of the
assets. We recorded depreciation and amortization expense of $29.9 million, $27.7 million and $56.2
million for the years ended August 31, 2006, 2005 and 2004, respectively, in cost of revenues and
general and administrative expenses in the accompanying consolidated statements of operations
related to our property and equipment. In fiscal 2004, depreciation and amortization expense
included accelerated amortization of $29.4 million on certain software assets (see Note 8 of our
consolidated financial statements for further details). From time to time, we will also capitalize
certain interest costs; however, during fiscal 2006, 2005 and 2004 there were no material interest
costs capitalized.
Long-lived assets, such as property and equipment and purchased intangibles subject to amortization
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge is recognized for the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Engineering, Procurement and Construction (EPC) Contract and Environmental and Infrastructure
Revenue Recognition and Profit and Loss Estimates Including Claims
A substantial portion of our revenues is derived from EPC contracts, which contracts may be
performed as stand-alone basis EPC or as combined contracts (i.e. one contract that covers EPC or a
combination thereof). We use accounting principles set forth in American Institute of Certified
Public Accountants (AICPA), Statement of Position 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts,” and other applicable accounting standards
to account for our contracts. We recognize revenues for these contracts on the
percentage-of-completion method, primarily based on costs incurred to date compared with total
estimated contract costs. Performance incentives are included in our estimates of revenues using
the percentage-of-completion method when their realization is reasonably assured. 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 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. The costs attributable to change orders and claims being negotiated or disputed
with customers, vendors or subcontractors or subject to litigation are included in our estimates of
revenues when it is probable they will result in additional contract revenues and the amount can be
reasonably estimated. Profit from such change orders and claims is recorded in the period such
amounts are settled or approved. Back charges 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 are probable and the costs can be
reasonably estimated.
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Disputes with other parties involved in the contract can and often do occur, which we refer to as
claims. These disputes are generally the result of one party incurring costs or damages caused by
another party during execution of the project. We may incur additional costs or be damaged and we
may cause additional costs or damages 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 to the extent that contract costs have been 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 are 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 subsequent to the
date 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 collection is
deemed probable and the amounts can be reasonably estimated. Including claims in this calculation
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 to the extent of costs
incurred and include no 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 consolidated
balance sheets.
Revenue Recognition – EPC Contract Segmenting
Certain EPC 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 American Institute of Certified Public Accountants Statement of Position
81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP
81-1”). Revenues recorded in our F&M segment under this policy are based on our current prices and
terms for such services to third party customers. This policy may result in different 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.
Other Revenue Recognition and Profit and Loss Estimates
Revenue is recognized from consulting services as the work is performed. Consulting service work is
primarily performed on a cost-reimbursable basis. Revenues related to royalty use of our
performance enhancements derived from our chemical technologies are recorded in the period earned
based on the performance criteria defined in the related contracts. 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 primarily by the
percentage of costs incurred to date on engineering services to total estimated engineering costs.
Under such agreements, revenues available for recognition on a percent complete basis is limited to
the agreement value less a liability provision for contractually specified process performance
guarantees. The liability provision is recorded in gross profit when, and if, the related
performance testing is successfully completed.
We recognize revenues for pipe fittings, manufacturing operations and other services at the time of
shipment or as services are performed.
For unit-priced pipe fabrication contracts, we recognize revenues upon completion of individual
spools of
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production. A spool consists of piping materials and associated shop labor to form a prefabricated
unit according to contract specifications. Spools are generally shipped to job site locations when
complete. During the fabrication process, all direct and indirect costs related to the fabrication
process are capitalized as work in progress. For fixed-price fabrication contracts, we recognize
revenues based on the percentage-of-completion method, measured primarily by the cost of materials
for which production is complete to the total estimated material costs of the contract.
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 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. 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.
Cost Estimates
Contract costs include all direct material and labor costs and those indirect costs related to
contract performance. Indirect costs include charges for such items as facilities, engineering,
project management, quality control, bid and proposals, and procurement.
