CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements and information in this Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those described in (1) Part I, Item 1A — Risk Factors and elsewhere in this Form 10-K, (2) our reports and registration statements filed from time to time with the Securities and Exchange Commission (SEC) and (3) other announcements we make from time to time.

 

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

 

 

General

 

The Shaw Group Inc. (Shaw, we, us, and our) is a leading global provider of technology, engineering, procurement, construction, maintenance, fabrication, manufacturing, consulting, remediation and facilities management services to a diverse client base that includes multinational and national oil companies and industrial corporations, regulated electric utilities, independent and merchant power producers, government agencies and equipment manufacturers. We have developed and acquired significant intellectual property, including downstream petrochemical technologies, induction pipe bending technology and environmental decontamination technologies. Through our investment in the Westinghouse Group, we have exclusive opportunities to bid on engineering, procurement and construction (EPC) services on future Westinghouse advanced passive AP1000^tm nuclear power technology units to be built in the United States (U.S.) and other locations. Our proprietary olefin and refinery technologies, coupled with ethyl benzene, styrene, cumene and Bisphenol A technologies, allow us to offer clients integrated oil refinery and petrochemicals solutions. We believe our technologies provide a competitive advantage in the market place and will help us to compete on a longer-term basis with lower cost competitors from developing countries that are likely to emerge.

 

Shaw has significant experience in effectively managing subcontractors, craft labor and materials procurement associated with the construction of oil refineries, petrochemical plants, electric power generation plants and other industrial facilities. We have the versatility to function on any given project as the primary contractor, subcontractor or quality assurance construction manager. We provide technical and economic analysis to a global client base primarily in the fossil, nuclear power, energy and chemicals industries.

 

We report our financial results using August 31^st as our fiscal year end. Accordingly, our fiscal quarter end dates are as follows:

 

Our stock trades on the New York Stock Exchange (NYSE) under the ticker symbol “SHAW.” Prior to August 21, 2009, our stock traded on NYSE under the ticker symbol “SGR.” We are a Louisiana corporation with our executive offices located at 4171 Essen Lane, Baton Rouge, Louisiana 70809, and our telephone number is (225) 932-2500.

 

History

 

In 1987, J. M. Bernhard, Jr., our Chairman, President and Chief Executive Officer, and two colleagues, founded Shaw as a pipe fabrication shop in Baton Rouge, Louisiana. Since then we have significantly expanded our expertise and the breadth of our services through organic growth and strategic acquisitions.

 

In July 2000, we acquired certain assets of Stone & Webster, Inc. (Stone & Webster), a leading global provider of EPC, construction management and consulting services to the energy, chemical, nuclear, environmental and infrastructure industries. Combined with our existing pipe fabrication and construction capabilities, the Stone & Webster acquisition transformed Shaw into a vertically integrated EPC services company.

 

Our May 2002 acquisition of the assets of the IT Group, Inc. (IT Group) significantly increased our position in the environmental remediation and infrastructure markets, particularly in the U.S. government services sector. The IT Group acquisition further diversified our end market, client and contract mix and provided new opportunities to cross-sell services, such as environmental remediation services, to our existing EPC clients.

 

In October 2006, we acquired a 20% interest in two companies (Investment in Westinghouse) who, together with their subsidiaries, are collectively referred to as the Westinghouse Group (Westinghouse). Westinghouse provides advanced nuclear plant designs and equipment, fuel and a wide range of other products and services to the owners and operators of nuclear power plants. We believe our Investment in Westinghouse uniquely positions us in the domestic and international nuclear electric power markets through the commercial relationship agreement (Westinghouse CRA) which provides us certain exclusive opportunities to bid on projects where we would perform EPC services for future projects utilizing Westinghouse’s nuclear AP1000 technology. For an explanation of this investment, see Part I, Item 1 — Business — Investment in Westinghouse Segment, below.

 

In 2006, we formed Shaw Capital, Inc. (Shaw Capital), a wholly owned subsidiary. Shaw Capital leverages our global presence, technical and operational experience and transactional capabilities to identify and develop targeted energy and construction project investment opportunities for third party investors, which might result in management fee revenues. Shaw Capital may seek to arrange equity, mezzanine and debt investments in the energy, chemicals, environmental and infrastructure markets, which might present opportunities for us to participate with equity ownership in projects where we may be performing EPC or related services.

 

Our Business Segments

 

Because of the wide variety of Shaw’s technical services and our vertical integration, we believe we are uniquely positioned to provide seamless services to our clients throughout the lifespan of projects, from the concept, design, building and construction phases to the maintenance, operations, decommissioning and decontamination phases. Our segments strive to support and complement each other, allowing Shaw to rely on internal resources for much of our work. We believe our direct hire construction capabilities provide us with a competitive advantage in many of the markets we serve.

 

Currently, we are organized under the following seven reportable segments:

 

 

 

For detailed financial information and geographical sales information regarding each segment, see Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 14 — Business Segments included in our consolidated financial statements beginning on page F-1. In addition, see Item 1A — Risk Factors for a discussion of the risks related to our foreign operations.

 

Fossil, Renewables & Nuclear Segment

 

Our Fossil, Renewables & Nuclear segment provides a range of services, including design, engineering, construction, procurement, technology and consulting services, primarily to the fossil, renewables and nuclear power generation industries.

 

Nuclear Power Generation.  Safe and reliable operation of existing plants, carbon emissions concerns, climate change and domestic incentives under the Energy Policy Act of 2005 have prompted significant interest in new nuclear plant construction. As of May 2009, approximately 21.0% of the electric power generated in the U.S. was from nuclear power plants. We provide a wide range of technical services to meet the demands of this growing sector, including engineering, design, procurement, construction, and project management that support the domestic and international nuclear power markets. As part of the Westinghouse CRA, we have been awarded a technical services contract for four AP1000 nuclear power units in the People’s Republic of China (China) and three EPC contracts to build six domestic AP1000 units — two each for Georgia Power, South Carolina Electric & Gas and Progress Energy. These projects are among the first new nuclear power construction projects in the U.S. in more than 30 years. We recently reached several international milestones including supervising the placement of the first nuclear concrete and the first major structural module at the world’s first AP1000 nuclear power plant at the Sanmen nuclear power plant in China’s Zhejiang province. Domestically the Nuclear Energy Institute and the Nuclear Regulatory Commission (NRC) disclosed that as of July 2009 there are plans for developing of at least 33 new nuclear units, with the Westinghouse AP1000 design being considered for at least 14 of them. We believe that our support of existing U.S. utilities, combined with our Westinghouse CRA, could result in increased activity in the nuclear sector for us. Recognized in the power industry for improving the efficiency, capacity output and reliability of existing domestic nuclear plants (also known as power uprates), we have added more than 2,111 megawatts (MW) of new nuclear capacity to the U.S. electric power transmission grid since 1984. In addition, we serve as architect-engineer for two uranium enrichment facilities and provide engineering services in support of new nuclear units in South Korea and China. We anticipate long-term growth in the global nuclear power sector, driven in large part by the U.S., United Kingdom (U.K.), China, India, Brazil, the Czech Republic and Canada. While it is unclear what impact current economic conditions might have on the timing or financing of such projects, we expect that our existing base of nuclear services work, combined with our collaboration with Westinghouse and its majority owner Toshiba Corporation (Toshiba) on new nuclear plant work, should position us to capitalize on the long-term growth within this industry.

 

Please read our disclosures under “Liquidity” in Part II, Item 7 — Managements’ Discussion and Analysis of Financial Conditions and Results of Operations with respect to the circumstances in which our ownership in Westinghouse may be purchased by Toshiba. Information may also be found in Note 6 — Equity Method Investments and Variable Interest Entities and Note 8 — Debt and Revolving Lines of Credit contained in our consolidated financial statements beginning on page F-1.

 

Clean Coal-Fired Generation.  The U.S. has significant coal reserves and at May 2009, approximately 45.4% of electric power currently generated in the U.S. comes from coal-fired power plants. Electric power companies in the U.S. have historically pursued construction of new coal-fired power plants, because, although coal-fired capacity is capital intensive to build, it generally has relatively lower operating costs as compared to other fossil fuels. Recently, however, uncertainty surrounding potential regulations targeting carbon emissions, as well as the global economic downturn and low natural gas prices, have caused the development of coal and

other solid fuel-fired power plants to slow significantly. Nevertheless, we believe that coal will continue to be a significant component of future domestic energy generation, and we intend to continue positioning our resources to capture a significant market share of any new build or expansion projects.

 

Air Quality Control (AQC).  Our AQC business includes domestic and international markets for flue gas desulfurization (FGD) retrofits, installation of mercury emission controls, fine-particle pollution control, carbon capture and selective catalytic reduction (SCR) processes used at existing coal-fired electric power plants. We believe we are the market leader for EPC FGD projects.

 

Existing U.S. government and state environmental AQC regulations have driven the need to retrofit existing coal-fired power plants with modern pollution-control equipment. In July 2008, the D.C. Circuit Court of Appeals issued an opinion in North Carolina v. EPA, vacating and remanding the Clean Air Interstate Rule (CAIR), a pollution reduction program designed to reduce power plant emissions through various air quality standards. As a result of the Court’s decision, the current CAIR standards remain in place until the Environmental Protection Agency (EPA) makes modifications. These rulings provide some temporary stability to the emission standards. Although the EPA is required to revise the current CAIR rule and the status of any new emissions legislation remains undecided, we anticipate that the revised CAIR rule and any future CAIR-related legislation will continue to impose stringent requirements on air emissions, which is expected to have a positive effect on future demand for our AQC services.

 

Mercury emission controls and the SCR process for nitrogen oxide emission controls and AQC services are in continued demand. We believe the domestic market for both these services could increase if the current federal and state government trends toward increased regulation continue, and we believe there will be select international markets for pursuing the SCR and fine particle control work.

 

Gas-Fired Generation.  At May 2009, approximately 20.8% of the electric power generated in the U.S. was generated by natural gas-fired power plants. We continue to observe renewed interest in gas-fired electric generation as electric utilities and independent power producers look to diversify their options. In many states, recent initiatives to reduce carbon dioxide and other greenhouse gas emissions and immediate demand for additional electric power generation capacity seem to be stimulating renewed demand for gas-fired power plants. Gas-fired plants generally are less expensive to construct than coal-fired and nuclear power plants but tend to have comparatively higher and potentially more volatile operating costs. We expect power producers to increase capital spending on gas-fired power plants to take advantage of recent lower natural gas prices and the prospect that these prices may remain low for some time because of gas field development projects in the U.S. as well as potential liquefied natural gas (LNG) imports. Although the effect of current economic conditions on the timing or financing of such projects is unclear, we expect that gas-fired power plants will continue to be an important component in the development of long-term power generation in the U.S. and internationally. We believe our capabilities and expertise position us well to capitalize on opportunities in this market.