General and Administrative Expenses
Our general and administrative (G&A) expenses represent overhead expenses that are not associated
with the execution of the contracts. G&A expenses include charges for such items as business
development, information technology, finance and accounting, human resources and various other
corporate functions.
Financial Instruments, Forward Contracts — Non-Trading Activities
The majority of our transactions are in U.S. dollars; however, certain of our foreign subsidiaries
conduct operations in the various foreign currencies. We use financial hedging instruments
(generally foreign currency forward contracts) to manage foreign currency risks when our foreign
subsidiaries enter into a transaction denominated in a currency other than their local currency.
We utilize forward foreign exchange contracts to reduce our risk from foreign currency price
fluctuations related to firm or anticipated sales transactions, commitments to purchase or sell
equipment, materials and/or services. The fair value of our hedges was not material at August 31,
2006 and 2005.
Other Comprehensive Income
FASB Statement of Financial Accounting Standard (SFAS) No. 130, “Reporting Comprehensive Income”
(SFAS 130), establishes standards for reporting and displaying comprehensive income and its
components in the consolidated financial statements. We report the cumulative foreign currency
translation adjustments, the net after-tax effect of unrealized gains and losses on derivative
financial instruments accounted for as cash flow hedges and changes in the fair value of
available-for-sale securities and changes in the minimum pension liability related to our foreign
subsidiaries-sponsored pension plans as components of other comprehensive income.
Our foreign subsidiaries maintain their accounting records in their local currency (primarily
British pounds, Canadian dollars, Venezuelan Bolivars, and the Euro). All of the assets and
liabilities of these subsidiaries (including long-term assets, such as goodwill) are converted to
U.S. dollars at the exchange rate in effect at the balance sheet date, with the effect of the
foreign currency translation reflected in accumulated other comprehensive income (loss), a
component of shareholders’ equity, in accordance with SFAS No. 52, “Foreign Currency
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Translation,” and SFAS 130. Foreign currency transaction gains or losses are credited or charged to
income as incurred. For the fiscal years ended August 31, 2006, 2005 and 2004, the cumulative
foreign currency translation adjustments were ($0.5 million), ($3.9 million), and $2.9 million,
respectively.
Minimum pension liability adjustments are required to be recognized on the plan sponsor’s balance
sheet when the accumulated benefit obligations of the plan exceed the fair value of the plan’s
assets. Minimum pension liability adjustments are non-cash adjustments that are reflected as an
increase (or decrease) in the pension liability and an offsetting charge (or benefit) to
shareholders’ equity, net of tax, through comprehensive loss (or income). Amounts reflected in
accumulated other comprehensive income or loss related to minimum pension liability, were $6.9
million and ($12.5 million) at August 31, 2006 and 2005, respectively.
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Self Insurance
Our employee-related health care benefits program, workers’ compensation insurance and general
liability insurance are self-funded up to a maximum amount per claim. Claims in excess of this
maximum are insured through stop-loss insurance policies. The liabilities are based on claims filed
and estimates of claims incurred but not reported. For the fiscal years ended August 31, 2006 and
August 31, 2005, we recorded liabilities for unpaid and incurred but not reported claims totaling
$19.9 million and $14.5 million, respectively, and are included in accrued liabilities in the
accompanying consolidated balance sheets. In management’s opinion, recorded reserves are adequate
to cover future claims payments related to claims already incurred.
Debt Issuance Costs
We defer debt issuance costs which are amortized over the term of the related debt. Unamortized
debt issuance costs are included in non-current other assets on the consolidated balance sheets and
related amortization expense is included in interest expense in the accompanying consolidated
statements of operations.
Stock Based Compensation
Effective September 1, 2005, we adopted SFAS No. 123 (revised), “Share-Based Payment” (SFAS 123(R))
utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R), we accounted for
stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25 “Accounting
for Stock Issued to Employees” (APB 25) (the intrinsic value method), and accordingly, recognized
no compensation expense for stock option grants when the exercise price equaled the fair value of
common stock on the date of grant. (See Note 12).