 

Renewable Energy Generation.  At May 2009, approximately 4.2% of the electric power generated in the U.S. was from renewable sources such as biomass, geothermal, solar, wind and other energy sources. We are actively pursuing international and domestic projects using a variety of renewable energy technologies, including geothermal, biomass and concentrating solar. Although the current economic climate and uncertainty of climate-control legislation have slowed development of many of these projects, we believe renewable energy projects will likely be a significant part of the energy market in the near future.

 

Maintenance Segment

 

Our Maintenance segment is a market leader, providing a full range of client-tailored technical services to complement our EPC services for the electric power generation, refining and petrochemical/chemical industries. Our comprehensive range of services helps clients increase capacity, reduce expenditures and optimize costs, improving a client’s return on critical production in each facility. We provide clients with turnaround maintenance, refueling outage maintenance, routine plant maintenance, capital construction, reliability engineering, plant engineering, off-site modularization and other specialty services. We restore,

rebuild, repair, renovate and modify industrial structure, and offer routine and preventive maintenance services. Our services are provided at client work sites throughout North America.

 

Nuclear Plant Maintenance and Modifications.  Currently, there are 104 operating nuclear reactors in the U.S., each of which requires engineering and maintenance services to support operations, planned outages, extend equipment life and licenses, upgrade materials, increase capacity and improve performance. We provide systemwide maintenance, modification and capital construction services to 40 of these domestic nuclear reactors. We believe we are a significant contributor to the nuclear industry’s success in reducing refueling outage durations and costs by bringing plants online significantly faster than industry average since 2000. In addition to supporting operations and improving performance, we believe we can further expand in-plant restarts, uprate-related modifications and in-plant support services.

 

Fossil Plant Maintenance and Modifications.  We offer fossil plant maintenance services for energy generation facilities throughout North America. Our expertise, developed in the nuclear industry through our refueling outages and construction planning/execution, is similarly valuable in the fossil power sector. We believe significant opportunities exist to expand in this market as energy demand continues to increase and clients seek longer run times, higher reliability and improved outage performance.

 

Industrial Plant Maintenance and Modifications.  We have a continuous presence in approximately 90 U.S. field locations serving petrochemical, specialty chemical, oil and gas, manufacturing and refining markets. We believe there are opportunities to expand this business as we help clients reduce cost through efficiency initiatives.

 

Capital Construction Services.  Our Maintenance segment includes a capital construction component serving existing and new clients. Capital construction projects include renovations and green-field projects. Our scope includes constructability reviews, civil and concrete work, structural steel erection, electrical and instrumentation, mechanical and piping system erection.

 

Recovery and Rebuild Services.  We successfully execute large projects related to natural disasters and catastrophes, meeting client deadlines to rebuild and restore facilities to pre-damage capacity. Recent successfully completed projects include major petrochemical, natural gas processing, refining and nuclear power facilities in Texas and Louisiana. We also coordinate emergency response projects, partnering with U.S. government, state and local governments to provide program planning and management.

 

E&I Segment

 

Our E&I segment provides engineering, design and construction, construction management, regulatory, scientific, logistics support, operations and maintenance and program management services to both commercial clients and federal, state and local government clients worldwide. Our staff is strategically positioned throughout the U.S. and abroad to provide full-service solutions to clients facing complex environmental and infrastructure challenges.

 

Program Management.  We oversee large U.S. federal, state and local government programs including capital improvement, emergency response and disaster recovery projects and programs, as well as private sector commercial programs. In doing so, we implement the necessary planning, management and organizational activities and technical services, with quality and safety in mind. We typically staff projects with a full complement of experienced professionals, provide our clients with a single point of contact and manage all administrative duties required for each job. Our integrated business teams work together to provide expertise across all business lines and consistency throughout each program.

 

Design-Build.  We execute all design-build phases using our proficiencies in engineering, design, operations, construction and construction management for large infrastructure projects. Our current hurricane protection project in New Orleans, Louisiana, is the largest design-build domestic civil works project ever undertaken by the U.S. Army Corps of Engineers (USACE). Also, the U.S. Department of Energy (DOE) contracted us, through our joint venture Shaw Areva Mox Services, LLC to design, license and construct the Mixed Oxide (MOX) Fuel Fabrication Facility in Aiken, South Carolina, a first-of-a-kind facility in the U.S. to process weapons-grade plutonium into nuclear fuel. As part of our sustainability efforts, we help our clients

achieve Leadership in Energy and Environmental Design (LEED) certification for facilities by using green building practices. We continue to develop engineering, design and construction strategies to promote the use of sustainable development techniques. Some of those strategies include retrofitting buildings for energy efficiency and weatherizing structures, with the goal of providing a return on investment for our clients.

 

Environmental Remediation.  We have extensive experience in environmental remediation for both government and private-sector clients, including those in the chemical, energy, real estate, manufacturing and transportation fields. We have executed many complex remediation and restoration projects for the U.S. government, including remediating military bases with unexploded ordnance exposure and residual fuel and chemical contamination, as well as former nuclear weapons production and atomic testing sites. Our technological capabilities, such as laboratory assessments, field testing and analysis, support a wide range of client needs, including but not limited to groundwater modeling, contaminant transport and soil washing. We hold patented technologies in the bioaugmentation field, implementing microbial culture techniques to remediate groundwater contaminants, and spearheading the use of ozone, a common element in the earth’s atmosphere, to eliminate organic contaminants.

 

Coastal, Maritime and Natural Resource Design and Restoration.  We provide engineering and design services, including navigation, sediment management, port and waterway development, coastal engineering, environmental services, levee development and construction, shoreline protection and restoration and marine security. We perform wetland construction, mitigation, restoration and related work for clients around the world. We are involved in projects generated by the Coastal Wetlands Planning Protection and Restoration Act, which provides federal funds to restore and conserve coastal wetlands and barrier islands.

 

Transportation and General Infrastructure.  We offer program management for infrastructure projects related to transportation, water and wastewater systems. We offer a full range of technical and management services to design, plan, engineer, construct, renovate, operate and maintain highways, railways, transit systems, waterways and airports. We provide airport-related services for runways, taxiways, aprons, terminals and concourses. Bridge and roadwork, transit and highway tunnels, parking structures and vehicle maintenance facilities are also included in our broad scope of services. Large U.S. municipal agencies, such as the New York City Department of Environmental Protection and the San Francisco Public Utilities Commission, have engaged us for major water infrastructure needs, which include water system improvements and wastewater services such as planning, collection and treatment, as well as plant construction services. Additionally, we execute urban planning projects and provide clients with a long-term vision that supports viable growth opportunities for their region.

 

Other Federal Services.  We offer program management, operations, engineering, design, construction, consulting and technology-based solutions to help various U.S. government clients including DOE, USACE, the Department of Defense (DoD), the EPA, Federal Transit Administration (FTA) and Federal Emergency Management Agency (FEMA) meet goals and manage challenges associated with the operation of large federal facilities and programs. Our core services include environmental remediation and restoration, regulatory compliance, facilities management and operations and emergency response services. Environmental restoration activities support client compliance with government requirements such as the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), also known as the Superfund law, and the Resource Conservation and Recovery Act (RCRA). Additionally, we support our clients’ efforts to comply with Clean Water Act, Clean Air Act and Toxic Substances Control Act requirements. We are a significant service provider for U.S. government operations at the EPA Test and Evaluation facility and other National Risk Management Research Laboratory facilities, where we provide operational support and research services.

 

E&C Segment

 

Our E&C segment provides a full range of project-related services including proprietary technology, project management, engineering, procurement, construction, commissioning/start-up and consulting to the oil and gas, refining, and petrochemical industries globally. Our ability to develop, design, commercialize and integrate a wide range of process technologies and perform projects that range from small consulting studies to large EPC projects differentiate us from many of our competitors. From our main offices in Houston, Texas;

Baton Rouge, Louisiana; Cambridge, Massachusetts; Toronto, Canada; Mumbai, India and Milton Keynes, England, we deliver services through five major business lines: ethylene, petrochemicals, refining, upstream and consulting.

 

While the current global economic climate has impacted E&C segment’s prospects in the short-term, as the economy recovers, we anticipate that expenditures by our major oil and petrochemical clients will revert to prior levels.

 

Ethylene.  One of Shaw’s core proprietary technologies is ethylene process technology. Ethylene is an olefin that serves as a base chemical of the petrochemical industry. Since our first ethylene plant was built in 1941, we have designed and/or built more than 120 grassroots units, which provide a significant portion of the world’s ethylene supply. Produced by the steam cracking of hydrocarbon feedstocks, ethylene and its co-product, propylene, are key building blocks for other petrochemicals and polymers. The economic slowdown and the large amount of ethylene currently entering the market from recently completed projects have contributed to reduced demand and the delay of many planned projects. Exceptions are in the Middle East, where projects are generally proceeding because of the availability of low-cost feedstock, and China, which seems to be affected less by the slowdown than other regions.

 

We believe the delay in new, grassroots project activity will be somewhat offset by opportunities to revamp existing facilities, as owners seek to maximize productivity. We anticipate that debottleneck and revamp projects and technology upgrades might bring additional opportunities in the next one to two years.

 

Petrochemicals.  The economic downturn has resulted in a decrease in global demand for durable goods made from petrochemicals and a corresponding decline in production and new construction. However, we expect Middle East and Chinese clients may continue to focus on strategic plans and investments. In the rest of Asia, we anticipate that investments may ramp up as the economy recovers. We also expect that the Middle East’s demand for polymers may increase, especially for specialty commodities and engineering plastics. With our portfolio of technologies in polystyrene, acrylonitrile butadiene styrene (ABS), intermediate polycarbonates and others, Shaw is well positioned to participate in the expected economic upturn.

 

Additional opportunities may arise as major oil and petrochemical companies look for ways to integrate their refining and petrochemical facilities to improve profitability. We have extensive expertise in the design and construction of ethylene and downstream derivative plants, which provide the source of many higher value chemical products used to produce packaging, pipe, polyester, antifreeze, electronics and tires — all vital products in today’s market.

 

Refining.  Demand for technology and services in the petroleum refining industry has been driven primarily by our clients’ requirements to process heavier, poorer quality feedstocks into a variety of lighter, cleaner products. Adaptability and increased flexibility are key as refiners around the world consider expanding beyond their traditional fuels market by integrating their facilities with petrochemical operations.

 

This year the refining sector slowed with the economic downturn and shrinking margins led to reduced investments. The Middle East appears to be the strongest region for future growth, where oil producers are striving to own more of the supply chain by also exporting finished oil products and even petrochemicals. In the U.S., refinery utilization is decreasing, but reconfiguration of refineries to produce cleaner fuels and meet environmental legislation create new opportunities. In Europe, we expect strong diesel demand to drive investment decisions.

 

Shaw’s fluid catalytic cracking (FCC) technology, jointly licensed with our international partner, remains a key technology in new refineries being built around the world, primarily due to the FCC’s ability to boost production of gasoline and polymer-grade propylene. This same technology is being used to enhance the performance of existing assets through its ability to process poorer quality feedstocks, increase capacity and improve product yields, quality and energy efficiency. Modifications, or revamps, of existing FCCs to increase refinery profit margins may result in opportunities in the U.S. and Europe, where most of the world’s catalytic crackers are located.

In addition to FCC, Shaw offers related technologies including deep catalytic cracking (DCC) and catalytic pyrolysis process (CPP), which boost production of ethylene and propylene. The recent popularity of these technologies is driven by the growing global trend toward integrating refineries and petrochemical facilities.

 

Upstream.  Upstream has been successful in winning project management consultancy (PMC) work in the offshore sector and is currently pursuing additional onshore opportunities in the Middle East. In response to the global rising demand for liquefied petroleum gas (LPG), production is forecast to increase dramatically by 2012, mainly in the Middle East and North Africa. We are active in this market, with recent awards for front-end engineering design (FEED) and detailed engineering services for an LPG project in Algeria.

 

Syngas (short for synthesis gas), a clean gas that can be used for power generation or converted to substitute natural gas (SNG) or high value clean fuels, may play a role. Syngas (short for synthesis gas), a clean gas that can be used for power generation or converted to substitute natural gas (SNG) or high value clean fuels. Syngas can be produced through a number of processes including coal gasification and steam reforming of natural gas or liquid hydrocarbons. This area may grow with rising demand for electricity and the push for reductions in greenhouse gas emissions, especially carbon dioxide and we are pursuing opportunities in this growing business.

 

Consulting.  We offer consulting services to the energy, power, process, petrochemical, refining, and government market segments, as well as to the broader investment and financial community. Previously known as Stone & Webster Management Consultants, the business name was changed to Shaw Consultants International in 2009. It originally was founded in Boston more than 100 years ago.

 

The global economic downturn has slowed the pace of new consulting engagements, as operating companies and the financial community experienced uncertainty regarding project finance availability and hydrocarbon and energy pricing. However, we expect consulting activity to increase during the early stages of the expected economic recovery in 2010.

 

F&M Segment

 

We believe our F&M segment is among the largest worldwide suppliers of fabricated piping systems. Demand for our F&M segment’s products is typically driven by capital projects in the electric power, chemical and refinery industries.

 

We provide support and work for both external clients and for other business units within our company. F&M provides pipe and structural steel fabrication for projects such as the E&I segment’s DOE work and several Fossil, Renewables & Nuclear segment’s power projects, as well as the E&C segment’s largest current project. Our F&M segment is nearing completion on a new facility that will assemble modules for the construction of nuclear power plants.

 

Pipe Fabrication.  We fabricate fully integrated piping systems for heavy industrial clients around the world. We believe our expertise and proven capabilities in furnishing complete piping systems to a global market have positioned us among the largest suppliers of fabricated piping systems for power generation facilities in the U.S. and worldwide. Piping systems are normally a critical path for heavy industrial plants that convert raw or feedstock materials to products and piping system integration accounts for a significant portion of the total man hours associated with constructing power generation, chemical and other processing facilities.

 

We fabricate complex piping systems using carbon steel, stainless, nickel, titanium and aluminum pipe. We fabricate the pipe by cutting it to specified lengths, welding fittings, flanges or other components on the pipe and/or bending the pipe to precise client specifications using our unique pipe-bending technology. We believe our Shaw Cojafex induction pipe-bending technology is the most advanced, sophisticated and efficient pipe bending technologies of its kind. We utilize the Cojafex technology and related equipment to bend carbon steel and alloy pipe for industrial, commercial and architectural applications. Delivering pipe bent to client specifications can provide significant savings in labor, time and material costs compared to field fabrication and greater strength than pipes and fittings welded together.

Additionally, we implemented a robotics program that we believe results in increased productivity and quality levels. By utilizing robotics, as well as automated and semi-automated welding processes and production technology, we are able to provide our clients a complete range of fabrication services.

 

We operate pipe fabrication facilities in Louisiana, Arkansas, South Carolina, Utah, Mexico and Venezuela and through a joint venture in Bahrain. Our South Carolina facility is authorized to fabricate piping for nuclear energy plants and maintains a nuclear piping American Society of Mechanical Engineers certification.

 

Through structural steel fabrication, we produce custom fabricated steel components and structures used in the architectural and industrial markets. These steel fabrications are used for supporting piping and equipment in buildings, chemical plants, refineries and power generation facilities. Our fabrication lines utilize standard mill-produced steel shapes that are cut, drilled, punched and welded into the specifications requested by our clients. We have structural steel fabrication facilities in Louisiana and Mexico, which is our newest facility offering the latest in advanced technology and efficiency for structural steel fabrication.

 

Manufacturing and Distribution.  We operate pipe fitting manufacturing facilities in Louisiana and New Jersey. Products from these facilities ultimately are sold to third-party operating plants, engineering and construction firms, as well as to our other business segments within the company. We maintain an inventory of pipe and pipe fittings enabling us to realize greater efficiencies in the purchase of raw materials, reduces overall lead times and lowers total costs.

 

We operate distribution centers in Louisiana, Texas, Georgia and New Jersey that distribute our products and products manufactured by third parties.

 

Module Facility.  We are constructing and expect to begin operations of a modular facility in Lake Charles, Louisiana in early fiscal year 2010. The Shaw Modular Solutions facility is believed to be the first of its kind in the U.S. and will build modules for the construction of domestic AP1000 nuclear power plants. The new facility will utilize our industry-leading technologies and our proprietary operations management systems, which are in use at our other facilities. We have received orders for the first six nuclear reactors to be built domestically in more than 30 years, all of which are designed to use AP1000 technology and all will have modular components fabricated in our Lake Charles facility.

 

Our F&M segment typically contemporaneously invoices our clients when we purchase our pipe, steel and materials for modular fabrication contracts. Our invoices generally do not include extended payment terms, nor do we offer significant rights of return. These contracts typically represent the majority of the business volume of our F&M segment. We maintain limited amounts of stock inventory primarily relating to our manufacturing and distribution businesses.

 

Investment in Westinghouse Segment

 

Our Investment in Westinghouse includes a 20% equity interest (Westinghouse Equity) in Westinghouse. We financed our Westinghouse Equity purchase from Toshiba partially through our subsidiary Nuclear Energy Holdings, LLC (NEH), issuing limited recourse to us (except NEH) Japanese Yen (JPY)-denominated bonds (Westinghouse Bonds). Westinghouse serves the domestic and international nuclear electric power industry by supplying advanced nuclear plant designs, licensing, engineering services, equipment, fuel and a wide range of other products and services to owners and operators of nuclear power. We believe that Westinghouse products and services are being used in approximately half of the world’s operating nuclear plants, including 60% of those in the U.S. Internationally, Westinghouse technology is being used for six reactors under construction in South Korea, and four reactors under construction in China and is under consideration for numerous new nuclear reactors in multiple countries. Please see our disclosures under Note 6 — Equity Method Investments and Variable Interest Entities and Note 8 — Debt and Revolving Lines of Credit included in Part I, Item 1 — Financial Statements and “Liquidity” below with respect to circumstances in which our Westinghouse Equity may be re-purchased by Toshiba.

In connection with our Investment in Westinghouse, we entered into JPY-denominated Put Option Agreements with Toshiba (Put Option), providing us the option to sell all or part of our Westinghouse Equity to Toshiba during a defined “Exercise Period.” The Exercise Period commences upon the earlier of March 31, 2010, or the occurrence of a “Toshiba Event” which is caused by, among other things, Toshiba failing to maintain certain financial metrics.

 

Toshiba notified us on May 11, 2009, that it experienced a Toshiba Event as of May 8, 2009, because it failed to maintain a minimum consolidated net worth of JPY 800 billion. Because of the Toshiba Event, the Westinghouse Bond holders who funded our Investment in Westinghouse currently have the opportunity, under certain circumstances, to direct us to exercise the Put Option.

 

In the third quarter of fiscal 2009, we reclassified our Investment in Westinghouse and the corresponding outstanding bonds from long-term to current. Because of the reclassification, we were required to expense the unamortized original issuance bond discount of $22.8 million pre-tax, or $13.9 million after tax, as well as the remaining deferred financing costs of $6.6 million pre-tax, or $4.0 million after tax, in that period. Those non-cash charges are included as interest expense in the financial statements.

 

As of the date of this report, the bondholders have not directed us to exercise the Put Option, and the company has no knowledge of any intent to do so in the future. The bondholders’ direction to exercise the Put Option would not affect Toshiba’s or our obligations under the Westinghouse CRA, which provides us with certain exclusive opportunities to bid on projects where the company would provide EPC services on future Westinghouse AP1000 nuclear power plants and other commercial opportunities such as supplying piping for those units. In June 2009, Toshiba reported that it raised approximately $3.0 billion in equity, and thus may no longer fail to meet the minimum financial metrics.

 

Westinghouse maintains its accounting records for reporting to its majority owner, Toshiba, on a calendar quarter basis with a March 31 fiscal year end. Financial information about Westinghouse’s operations is available to us for Westinghouse’s calendar quarter periods. The financial results of the Westinghouse segment continue to experience significant volatility from non-operating foreign exchange translation losses that result when the JPY strengthens versus the U.S. Dollar. We revalue the U.S. Dollar equivalent of the JPY denominated Westinghouse Bonds at each fiscal quarter end and as the JPY strengthens, the U.S. Dollar equivalent of these JPY bonds increases which also generates translation losses in our Consolidated Statement of Operations. Offsetting the increase in the dollar equivalent of the Westinghouse Bonds, the underlying value of the Put Option also increases. However, the Put Option is not revalued each quarter for financial reporting purposes. At August 31, 2009, the JPY to dollar exchange rate was 92.9. Currency translation losses for fiscal 2009 resulting from the increase in the JPY to U.S. Dollar exchange rate amounted to $198.1 million pre-tax, or $121.6 million after-tax.

 

For additional information, see Note 6 — Equity Method Investments and Variable Interest Entities and Note 8 — Debt and Revolving Lines of Credit included in Part I, Item 1 — Financial Statements and in “Liquidity” below.

 

Corporate Segment

 

Our Corporate segment includes our corporate management and expenses associated with managing our company as a whole. These expenses include compensation and benefits of corporate management and staff, legal and professional fees and administrative and general expenses that are not allocated to other segments. Our Corporate segment’s assets primarily include cash and cash equivalents held by the corporate entities, property and equipment related to our corporate headquarters and certain information technology costs.