Note 2 — Public Capital Stock Transactions
There were no public capital stock transactions during fiscal 2006. The following table
represents the public capital stock transactions that have occurred during fiscal 2005 (in
thousands, except price per share amounts):
In May 2005, pursuant to a tender offer which commenced on May 5, 2005, we repurchased Senior Notes
with the proceeds of our April 2005 common stock offering (see Note 9 of our consolidated financial
statements). The April 2005 common stock issuance occurred on two separate dates, April 22, 2005
for 1.2 million shares and April 18, 2005 for 12.9 million shares.
Note 3 — Restricted and Escrowed Cash
As of August 31, 2006 and 2005, we had restricted and escrowed cash of $43.4 million and $171.9
million, respectively, which consisted of:
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Note 4 — Acquisitions
SFAS No. 141, “Business Combinations,” requires that all acquisitions be recorded utilizing the
purchase method of accounting which requires the cost of an acquired operation to be allocated to
the assets acquired and liabilities assumed based on their estimated fair values. These estimates
are revised during an allocation period as necessary when, and if, information becomes available to
further define and quantify the value of the assets acquired and liabilities assumed. The
allocation period generally does not exceed one year from the date of the acquisition. To the
extent additional information to refine the original allocation becomes available during the
allocation period, the allocation of the purchase price is adjusted and reflected as an adjustment
to goodwill. Likewise, to the extent such information becomes available after the allocation
period, such items are generally included in our operating results in the period that the
settlement occurs or information is available to adjust the original allocation to a better
estimate. These future adjustments, if any, may materially favorably or unfavorably impact our
future consolidated financial position or results of operations.
In connection with potential acquisitions, we incur and capitalize certain transaction costs, which
include legal, accounting, consulting and other direct costs. When an acquisition is completed,
these costs are capitalized as part of the acquisition price. We routinely evaluate capitalized
transaction costs and expense those costs related to acquisitions that are not likely to occur.
Indirect acquisition costs, such as salaries, corporate overhead and other corporate services are
expensed as incurred.
The operating results of the acquisitions accounted for as a purchase are included in our
consolidated financial statements from the applicable date of the transaction.
The following is a description of the various acquisitions that have occurred during the past three
fiscal years.
Energy Delivery Services, Inc.
Effective December 31, 2003, we acquired all of the common stock of Energy Delivery Services, Inc.
(EDS) from Duke Energy Global Markets, Inc. for a total purchase price, including direct
acquisition costs, of approximately $22.4 million of which $18.4 million was paid in cash and $4.0
million was paid through a transfer of the ownership of a portion of EDS’s receivables to the
seller. In connection with this acquisition, we also acquired equipment under capital leases of
approximately $5.4 million which is reflected as a purchase price adjustment during the third
quarter of fiscal 2004. EDS, renamed Shaw EDS, provides a full line of vertical services to utility
companies seeking to upgrade, install and maintain their energy grids and is included in our Energy
& Chemicals (E&C) segment. During the second quarter of fiscal 2005, we finalized our purchase
price allocation. The total purchase price of $22.4 million was allocated as follows: $11.8 million
of goodwill, $0.9 million in other intangibles including tradename and customer relationships,
$11.8 million in accounts receivable, $9.6 million of equipment, $0.5 million in other assets, $0.5
million in cash, $5.4 million in capital lease obligations and $7.3 million of other liabilities.
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Note 5 — Inventories, Accounts Receivable and Concentration of Credit Risk
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) or weighted-average cost methods.
The major components of inventories consist of the following (in thousands):
Accounts Receivable and Credit Risk
We grant short-term credit to our customers. Our principal customers are major multi-national
industrial corporations, governmental agencies, regulated utility companies, independent and
merchant energy producers and equipment manufacturers. Accounts receivable are based on contracted
prices, and we believe that in most cases our exposure to credit risk is mitigated through customer
prepayments, collateralization and guarantees.
Accounts receivable on the accompanying consolidated balance sheets as of August 31, 2006 and 2005
include the following (in thousands):
Concentration of Credit — Government Contracting
The following table presents amounts due from government agencies or entities owned by the U.S.
government, along with revenues related to these governmental agencies and entities (in millions):
The increase in 2006 in the amounts due from and revenues earned from government agencies or
entities owned by the U.S. government is primarily due to the disaster relief, emergency response
and recovery services provided to FEMA and the U.S. Army Corps of Engineers.
Costs and estimated earnings in excess of billings on uncompleted contracts include $267.1 million
related to the U.S. government agencies and related entities, an increase of $165.5 million during
the year ended August 31, 2006. This increase reflects our rapid deployment of a high volume of
resources for the disaster relief, emergency response and recovery services provided in the Gulf
Coast area of the U.S.
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Allowance for Doubtful Accounts
We estimate the amount of doubtful accounts based on our understanding of the financial condition
of specific customers and for contract adjustments, to reflect the net amount expected to be
collected. We establish an allowance for uncollectible accounts based on the assessment of the
customers’ ability to pay. Accruals resulting from disputes or other negotiations which are
established to reflect certain project related accounts receivable or claims at their net
realizable values are included in billings in excess of costs and estimated earnings on uncompleted
contracts. Past-due receivable balances are written off when our internal collection efforts have
been unsuccessful in collecting the amounts due. Accounts receivable are presented net of the
allowance for doubtful accounts on the accompanying consolidated balance sheets.
Analysis of the change in the allowance for doubtful accounts follows (in thousands):
Unbilled Receivables, Retainage Receivables, Advance Billings and Disputed Accounts Receivable
In accordance with normal practice in the construction industry, we include in current assets and
current liabilities amounts related to construction contracts realizable and payable over a period
in excess of one year. Costs and estimated earnings in excess of billings on uncompleted contracts
of $455.8 million and $395.1 million as of August 31, 2006 and 2005, respectively, represent the
excess of contract costs and profits recognized to date using the percentage-of-completion
accounting method over billings to date on certain contracts. Billings in excess of costs and
estimated earnings on uncompleted contracts of $316.7 million and $274.2 million as of August 31,
2006 and 2005, respectively, represents the excess of billings to date over the amount of contract
costs and profits recognized to date using the percentage-of-completion accounting method on
certain contracts. Deferred revenue-prebilled on contracts as of August 31, 2006 and 2005 were
$14.8 million and $8.4 million, respectively.
Unbilled accounts receivable become billable according to the contract terms which vary
significantly but usually consider the passage of time, achievement of certain milestones or
completion of the project. We believe that substantially all such unbilled amounts will be billed
and collected over the next twelve months. Retainage amounts are typically withheld from progress
billings by our customers until the completion of a project and, in some instances, for even longer
periods. Retainage may also be subject to restrictive conditions such as performance or fulfillment
guarantees.
Note 6 — Other Assets and Other Liabilities
Other Assets
The following table summarizes the amounts that comprise the balance of other long-term assets (in
thousands):
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Power generation plant equipment and materials represent the value of the project site, land and
materials and equipment which we obtained in settlement of our claim in the bankruptcy proceeding
of our customer in November 2003. During fiscal 2004, we finalized the valuation of the materials
and equipment. We recorded identifiable items at their estimated fair values. The site and land is
recorded at a nominal value which is offset by an accrual representing our estimated liability for
site restoration activities. Materials and equipment which are transferred to projects to which we
are a party to the contract are recorded at the previously established fair value. As equipment is
sold to third parties, we recognize increases to or reductions in cost of revenues for the
difference between the proceeds on the sales and the book values of the materials and equipment
using the specific identification method. During fiscal 2006 and 2005, we reviewed these assets for
impairment and determined that the carrying value of these assets was greater than fair value, thus
we recorded a $3.2 million and $3.1 million, respectively, impairment charge, which is reflected in
other expense in our consolidated statements of operations. We also used $1.0 million of these
assets as materials and equipment on projects for other customers during fiscal 2006.