 

Clients, Marketing and Seasonality

 

Our clients are principally regulated utilities, independent and merchant power producers, multinational oil companies and industrial corporations, government agencies and other equipment manufacturers. See Note 14 — Business Segments included in Part II, Item 8 — Financial Statements and Supplementary Data for information regarding our client concentrations. Additionally, see in Part II, Item 7 — Management’s

Discussion and Analysis of Financial Condition and Results of Operations — Backlog for information regarding our backlog concentrations as of August 31, 2009.

 

We conduct our marketing efforts principally with an in-house sales force. In addition, we engage independent contractors to market to certain clients and geographic areas. We pay our sales force a base salary plus, when appropriate, an annual bonus that may consist of cash, stock options, restricted stock awards, or stock or any combination thereof. We pay our independent contractors on a commission basis that may also include a monthly retainer.

 

A portion of our business, primarily our nuclear and fossil power plant maintenance business, is seasonal, resulting in fluctuations in revenues and gross profit in our Maintenance segment during our fiscal year. Generally, the spring and autumn are the peak periods for our Maintenance segment.

 

Competition

 

The markets we serve are highly competitive and for the most part require substantial resources and highly-skilled and experienced technical personnel. A large number of regional, national and international engineering & construction companies are competing in these markets, and certain of these competitors may have greater financial and other resources and more experience, market knowledge and client relationships.

 

Companies that we compete with in our Fossil, Renewables & Nuclear segment include Bechtel, Fluor Corporation, URS Corporation, Black & Veatch and Zachary. Companies that we compete with in our E&C segment include Chicago Bridge & Iron Company, KBR Inc., Jacobs Engineering Group, Inc., TECHNIP and JGC Corporation. Companies that we compete with in our E&I segment include CH2M Hill, URS Corporation, TetraTech, Inc. and KBR, Inc. Companies that we compete with in our Maintenance segment include Fluor Corporation, Day & Zimmerman/The Atlantic Group, Turner Industries, KBR, Inc. and Jacobs Engineering Group, Inc. Companies that we compete with in our F&M segment consist of a number of smaller pipe fabricators in the U.S. while internationally our principal competitors are divisions of large industrial firms. Companies that compete with our Investment in Westinghouse segment include Areva, General Electric (GE), Mitsubishi, Hitachi and AtomStroyExport.

 

In addition, see Part I, Item 1A — Risk Factors for a discussion of the risks related to competition we face in each of our business segments.

 

Backlog of Unfilled Orders

 

Our backlog represents management’s estimate of the amount of awards that we expect will result in future revenues. Backlog is based on legally binding agreements for projects that management believes are probable to proceed. Awards are evaluated by our management on a project-by-project basis and are reported for each period shown based upon the nature of the underlying contract, commitment and other factors, including the economic, financial and regulatory viability of the project and the likelihood of the contract proceeding. Projects in backlog may be altered (increased or decreased) for scope changes and/or may be suspended or cancelled at any time by our clients.

 

The following table sets forth the consolidated backlog at August 31, 2009 and 2008 (in millions).

 

For additional information with respect to our backlog as of August 31, 2009 and 2008, see Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations. In addition, see Part I, Item 1A — Risk Factors for a discussion of risks related to our backlog.

 

Types of Contracts

 

Our work is performed under two general types of contracts, cost-reimbursable contracts and fixed-price contracts. Both types of contracts may be modified by cost escalation provisions or other risk sharing mechanisms and both may include incentive and penalty provisions. Each of our contracts may contain components of more than one of the contract types discussed below. For example, some of our contracts have elements of reimbursable with a maximum target price, fixed-price subject to certain adjustments, and fixed price and cost-reimbursable provisions encompassed within one contract. During the term of a project, the contract or components of the contract may be renegotiated to include characteristics of a different contract type. We attempt to focus our EPC activities on a cost-reimbursable plus a fee or mark-up and negotiated fixed-price work, each as described in more detail below. We believe these types of contracts may help reduce our exposure to unanticipated and unrecoverable cost overruns. When we negotiate any type of contract, we frequently are required to accomplish the scope of work and meet certain performance criteria within a specified timeframe; otherwise, we could be assessed damages, which in many cases are pre-agreed-upon liquidated damages. All contract types are subject to client-authorized amendment.

 

At August 31, 2009, approximately 55% of our backlog was comprised of cost-reimbursable contracts and 45% was comprised of fixed-price contracts. See Note 1 — Description of Business and Summary of Significant Accounting Policies for a discussion of the nature of our operations and types of contracts.

 

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, are limited by public sector budgeting constraints and may be terminated at the discretion of the government agency with payment only for work performed and commitments made at the time of termination. In the event of termination, we generally receive some allowance for profit on the work performed. Many of these contracts are multi-year indefinite delivery, indefinite quantity (IDIQ) agreements. These programs provide estimates of a maximum amount the agency expects to spend. Our program management and technical staffs work closely with the government agency to define the scope and amount of work required. Although these contracts do not initially provide us with any specific amount of work, as projects are defined, the work may be awarded to us without further competitive bidding. We generally include in our backlog an estimate of the work we expect to receive under these specific agreements.

 

Although we generally serve as the prime contractor on our federal government contracts, or as part of a joint venture acting as the prime contractor, we may also serve as a subcontractor to other prime contractors. With respect to bidding on large, complex environmental contracts, we have entered into, and expect to continue to enter into, joint venture or teaming arrangements with competitors.

 

U.S. government contracts are subject to oversight audits by government representatives, profit and cost controls and limitations and provisions permitting modification or termination, in whole or in part, without prior notice, at the government’s discretion. Government contracts are subject to specific procurement regulations and a variety of socio-economic and other requirements. Failure to comply with such regulations and requirements could lead to suspension or debarment, for cause, from future government contracting or subcontracting for a period of time. Some of the causes for debarment are violations of various statutes, including those related to employment practices, the protection of the environment, the accuracy of records and the recording of costs.

 

Our continuing service agreements with clients 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 clients to achieve greater cost efficiencies and reduced cycle times in the design and fabrication of complex piping systems for power generation, chemical and refinery projects. Additionally, while these agreements do not typically contain committed volumes, we believe that these agreements provide

us with a steady source of new projects and help minimize the impact of short-term pricing volatility and reduce our sales pursuit costs.

 

See Part I, Item 1A — Risk Factors for additional discussion of the risks related to contractual arrangements, including our contracts with the U.S. government.

 

Raw Materials and Suppliers

 

For our EPC services, we often rely on third party equipment and raw materials manufacturers and subcontractors to complete our projects. We are not substantially dependent on any individual third party to support these operations; however, we are subject to possible cost escalations based on inflation, currency and other market price fluctuations resulting from supply and demand imbalances. In the future, our mix of third party suppliers will increase as our construction phase progresses on our major nuclear EPC contracts and we may experience increased dependence on particular suppliers as a result. We expect the current market for these inputs to continue to remain competitive throughout our fiscal year 2010.

 

Our principal raw materials for our pipe fabrication operations are carbon steel, stainless and other alloy piping, which we obtain from a number of domestic and foreign steel producers. The market for most raw materials is extremely competitive, and certain types of raw materials are available from only one or a few specialized suppliers.

 

In addition to manufacturing our own pipe fittings, we purchase some of our pipe fittings from other manufacturers. These arrangements generally lower our pipe fabrication costs because we are often able to negotiate advantageous purchase prices as a result of the volume of our purchases. If a manufacturer is unable to deliver the materials according to the negotiated terms, we may be required to purchase the materials from another source (or manufacture our own the pipe fittings) at a higher price. We keep certain items in stock at each of our facilities and transport items between our facilities as required. We obtain materials that are more specialized from suppliers when required for a project.

 

In addition, see Part I, Item 1A — Risk Factors for a discussion of our dependence on joint venture or consortium partners, subcontractors and equipment manufacturers.

 

Safety

 

We actively promote a positive and proactive attitude toward safety in accordance with all applicable and related laws. Our mission is to be the industry leader in environmental, health and safety performance and is evidenced by our achievements in reaching safety milestones, winning safety awards and maintaining a low Occupational Safety and Health Administration (OSHA) case rate. We marked a significant safety milestone in which our Eastern Petrochemical Company (SHARQ) project team completed 56 million man hours without a lost time incident, marking a record for us. We strive for zero injuries, illnesses and environmental incidents.

 

Industry Certifications

 

In order to perform certain aspects of nuclear power plant 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, and NA stamps) (NS Cert). These ASME certifications also authorize us to serve as a material organization for the supply of ferrous and nonferrous material. We also maintain the National Board nuclear repair certification (NR stamp) and National Board registration certification (NB stamp) for N and N3 stamped nuclear components.

 

In order to perform fabrication and repairs of coded piping systems, our domestic construction operations and fabrication facilities, as well as our subsidiaries in Derby, U.K., and Maracaibo, Venezuela, maintain the ASME certification (U and 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 and U stamps) and the National Board registration certification (NB stamp) for S, A, PP and U stamped items.

 

Our Laurens, South Carolina, facility also maintains a nuclear piping ASME certification (NPT stamp) and is authorized to fabricate piping for nuclear power plants and to serve as a material organization to manufacture and supply ferrous and nonferrous material. This facility is also registered by the International Organization of Standards (ISO 9002). Substantially all of our North American engineering operations, as well as our U.K. operations, are also registered by the International Organization of Standards (ISO 9001). This registration provides assurance to our clients that we have procedures to control quality in our fabrication processes.

 

Patents, Tradenames and Licenses and Other Intellectual Property

 

We consider our computerized project control system, SHAW-MAN^tm, and our web-based earned value application, SHAWTRAC^tm, to be proprietary assets. We believe that our E&C segment subsidiary has a leading position in technology associated with the design and construction of plants that produce ethylene, which we protect and develop with license restrictions and a research and development program.

 

Through Badger Licensing, LLC (Badger) our joint venture with ExxonMobil Chemical, we expanded our proprietary technology licensing business through the acquisition of the Shell Heritage Bisphenol A (BPA) technology from Resolution Performance Products. Badger is in a leading position to supply proprietary ethyl benzene, styrene monomer, cumene and BPA technologies to the petrochemical industry. In other technology partnerships, we are the exclusive provider of front-end basic engineering for Sasol’s Fischer-Tropsch technology in the areas of both gas-to-liquids and coal-to-liquids.

 

Through our IT Group acquisition in 2002, we 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 that uses ozone. The IT Group acquisition also included proprietary software programs that are used in the management and control of hazardous wastes and the management and oversight of remediation projects.

 

In addition, see Part I, Item 1A — Risk Factors for the impact of changes in technology or new technology developments by our competitors could have on us.

 

Environmental Matters

 

Our U.S. operations are subject to numerous laws and regulations at the federal, state and local level relating to the environmental protection and the safety and health of personnel and the public. These laws and regulations relate to a broad range of our activities, including those concerning emissions, discharges into waterways and generation, storage, handling, treatment and disposal of hazardous materials and wastes. Environmental protection laws and regulations generally require us to obtain and comply with a wide variety of environmental registrations, licenses, permits and other approvals. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and/or criminal penalties, the imposition of remedial requirements and the issuance of orders limiting or enjoining some or all of our future operations.

 

Under CERCLA and comparable state laws applicable to our domestic operations, we may be required to investigate and remediate hazardous substances and other regulated materials that have been released into the environment. CERCLA and comparable state laws impose strict and, under certain circumstances, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released regardless of whether a company knew of or caused the release of the substances. Our domestic operations generate solid wastes, including hazardous wastes that are subject to the requirements of the Resources Conservation and Recovery Act (RCRA) and comparable state laws. Failure by us to handle and dispose of solid and hazardous wastes in compliance with RCRA may result in the imposition of liability, including remedial obligations. We could also incur environmental liability at sites where we have been

contractually hired by potentially responsible parties (PRPs) to remediate contamination of the site. Some PRPs have from time to time sought to expand the reach of CERCLA, RCRA and similar state statutes to make the remediation contractor responsible for site cleanup costs in certain circumstances. These PRPs have asserted that environmental contractors are owners or operators of hazardous waste facilities or that the contractors arranged for treatment, transportation or disposal of solid or hazardous wastes or hazardous substances. If we are held responsible under CERCLA or RCRA for damages caused while performing services or otherwise, we may be forced to incur cleanup costs directly, notwithstanding the potential availability of contribution or indemnification from other parties. Over the past several years, the EPA and other federal agencies have significantly constricted the circumstances under which they will indemnify their contractors against liabilities incurred in connection with the investigation and remediation of contaminated properties.

 

In response to recent scientific studies suggesting that emissions of carbon dioxide and other greenhouse gases may be contributing to global warming, the U.S. Congress is actively considering legislation to reduce emissions of greenhouse gases, with the U.S. House of Representatives having already passed legislation in June 2009 known as the “American Clean Energy and Security Act of 2009,” also known as the “Waxman-Markey cap-and-trade legislation” or “ACESA” which would establish an economy-wide cap-and-trade program to reduce U.S. emissions of carbon dioxide and other greenhouse gases by 17 percent from 2005 levels by 2020, and just over 80 percent by 2050. Also, more than one-third of the states have pursued legal measures to reduce emissions of greenhouse gases, primarily through the planned development of gas emission inventories or regional greenhouse gas cap and trade programs. In addition, following publication in April 2009 of its proposed notice of finding and determination that emissions of carbon dioxide and other greenhouse gases present an endangerment to human health and the environment, the EPA is considering adopting regulations under existing provisions of the federal Clean Air Act to control emissions of carbon dioxide in response to the U.S. Supreme Court’s 2007 decision in Massachusetts, et al. v. EPA, and further, has proposed a rulemaking in April 2009 requiring mandatory reporting of greenhouse gas emissions by major source in the U.S. Any legislation or regulation restricting emissions of greenhouse gases could have a significant impact on our business. One potential negative impact is a reduction in demand for construction of new coal-fired power plants, but this impact could be offset by an increase in demand for construction of new nuclear power plants. It is not possible to predict at this time whether any such legislation or regulation would have an overall negative or positive impact on our business.

 

Our operations outside of the U.S. are subject to similar foreign governmental controls and restrictions pertaining to protection of the environment and the safety and health of personnel and the public. For example, with respect to climate change, many foreign nations (but not the U.S.) have agreed to limit emissions for greenhouse gases pursuant to the United Nations Framework Convention on Climate Change, also known as the “Kyoto Protocol.” Failure to comply with foreign requirements, including the Kyoto Protocol, in areas outside of the U.S. where we conduct operations may lead to government sanctions resulting in penalties, remedial obligations and injunctive relief against future activities.

 

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 net of any insurance proceeds with respect to environmental compliance have not been material, and to our knowledge, we have not incurred any material net environmental liability. However, we can provide no assurance that we will not incur material environmental costs or liabilities in the future. For additional information on how environmental matters may impact our business, see Part I, Item 1A — Risk Factors.

 

Employees

 

We employ approximately 28,000 people, including part-time and temporary workers. This total includes approximately 15,000 craft employees, 8,000 technical employees and 5,000 nontechnical overhead employees. Approximately 5,000 employees were represented by labor unions pursuant to collective bargaining agreements. We often employ union workers on a project-specific basis. We believe that 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.

 

See Part I, Item 1A — Risk Factors for a discussion of the risks related to work stoppages and other labor issues.

 

Available Information

 

All of our periodic report filings with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are made available, free of charge, through our website located at http://www.shawgrp.com, including our Annual Reports 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 the reports to the SEC. Information on our website is not incorporated into this 2009 Form 10-K or our other securities filings. You may also request an electronic or paper copy of these filings at no cost by writing or telephoning us at the following: The Shaw Group Inc., Attention: Investor Relations Office, 4171 Essen Lane, Baton Rouge, Louisiana, 70809, (225) 932-2500. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or on the SEC’s Internet website located at http://www.sec.gov. The public may obtain information on the operation of the Public Reference Room and the SEC’s Internet website by calling the SEC at 1-800-SEC-0330.

 

Certifications

 

We will timely provide the annual certification of our Chief Executive Officer to the NYSE. We filed last year’s certification on February 19, 2009. In addition, our Chief Executive Officer and Chief Financial Officer each have signed and filed the certifications under Section 302 of the Sarbanes-Oxley Act of 2002 with this Form 10-K.

 

The risks described below could materially and adversely affect our stock price, business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Form 10-K The risk factors described below are not the only ones we face. Our stock price, business, financial condition and results of operations may also be affected by additional factors that are not currently known to us or that we currently consider immaterial or that are not specific to us, such as general economic conditions.

 

The categorization of risks set forth below is meant to help you better understand the risks facing our business and is not intended to limit consideration of the possible effects of these risks to the listed categories. Any adverse effects related to the risks discussed below may, and likely will, adversely affect many aspects of our business.

 

You should refer to the explanation of the qualifications and limitations on forward-looking statements under “Cautionary Statement Regarding Forward-Looking Statements.” All forward-looking statements made by us are qualified by the risk factors described below.

 

Risks Related to Our Operations

 

Our backlog of unfilled orders is subject to unexpected adjustments and cancellations and is, therefore, not a reliable indicator of our future revenues or earnings.

 

At August 31, 2009, our backlog was approximately $22.7 billion. Our backlog consists of projects for which we have signed contracts or commitments from clients, including those based on legally binding agreements without the scope being defined. Commitments may be in the form of written contracts for specific projects, purchase orders or indications of the amounts of time and materials we need to make available for clients’ anticipated projects. Our backlog includes expected revenue based on engineering and design specifications that may not be final and could be revised over time and also includes expected revenues for government and maintenance contracts that may not specify actual dollar amounts for the work to be performed. For these contracts, our backlog is based on an estimate of work to be performed, which is based on our knowledge of our clients’ stated intentions or our historic experience.

 

There can be no assurance that the revenues projected in our backlog will be realized or, if realized, will result in profits. Because of project terminations or suspensions and changes in project scope and schedule, we cannot predict with certainty when or if our backlog will be performed. For example, one new build coal/petroleum coke fired generation facility was canceled and removed from backlog in the second quarter of fiscal 2009. We can provide no assurance that we will not receive additional cancellations as a result of global economic conditions. Even where a project proceeds as scheduled, it is possible that the client may default and fail to pay amounts owed to us. Material delays, cancellations or payment defaults could materially affect our financial condition, results of operations and cash flow and may reduce the value of our stock.

 

Client cancellations could reduce our backlog, which, among other things, could materially impact the revenues and earnings. Many of the contracts in our backlog provide for cancellation fees in the event clients 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.

 

Our results of operations depend on new contract awards; however, the selection process and timing for performing these contracts are not within our control.

 

A substantial portion of our revenues is directly or indirectly derived from new contract awards. We operate in highly competitive markets and it is difficult to predict whether and when we will receive such awards due to the lengthy and complex bidding and selection process. Client investment decisions are affected by a number of factors, such as market conditions, financing arrangements, government 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. Consequently, we are subject to the risk of losing new awards to competitors and the risk a project may experience significant delay or cancellation.

 

Many of our clients’ as well as state and local governments’ activity levels and spending for our products and services and their ability to meet their payment commitments to us may be impacted by the current deterioration in the credit markets and we may be unable to recover all expenditures

 

Due to the current economic downturn, many of our clients may face budget shortfalls or may delay capital spending that may decrease the overall demand for our services. In addition, a decrease in state tax revenue as well as other economic declines may result in lower state and local government spending. Our clients may find it more difficult to raise capital in the future due to limitations on the availability of credit and other uncertainties in the municipal and global credit markets. This reduction in spending could have a material adverse effect on our operations.

 

In many instances during the course of a project, we commit and/or pay for products or expenses attributable to our clients with an understanding that the client will pay us per the terms of our commercial contract with them. Due to the deterioration of the credit markets, our clients may not be able to make such payments to us in a timely manner, or at all, in which case we could be forced to absorb these costs requiring that we commit our financial resources to projects prior to receiving payments from the client. If a client defaults in making its payments on a project in which we have devoted significant financial resources, it could have a material adverse effect on our business or results of operations.

 

The nature of our contracts, particularly our fixed-price contracts, could adversely affect us.

 

Approximately 55% of our backlog at August 31, 2009, was from cost-reimbursable contracts and the remaining 45% was from contracts that are primarily fixed-price. Revenues and gross profit from both cost-reimbursable and fixed price contracts can be significantly affected by contract incentives/penalties that may not be known or finalized until the later stages of the contract term. Under fixed-price contracts, we agree to the contract price of the project at the time we enter into the contract. While we benefit from costs savings and earnings from approved change orders under fixed-priced contracts, we are generally unable to recover cost overruns to the approved contract price. Under certain fixed-price contracts, we share with the client any savings up to a negotiated or target ceiling. When costs exceed the negotiated ceiling price in a fixed-price contract, we may be required to reduce our fee or to absorb some or all of the cost overruns.

 

We also assume the risks related to revenue, cost and gross profit realized on fixed-priced contracts that can vary, sometimes substantially, from the original projections due to changes in a variety of other factors that include, but not limited to:

 

 

These risks may be exacerbated by the length of time between signing a contract and completing the project because most fixed-price contracts are long-term. The term of our contracts can be as long as approximately seven years. Long-term, fixed-price contracts often make us subject to penalties if portions of the project are not completed in accordance with agreed-upon time limits. Therefore, significant losses can result from performing large, long-term projects on a fixed-price basis. These losses may be material, including, in some cases, up to or exceeding the full contract value in certain events of non-performance, and could negatively impact our business, financial condition, results of operations and cash flows.