LandBank assets represent the real estate owned by E&I through its subsidiary LandBank Group, Inc.
(LandBank). LandBank acquires and remediates environmentally impaired real estate. The real estate
is recorded at cost and the book value is increased as improvements are made to the assets. During
the fourth quarter of fiscal 2005, we sold certain real estate assets associated with these
LandBank assets for approximately $15.9 million and recognized a $2.2 million gain on the sale. The
gain on the transaction is included in other income (expense) in the accompanying consolidated
statements of operations for fiscal 2005.
Intangible assets, other than contract (asset) adjustments consist of ethylene technology, certain
petrochemical process technologies, patents, trade names and a customer relationship intangible. As
of August 31, 2006 and 2005, technologies, patents and trade names totaled $29.5 million and $32.1
million, and customer relationship intangible totaled $1.6 million and $1.9 million, respectively
(see Note 8 of our consolidated financial statements).
Notes receivable decreased during fiscal 2006 by $3.7 million. During the first quarter of fiscal
2006, one of our consolidated joint ventures, Badger Licensing, LLC (Badger) received a transfer of
a portion of its joint venture partner member’s equity as payment of an $8.9 million long-term note
receivable owed to Badger. Additionally, during the second quarter of fiscal 2006, we recorded a
note receivable of $4.2 million related to the substantial payment and release of certain claims on
the Wolf Hollow project (See Note 20 of our consolidated financial statements). The payment of the
receivable balance is due in 2012 from the purchaser of the plant and related assets.
The real estate option was purchased in December 2001, for $12.2 million. The purpose of the
option, which expires in January 2012, is to purchase certain real estate properties in Baton
Rouge, Louisiana to support our future growth and operations. The real estate properties subject to
the option include three commercial office buildings and two undeveloped parcels of land. The
option agreement provides that we may purchase these properties in bulk for the sum of a fixed
price for the three developed properties and land value of the undeveloped properties at the time
the option agreement was entered into plus the costs to develop the undeveloped properties
(including a mark-up for builders’ profit) less the price paid for the option. The combined total
purchase price for these properties is estimated to be approximately $130 million at August 31,
2006. In the event the counter-party to the option receives an offer from a third party to purchase
the properties, we have the right of first refusal, subject to the terms of the option agreement.
Deferred financing fees represent unamortized deferred financing fees related to Senior Notes and
Credit Facility.
It is our policy to defer certain third party costs directly attributable to our efforts on
potential acquisitions. During fiscal 2006, we expensed $4.7 million of previously deferred
financing and equity offering costs and certain due diligence costs related to our proposed
acquisition of a controlling interest in Westinghouse. These costs are recorded in general and
administrative expenses on our consolidated statements of operations for the year ended August 31,
2006. The remaining $2.6 million of deferred acquisition costs will be reflected in accounting for
the acquisition of our investment in Westinghouse, which closed in October 2006.
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The following table summarizes the amounts that comprise the balance of other current assets (in
thousands):
Notes receivable at August 31, 2006, includes the notes we received in settlement of the Covert and
Harquahala claims of $44.8 million. Of this amount, $18.8 million was collected in September 2006
and $26.0 million is due to us in March 2007.
Other Liabilities
The following table summarizes the amounts that comprise the balance of other liabilities (in
thousands):
Accumulated benefit obligations consist of the accrued benefit costs for our three defined benefit
plans for subsidiaries in the United Kingdom (U.K.) and Canada. At August 31, 2006 and 2005, the
long-term portion of the accrued benefit costs for all three plans totals $22.6 million and $30.0
million, respectively. Including the current portion of $3.0 million and $0.7 million in accrued
liabilities, the total amount of the accrued benefit costs is $25.6 million and $30.7 million at
August 31, 2006 and 2005, respectively (see Note 17 of our consolidated financial statements).
For our leases on one facility and several airplanes, which include scheduled rent increases, we
recognize rental expense on a straight-line basis in accordance with FASB Technical Bulletin No.