 

We enter into contractual agreements with clients for some of our EPC services to be performed based on agreed-upon reimbursable costs and labor rates. Some of these contracts provide for the client’s review of our 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 client.

 

Many of our client contracts require us to satisfy specified design or EPC 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 client determines not to proceed with the completion of the project or if the client 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 clients 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 clients. 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.

 

The ability of our clients to receive the applicable regulatory and environmental approvals for our projects and the timeliness of those approvals could adversely affect us.

 

The regulatory permitting process for many of the projects performed by our Fossil, Renewables & Nuclear segment requires significant investments of time and money by our clients. There are no assurances that our clients will obtain the necessary permits for these projects. Applications for permits to operate these fossil and nuclear-fueled facilities, including air emissions permits, may be opposed by individuals or environmental groups, resulting in delays and possible non-issuance of the permits. For example, the NRC recently notified Westinghouse that the proposed AP1000 shield building design will require modification. While we believe Westinghouse will be able to satisfy the NRC’s concerns and receive design certification, this or similar certification actions could affect or delay our ability to complete our projects.

 

We continue to expand our business in areas where surety bonding is required, but bonding capacity is limited.

 

We continue to expand our business in areas where the underlying contract must be bonded, especially in government services in which bonding is predominately provided by insurance sureties. These surety bonds indemnify the client if we fail to perform our obligations under the contract. Failure to provide a bond on terms required by a client may result in an inability to compete for or win a project. Historically, we have had a strong surety bonding capacity but, as is typically the case, bonding is at the surety’s sole discretion. In addition, because of a reduction in overall worldwide bonding capacity, we may find it difficult to find sureties who will provide the contract-required bonding. Moreover, these contracts are often very large and extremely complex, which often necessitates the use of a joint venture, often with a competitor, to bid on and perform these types of contracts, especially since it may be easier to jointly pursue the necessary bonding. However, entering into these types of joint ventures or partnerships exposes us to the credit and performance risks of third parties, many of whom are not as financially strong as us. If our joint ventures or partners fail to perform, we could suffer negative results.

Our use of the percentage-of-completion accounting method could result in a reduction or elimination of previously reported profits.

 

Under our accounting policies, we measure and recognize a large portion of our profits and revenue under the percentage-of-completion accounting methodology. This methodology allows us to recognize revenue and profits ratably over the life of a contract by comparing the amount of the cost incurred to date against the total amount of cost expected to be incurred. The effect of revisions to revenue and estimated cost is recorded when the amounts are known and can be reasonably estimated. For example, our Fossil, Renewables & Nuclear segment’s gross profit for fiscal year 2009 was significantly reduced by substantially increased estimated costs to complete two coal-fired power plant projects. Additional revisions can occur at any time and could be material. Given the uncertainties associated with these types of contracts, it is possible for actual cost to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits.

 

The nature of our projects exposes us to potential professional liability, product liability, warranty and other claims, which may reduce our profits.

 

We engineer, construct and perform services in large industrial facilities where accidents or system failures can have significant consequences. Any such accident or failure at a site where we provided EPC or similar services could result in significant professional liability, product liability, warranty and other claims against us, regardless of whether our products or services caused the incident. Further, the engineering and construction projects we perform expose us to additional risks including, but not limited to, equipment failures, personal injuries, property damage, shortages of materials and labor, permitting delays, work stoppages, labor disputes, weather problems and unforeseen engineering, architectural, environmental and geological problems, each of which could significantly impact our performance and materially impact our financial statements.

 

Additionally, once our construction is complete, we may face claims relating to our job performance, which could materially impact our financial statements. Under some of our contracts, we must use client specified metals or processes for producing or fabricating pipe for our clients. The failure of any of these metals or processes could result in warranty claims against us for significant replacement or reworking costs, which could materially impact our financial statements.

 

We have been and may in the future be named as a defendant in legal proceedings where parties may make a claim for damages or other remedies with respect to our projects or other matters. Should we be determined liable, we may not be covered by insurance or, if covered, the dollar amount of these liabilities may exceed our policy limits. Our professional liability coverage is on a “claims-made” basis covering only claims actually made during the policy period currently in effect. Even where insurance is maintained for such exposures, the policies have deductibles resulting in our assuming exposure for a layer of coverage with respect to any such claims. Any damages not covered by our insurance, in excess of our insurance limits or, if covered by insurance subject to a high deductible, could result in a significant loss for us, which may reduce our profits and cash available for operations.

 

We will be exposed to additional risks in our Fossil, Renewables & Nuclear segment, as we begin to execute our significant nuclear backlog. These risks include greater backlog concentration in fewer projects, significantly increased requirements for letters of credit and potential cost overruns which could have a material adverse effect on our future revenues and liquidity.

 

We expect to convert a significant part of our backlog for nuclear projects in the Fossil, Renewables & Nuclear segment into revenues in the future. Nuclear projects may utilize larger sums of working capital than projects in our business segments and are concentrated among a few larger clients. As we increase our active projects in the nuclear business, and consequently our reliance in revenues from this business, we become more dependent on a smaller number of clients. If we lose clients in our nuclear business and are unable to replace them, our revenues could be materially adversely impacted.

 

Additionally, nuclear projects, due to their size and complexity, may be subject to significant cost-overruns which could adversely affect us. The complexity of these projects is increased by permit, licensing

and regulatory approvals that can be even more stringent and time consuming than similar processes for more conventional construction projects. These approvals include additional NRC certification requirements for our nuclear design as well as our clients’ receipt from the NRC of the license necessary to construct and operate a particular facility. Delays in receipt of such permits or licenses or other problems encountered during construction could cause our actual results of operations to significantly differ from anticipated results.

 

As we convert our nuclear projects from backlog into active construction we may face significantly greater requirements for the provision of letters of credit or other forms of credit enhancements. Together with the initial fixed construction costs for nuclear plants, which are significantly higher than those for coal- or gas-fired plants, we may be required to significantly expand our access to capital and credit. We can provide no assurance that we will be able to access such capital and credit as needed or that we would be able to do so on economically attractive terms.

 

If the U.S. were to change its support of nuclear power or revoke or limit DOE’s Loan Guarantee Program (LGP) it could have a material adverse effect on our operations.

 

The U.S. government has been supportive of increased investment in nuclear power. However, if the federal government changed its policy or public acceptance of nuclear technology as a means of generating electricity significantly wanes, demand for nuclear power could be negatively affected and potentially increase the regulation of the nuclear power industry. Because several of our segments deal with nuclear power either directly or indirectly this could have a material adverse effect on our operations.

 

Some of our clients may rely on DOE LGP under which DOE issues loan guarantees to eligible projects that “avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases” and “employ new or significantly improved technologies as compared to technologies in service in the U.S. at the time the guarantee is issued.” If the current administration were to revoke or limit DOE’s LGP it could make obtaining funding more difficult for many of our clients which could inhibit their ability to take on new projects resulting in a negative impact on our operations.

 

Our failure to meet contractual schedule or performance requirements could adversely affect our revenue and profitability.

 

In certain circumstances, we guarantee project completion by a scheduled date or certain performance testing levels. Failure to meet these schedule or performance requirements could result in a reduction of revenues and/or additional costs, and these adjustments could exceed projected profits. A project’s revenues could also be reduced by liquidated damages withheld by clients under contractual penalty provisions, which can be substantial and can accrue on a daily basis. Our costs generally increase from schedule delays and/or could exceed our projections for a particular project. 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 that may result from liquidated damages provisions and cost overruns, see Note 19 — Long-Term Construction Accounting for Revenue and Profit/Loss Recognition Including Claims, Unapproved Change Orders and Incentives included in Part II, Item 8 — Financial Statements and Supplementary Data.

 

If our joint venture or consortium partners, subcontractors or equipment manufacturers fail to perform their contractual obligations on a project, we could be exposed to the risk of loss, and in some cases, joint and several liability to our clients, loss of reputation and additional financial performance obligations that could result in reduced profits or, in some cases, significant losses.

 

We often enter into consortium arrangements and joint ventures as part of our Fossil, Renewables & Nuclear segment, E&C segment and E&I segment contracts in order to jointly bid and perform a particular project. The success of these consortium agreements and joint ventures depends, in large part, on the satisfactory performance of the contractual obligations by our partners. If our partners do not meet their obligations, the consortium or joint venture may be unable to adequately perform and deliver its contracted services. Under these circumstances, we may be required to incur additional costs, make additional investments

and provide additional services to ensure the adequate performance and delivery of the contracted services and/or to pay liquidated damages. Under agreements with joint and several liabilities, we could be liable for both our obligations and those of our partners. 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 negatively affect our reputation in the industries we serve. Additionally, we rely on third party partners, equipment manufacturers and third party subcontractors to complete our projects. To the extent our partners cannot execute their portion of the work, are unable to deliver their services, equipment or materials according to the negotiated terms and/or we cannot engage subcontractors or acquire equipment or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price work, we could experience losses in the performance of these contracts.

 

Demand for our products and services is cyclical and vulnerable to sudden economic downturns and reductions in private industry and government spending. If general economic conditions continue to weaken, then our revenues, profits and our financial condition may rapidly deteriorate.

 

The industries we serve historically have been, and will likely continue to be, cyclical in nature and vulnerable to general downturns in the domestic and international economies. Consequently, our results of operations have fluctuated and may continue to fluctuate depending on the demand for products and services from these industries.

 

Due to the current economic downturn, many of our clients may face budget shortfalls or may delay capital spending that may decrease the overall demand for our services. A decrease in state tax revenue as well as other economic declines may result in lower state and local government spending. Our clients may find it more difficult to raise capital in the future due to limitations on the availability of credit and other uncertainties in the municipal and global credit markets.

 

In addition, our clients may demand better pricing terms and their ability to timely pay our invoices may be affected by an increasingly weakened economy. Our business traditionally lags any recovery in the economy; therefore, our business may not recover immediately upon any economic improvement. If the economy weakens further or government spending is reduced, then our revenues, net income and overall financial condition may deteriorate.

 

Our government contracts may present risks to us.

 

We are a major provider of services to U.S. government agencies and therefore are exposed to risks associated with government contracting. Government clients typically can terminate or modify contracts with us at their convenience. As a result, our backlog may be reduced or we may incur a loss if a government agency decides to terminate or modify a contract with us. We are also subject to audits, cost reviews and investigations by government contracting oversight agencies. During the course of an audit, the oversight agency may disallow costs. Cost disallowances may result in adjustments to previously reported revenues and may require refunding previously collected cash proceeds. In addition, our failure to comply with the terms of one or more of our government contracts or government regulations and statutes could result in our being suspended or barred from future government projects for a significant period of time, possible civil or criminal fines and penalties and the risk of public scrutiny of our performance, each of which could have a material adverse effect on our business. Other remedies that our government clients may seek for improper activities or performance issues include sanctions such as forfeiture of profits and suspension of payments.

 

Our government contracts present us with other risks as well. Legislatures typically appropriate funds on a year-by-year basis, while contract performance may take more than one year. As a result, our contracts with government agencies may be only partially funded or may be terminated, and we may not realize all of our potential revenues and profits from those 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.

For the fiscal year ended August 31, 2009, 93.4% of our E&I segment’s backlog was with U.S. government agencies.

 

Actual results could differ from the estimates and assumptions that we use to prepare our financial statements.

 

To prepare financial statements in conformity with U.S. generally accepted accounting principles (GAAP), our management is required to make estimates and assumptions, as of the date of the financial statements, that affect the reported values of assets and liabilities and revenues and expenses and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include, among other things:

 

 

Our actual results could differ materially from our estimates. Changes in reported amounts may be recorded in future periods.

 

Risks related to our Investment in Westinghouse could have an adverse effect on us.

 

We incur significant interest cost on the Westinghouse Bonds issued to finance our Investment in Westinghouse, and we can provide no assurance that we will receive dividends sufficient to cover these costs.

 

While we have significant influence as a member on the board of the Westinghouse companies, we do not have any rights to control the outcome of material decisions and activities related to the Westinghouse business. We have limited access to, and ability to disclose, the details of the Westinghouse business and its operations. Further, we are subject to limitations on our ability to sell our Westinghouse Equity without the approval of the other shareholders. Although we have obtained certain rights to bid on Westinghouse AP1000 nuclear plant projects and preferred rights to provide other services, we can provide no assurance that we will obtain significant future business from this arrangement.

 

In connection with our Investment in Westinghouse and issuing the Westinghouse Bonds, we entered into the Put Option with Toshiba providing us the option to sell all or part of our Westinghouse Equity to Toshiba during a defined Exercise Period. Per the Put Option, the Exercise Period commences upon the earlier of March 31, 2010, or a “Toshiba Event,” which is caused by, among other things, certain Toshiba financial metrics. Toshiba notified us on May 11, 2009, that it experienced a Toshiba Event as of May 8, 2009 because it failed to maintain a minimum consolidated net worth of JPY 800 billion. Toshiba reported that it raised approximately $3 billion in equity capital in June 2009, and thus may no longer fail to meet the required financial metrics under the Put Option.

 

The Toshiba Event is not an “event of default” or other violation of the Bond Trust Deed or the Put Option, but due to the Toshiba Event, the Westinghouse Bond holders now have an opportunity to direct us to exercise the Put Option. To do so, a ‘supermajority’ of the bondholders representing a majority of not less

than an aggregate 75% of the principal amount outstanding, must pass a resolution instructing the bond trustee to direct us to exercise the Put Option. Specifically, in order for the bond trustee to direct us to exercise the Put Option, the Westinghouse Bond holders must convene a meeting with a quorum of bondholders representing no less than 75% of the Westinghouse Bonds principal amount outstanding during which a 75% majority of the required quorum approve a resolution instructing the bond trustee to take such action. Alternatively, a written resolution instructing the bond trustee to direct us to exercise the Put Option and signed by bondholders representing no less than 75% of the Westinghouse Bond principal amount outstanding shall have the same effect (collectively an “Extraordinary Resolution”).

 

To our knowledge, the Westinghouse Bond holders have not taken any action toward an Extraordinary Resolution. However, the bondholders’ decision is beyond our control, and we can provide no assurances that the holders will not issue an Extraordinary Resolution in the future.

 

In the event we exercise the Put Option at the direction of an Extraordinary Resolution or following a Toshiba Event, Toshiba is required to pay us approximately JPY 129.0 billion (equal to 100% of the face value of the Westinghouse Bonds currently outstanding). However, if we exercise the Put Option under other provisions of the Put Option, we would be required to fund the estimated 3% difference (equal to JPY 4.3 billion, or approximately $45.8 million using exchange rates at August 31, 2009) between the anticipated Put Option proceeds and the principal amount owed on the Westinghouse Bonds. Because the Put Option requires Toshiba to repurchase the Westinghouse Equity from us and the proceeds from the repurchase of the Westinghouse Equity will be used to repay the Westinghouse Bonds, the Bond holders’ decision to issue an Extraordinary Resolution may be significantly influenced by Toshiba’s financial condition as well as conditions in the general credit markets.

 

If the Westinghouse Bond holders issue an Extraordinary Resolution, we may consider a variety of alternatives including seeking a consent solicitation to modify or waive the terms of the Bond Trust Deed, refinancing some or all of our Investment in Westinghouse or negotiating for the purchase of all or part of the equity subject to the Put Option. If we decide to repay or refinance the Westinghouse Bonds, we may use some of our existing cash and/or seek to raise capital from the debt and/or equity markets. There can be no assurance that should we wish to repay or refinance the Westinghouse Bonds, we will be able to access sufficient capital on terms acceptable to us, and ultimately, we may be forced to put the Westinghouse Equity to Toshiba.

 

Sale of our Westinghouse Equity may affect our ability to extend the Westinghouse CRA beyond its original term which expires in 2013.

 

If we were required to write down all or part of our goodwill and/or our intangible assets, our net earnings and net worth could be materially adversely affected.

 

We had $501.3 million of goodwill and $21.0 million of intangible assets recorded on our consolidated balance sheet at August 31, 2009. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. If our market capitalization drops significantly below the amount of net equity recorded on our balance sheet, it might indicate a decline in our fair value and would require us to further evaluate whether our goodwill has been impaired. We also perform an annual review of our goodwill and intangible assets to determine if it has become impaired which would require us to write down the impaired portion of these assets. If we were required to write down all or a significant part of our goodwill and/or intangible assets, our net earnings and net worth could be materially adversely affected.

 

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 or in the currencies of our expenditures. However, we do enter into contracts that subject 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,

or entering into hedge contracts when there are different currencies for contract revenues and costs. However, these actions may not always eliminate all foreign exchange risks.

 

Our Westinghouse Bonds are JPY denominated. As the U.S. Dollar/JPY exchange rate changes, the amount of U.S. Dollars required to service this debt will change

 

The limitation or the modification of the Price-Anderson Act’s indemnification authority could adversely affect our business.

 

The Price-Anderson Act (PAA) partially indemnifies the nuclear industry against liability arising from nuclear incidents in the U.S. while still ensuring compensation for the general public. The 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 to the DOE at 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 DOE and the nuclear energy industry. If the indemnification authority does not extend to all of our services, our business could be adversely affected by either a refusal of new facilities operations to retain us or our inability to obtain commercially adequate insurance and indemnification.

 

Our environmental and infrastructure operations may subject us to potential contractual and operational costs and liabilities.

 

In our role as an environmental management contractor in connection with projects performed for clients under the E&I segment we face potential liabilities to third parties for property damage or personal injury stemming from exposure to or a release of toxic, hazardous or radioactive substances. These liabilities could arise long after completion of a project due to migration of these substances, could arise off the project site. We have performed asbestos abatement and anthrax and other biological agent decontamination work, and although the risks are similar to those faced in our toxic chemical emergency response business, the risks posed by attempting to detect and remediate these agents may include risks to our employees, subcontractors and others who may become adversely affected should our detection and remediation activities prove less effective than anticipated.

 

Because biological contamination and exposure to asbestos is difficult to evaluate and highly variable, there may be unknown risks involved, and in some circumstances, there may be no 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 segment are engaged in two similar programs that may involve assumption of a client’s environmental remediation obligations and potential claim obligations. One of our subsidiaries, The LandBank Group, Inc. (LandBank), purchases and then remediates and/or takes other steps as landowner to improve environmentally impaired properties, with a goal of selling the improved property at a price greater than the combined cost of acquisition and remediation. The second program is operated by our subsidiary, Shaw Environmental Liability Solutions, LLC (SELS), which contractually assumes responsibility for environmental matters at a particular site or sites owned by third parties and provides indemnifications for defined cleanup costs and post-closing third party claims in return for compensation by the client. These subsidiaries may operate and/or purchase and redevelop environmentally impaired property. As the owner or

operator of these properties, we may be required to clean up all contamination at these sites even if we did not place the contamination there. While we attempt to reduce our exposure to unplanned risks through the performance of environmental due diligence, the use of liability protection provisions of federal laws like the Brownfields Revitalization Act and similar state laws and the purchase of environmental legal liability and remediation cost cap insurance coverage or other risk management products, we can provide no assurance that our risk management strategies and these products and laws will adequately protect us in all circumstances or that no material adverse impact will occur.

 

Our ability to be profitable in this type of business also depends on our ability to accurately estimate cleanup costs. If we materially underestimate the required cost of cleanup at a particular project, our underestimation could materially adversely affect us. This type of business is dependent upon the availability of environmental legal liability and remediation cost cap insurance or other risk management products. We can provide no assurance that these products will continue to be available to us in the future or, if available, at commercially reasonable terms and whether the insurance carriers will have the ability to satisfy future claims. Moreover, environmental laws and regulations governing the cleanup of contaminated sites are subject to change and enforcement policies are subject to reinterpretation. We cannot predict the effect of future changes to these laws, regulations or policies on our LandBank and SELS businesses. Additionally, when we purchase real estate in this business, we are subject to real estate development risks such as the timely receipt of building, zoning and construction permits, construction delays, and the ability of markets to absorb new development projects.

 

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 and our environmental remediation business, our operations are subject to environmental laws and regulations, including those concerning:

 

 

Our projects often involve highly regulated materials, including hazardous and nuclear materials and wastes. Environmental laws and regulations generally impose limitations and standards relating to the use, handling, transport, discharge or disposal of regulated materials and require us to obtain a permit and comply with various other requirements. The improper characterization, use, handling, discharge or disposal of regulated materials or any other failure to comply with federal, state and local environmental laws and regulations or associated environmental permits may result in the assessment of administrative, civil and criminal penalties, the imposition of investigatory or remedial obligations or the issuance of injunctions that could restrict or prevent our ability to perform some or all of our activities under existing contracts.

 

The environmental, health and safety laws and regulations applicable to our operations are subject to change, 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 the properties undergoing or scheduled to undergo site restoration for which we are legally or contractually responsible, as well as any liabilities associated with the assets we previously acquired from Stone & Webster and IT Group. We can provide no assurance that our operations will continue to comply with future laws and regulations and that any such noncompliance would not materially adversely affect us.

 

The level of enforcement of environmental laws and regulations also affects the demand for many of our services, since greater or more vigorous enforcement of environmental requirements by government agencies creates greater demand for our environmental services. Any perception among our clients that enforcement of current environmental laws and regulations has been or will be reduced decreases the demand for some

services. Future changes to environmental, health and safety laws and regulations or to enforcement of those laws and regulations could result in increased or decreased demand for certain of our services. The ultimate impact of the proposed changes will depend upon a number of factors, including the overall strength of the economy and clients’ views on the cost-effectiveness of remedies available under the changed laws and regulations. If proposed or enacted changes materially reduce demand for our environmental services, our results of operations could be adversely affected.