85-3, “Accounting for Operating Leases with Scheduled Rent Increases.”
LandBank environmental remediation liabilities reflect both the estimated environmental remediation
costs for real estate sold, but for which some level of remediation obligation is retained, and the
estimated environmental remediation costs for properties held, if funds are recovered from
transactions separate from the original real estate acquisition, to fund the environmental
remediation costs estimated. (see Note 15 of our consolidated financial statement for further
details).
Note 7 — Variable Interest Entities, Unconsolidated Entities, Joint Ventures and Limited
Partnerships
We invest in and make advances to consolidated entities, unconsolidated entities, joint ventures,
and limited partnerships. Each of these entities is recorded in our consolidated financial
statements based on the structure associated with each respective entity. These entities are
accounted for as either variable interest entities (VIEs) as defined by FIN 46(R), or as
investments accounted for under the equity method.
Joint Ventures
As is common in the engineering, procurement and construction (EPC) industries, we execute certain
contracts jointly with third parties through joint ventures, limited partnerships and limited
liability companies (or “joint ventures”). If a joint venture is determined to be a VIE, and we are
determined to be the primary beneficiary of that VIE because we are subject to a majority of the
risk of loss from the VIE’s activities or entitled to receive the majority of the VIE’s residual
returns or both, the joint venture is consolidated in accordance with FIN 46(R). If consolidation
of the joint venture is not required, we generally account for these joint ventures using the
equity method of accounting with our share of the earnings (losses) from these investments
reflected in one line item on the
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consolidated statement of operations except for certain joint ventures with construction activities
for which our percentage share of revenues and costs from the joint ventures are reflected in our
consolidated statements of operations (proportionate consolidation). The investments in these
unconsolidated VIE’s as of August 31, 2006 and 2005 were $49.0 million and $31.7 million,
respectively.
Variable Interest Entities
The following table represents the total assets and liabilities before intercompany eliminations of
our consolidated and unconsolidated VIEs (in thousands):
The major captions of assets and liabilities, revenues, expenses and net income, after intercompany
eliminations included in the consolidated financial statements related to consolidated VIE’s are as
follows (in thousands):
The following is a summary of our significant VIEs at August 31, 2006:
Consolidated VIEs
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Unconsolidated VIEs (Equity Method Accounting)
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From time to time, we enter into joint ventures to bid and propose on specific contracts. If the
contract is ultimately awarded to the joint venture entity, certain modifications to the operating
agreements are often made and initial working capital investments are then made by each joint
venture partner. If a contract is not awarded, the joint venture is dissolved. Typically, the
activity in these joint ventures is limited to bid and proposal costs initially and are not
material. We will continue to monitor these joint ventures, but will generally defer the decision
as to whether these entities require consolidation under FIN 46(R) until contracts are awarded.
Some of our unconsolidated entities have operating agreements that allow for changes in ownership
interests and allocation of profits and losses if certain events should occur. These changes,
should they occur, would require us to reconsider whether these entities meet the definition of a
VIE as well as the determination of the primary beneficiary, if any, in accordance with FIN 46(R).
Unconsolidated Entities (including VIEs), Joint Ventures and Limited Partnerships
The following tables include summary financial information for our unconsolidated entities which
are significant in the aggregate (in thousands):
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The above summary financial information includes both our privatization subsidiaries and various
other entities. Our privatization subsidiaries include American Eagle Northwest, LLC, American
Eagle Communities Midwest, LLC, PFH Management, LLC, Hanscom Family Housing, LLC and Little Rock
Family Housing, LLC discussed above. These entities were established to privatize infrastructure
assets for the Federal Government, which are held by the Department of Defense. 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 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. 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.
We contributed equity of $5.6 million to our housing privatization joint ventures during fiscal
2006 as compared to $10.5 million in fiscal 2005. We are not scheduled to make any significant
equity contributions to the privatization joint ventures for fiscal 2007.
The following is a summary of our investments in and advances to unconsolidated entities, joint
ventures and limited partnerships which are accounted for under the equity method (in thousands):
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