 

For additional information, see Part I, Item 1 — Business — Environmental Matters.

 

We face substantial competition in each of our business segments.

 

We face competition from numerous regional, national and international competitors, some of which have greater financial and other resources than we do. Our competitors include well-established, well-financed businesses, both privately and publicly held, including many major energy equipment manufacturers and engineering and construction companies, some engineering companies, internal engineering departments at utilities and some of our clients.

 

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 who may have greater financial and other resources than we do. As a result, they may be able to exercise influence with suppliers and negatively impact our ability to obtain raw materials.

 

In our E&I segment, we compete with small and large organizations, including national and regional environmental management firms, architectural, engineering and construction firms, environmental management divisions or subsidiaries of international engineering and construction companies. Increased competition and changing client procurement procedures within our industry may require us to accept more contractual and performance risk.

 

There can be no assurance that our segments will be able to compete successfully.

 

Political and economic conditions in foreign countries in which we operate could adversely affect us.

 

Approximately 22% of our fiscal year 2009 revenues were attributable to projects in international markets, some of which are subject to political unrest and uncertainty. In addition to the specific challenges we face internationally, international contracts, operations and expansion expose us to risks inherent in doing business outside the U.S., including:

 

 

 

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.

 

The U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-bribery laws in other jurisdictions generally prohibit U.S. based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that experience government corruption to some degree, and, in certain circumstances, compliance with anti-bribery laws may conflict with those local customs and practices. Our FCPA policy and training provide our employees with procedures, guidelines and information about FCPA obligations and compliance. Further, we advise our partners, subcontractors, agents and others who work for us or on our behalf that they are obligated to comply with the FCPA. We have procedures and controls in place designed to ensure internal and external compliance. However, such internal controls and procedures will not always protect us from reckless or criminal acts committed by our employees or agents. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.

 

Work stoppages and other labor problems could adversely affect us.

 

At August 31, 2009, approximately 18% of our employees were represented by labor unions. A lengthy strike or other work stoppage at any of our facilities could have a material adverse effect on us. From time to time, we have also experienced attempts to unionize our non-union shops. While these efforts have achieved limited success to date, we cannot provide any assurance that we will not experience additional union activity in the future.

 

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 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. Our ability to successfully execute our business strategy 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, and we do not maintain key employee insurance on any of our executive officers.

 

If we are unable to retain qualified personnel, the roles and responsibilities of those employees will need to be filled, which may require that we devote time and resources to identifying, hiring and integrating new employees. In addition, the failure to attract and retain key employees, including officers, could impair our ability to provide services to our clients and conduct our business effectively.

Risks Related to Our Liquidity and Capital Resources

 

We may not be able to raise additional capital or obtain additional financing if needed.

 

The recent downturn in the equity and debt markets, tightening of the credit markets and general economic slowdown could make it more difficult for us to raise additional capital or obtain additional financing. We cannot be certain that additional funds will be available if needed and to the extent required or, if available, on acceptable terms. If we cannot raise necessary additional funds on acceptable terms, there could be a material adverse impact on our business and operations. We also may not be able to fund expansion, take advantage of future opportunities, meet our existing debt obligations or respond to competitive pressures or unanticipated requirements.

 

Non-compliance with covenants in our Credit Facility, without waiver or amendment from the lenders, could require us to post cash collateral for outstanding letters of credit and could adversely affect our ability to borrow under the Facility.

 

Our Credit Facility (Facility) contains certain financial covenants, including a leverage ratio, a minimum debt service coverage ratio and a defined minimum consolidated net worth. In addition, we are required to file our quarterly and annual reports with the SEC on a timely basis. The defined terms used in calculating the financial covenants require us to follow GAAP, which requires the use of judgments and estimates. We may not be able to satisfy these ratios, especially if our operating results deteriorate as a result of, but not limited to, the impact of other risk factors that may have a negative impact on our future earnings. Additionally, we may not be able to file our SEC reports on a timely basis. See Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources for a discussion of our Facility.

 

A breach of any covenant or our inability to comply with the required financial ratios could result in a default under our Facility, and we can provide no assurance that we will be able to obtain the necessary waivers or amendments from our lenders to remedy a default. In the event of any default not waived, the lenders under our Facility are not required to lend any additional amounts or issue letters of credit and could elect to require us to apply all of our available cash to collateralize any outstanding letters of credit, declare any outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable or require us to apply all of our available cash to repay any borrowings then outstanding at the time of default. If we are unable to collateralize our letters of credit or repay borrowings with respect to our Facility when due, our lenders could proceed against their collateral, which consists of substantially all of our assets. If any future indebtedness under our Facility is accelerated, we can provide no assurance that our assets would be sufficient to repay such indebtedness in full. At August 31, 2009, we had no outstanding borrowings under the Facility with outstanding letters of credit inclusive of both domestic financial and domestic performance of approximately $597.7 million. Our borrowing capacity under the Facility is reduced by the aggregate amount of letters of credit we have outstanding.

 

Further, we have entered into indemnity agreements with our sureties that contain cross-default provisions. Accordingly, in the event of a default under our Facility, we would need to obtain a waiver from our sureties or an amendment to our indemnity agreements. We can provide no assurance that we would be successful in obtaining an amendment or waiver.

 

Restrictive covenants in our Facility may restrict our ability to pursue our business strategies.

 

Our Facility limits our ability to, among other things:

 

 

 

These covenants may also impair our ability to engage in favorable business activities and our ability to finance future operations or capital needs in furtherance of our business strategies.

 

A breach of any of these covenants could result in an event of default under our Facility. For additional information, see “Non-compliance with covenants in our Facility, without waiver or amendment from the lenders, could adversely affect our ability to borrow under the Facility” above.

 

Inability to obtain adequate surety bonding or letters of credit could reduce our ability to bid on new work which could have a material adverse effect on our future revenues and business prospects.

 

In certain circumstances, clients 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 clients. These bonds and letters of credit provide credit support for the client if we fail to perform our obligations under the contract. If security is required for a particular project and we are unable to obtain a bond or letter of credit on terms commercially acceptable to us, we cannot pursue that project. We have letter of credit and bonding facilities but, as is typically the case, the issuance of bonds under our surety facilities is at the surety’s sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional cost. There can be no assurance that surety bonds or letters of credit will continue to be available to us on commercially reasonable terms.

 

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 independent rating agencies such as Moody’s Investors Service or Standard & Poor’s (S&P), it could be more difficult for us to obtain surety bonding for new projects in the future, and we may be required to increase or provide additional cash collateral to obtain these surety bonds, which would reduce our available cash and could impact our ability to renew or increase availability under our Facility. Any new or modified bonding facilities might not be on terms as favorable as those we have currently, and we could also be subject to increased costs of capital and interest rates.

 

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 that 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, client payment problems, foreign exchange risks and professional and product liability claims. 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, such as:

 

 

Our borrowing levels and debt service obligations could adversely affect our financial condition and impair our ability to fulfill our obligations under our Facility.

 

At August 31, 2009, we had total outstanding indebtedness of approximately $1,411.0 million, approximately $1,388.0 million of which relates to our Westinghouse Bonds and is of limited recourse to us. In addition, at August 31, 2009, letters of credit, domestic and foreign, issued for our account in an aggregate amount of $790.3 million were outstanding and we had no borrowings under our Facility. Our indebtedness could have important consequences, including the following:

 

 

To the extent that new debt is incurred in addition to our current debt levels, the leverage risks described above would increase.

 

Risks Related to Our Financial Reporting and Corporate Governance

 

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 changes to our internal controls has required compliance training of our directors, officers and employees and has entailed substantial costs in order to modify our existing accounting systems. Although these measures are designed to do so, we cannot be certain that such measures and future measures will guarantee that we will successfully implement and maintain adequate controls over our financial reporting processes and related reporting requirements. For example, in the past we have discovered a material weakness relating to project reporting on EPC fixed-price contracts and in income tax accounting, each of which we have taken steps to remediate. However, 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 and could result in a breach of a covenant in our Facility 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.

We rely on our information systems to conduct our business, and failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed.

 

The efficient operation of our business is dependent on computer hardware and software systems. Information systems are vulnerable to security breaches by computer hackers and cyber terrorists. We rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent security breaches. In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased overhead costs, causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any significant breach of security could adversely affect our business and results of operations.

 

We have in place a shareholder rights plan, and provisions in our articles of incorporation by-laws that may discourage a change of control of our company.

 

Certain of our corporate governing documents contain provisions that could make it more difficult for a third-party to acquire us without the consent of our board of directors. For example, certain provisions in our articles of incorporation authorize the board of directors to determine the powers, preferences and rights of preference shares and to issue preference shares without shareholder approval. These provisions could make it more difficult for a third-party to acquire us, even if the third-party’s offer may be considered beneficial by many shareholders. In addition, we have a shareholder rights plan that allows our shareholders to purchase preferred stock at a reduced price if certain parties attempt to acquire a substantial interest in us without the approval of our board of directors.

 

Any one of the provisions discussed above could discourage third parties from obtaining control of us. These provisions may also impede a transaction in which our shareholders could receive a premium over then-current market price and our shareholders’ ability to approve transactions that they consider in their best interests.

 

Other Risk Factors

 

Lawsuits and regulatory proceedings could adversely affect our business.

 

From time to time, we, our directors and/or certain of our current and former officers are named as a party to lawsuits and regulatory proceedings. A discussion of our material lawsuits appears in Note 13 — Contingencies and Commitments included in Part II, Item 8 — Financial Statements and Supplementary Data. Although it is not possible at this time to predict the likely outcome of these actions, an adverse result in any of these lawsuits could have a material adverse effect on us.

 

Litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim that is successfully asserted against us could result in significant damage claims and other losses. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could adversely affect our financial condition, results of operations or cash flows. For additional information, see Note 13 — Contingencies and Commitments and Note 19 — Long-Term Construction Accounting for Revenue and Profit/Loss Recognition Including Claims, Unapproved Change Orders and Incentives included in Part II, Item 8 — Financial Statements and Supplementary Data.

 

If we are unable to enforce our intellectual property rights or if our technology becomes obsolete, our competitive position could be adversely impacted.

 

We believe that we are an industry leader by owning or having access to our technologies. We protect our technology positions through patent registrations, license restrictions and a research and development program. We may not be able to successfully preserve our intellectual property rights in the future, and these rights could be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our

services may be sold do not protect intellectual property rights to the same extent as U.S. law. Because we license technologies from third parties, there is a risk that our relationships with licensors may terminate or expire or may be interrupted or harmed. If we are unable to protect and maintain our intellectual property rights, or if there are any successful intellectual property challenges or infringement proceedings against us, our ability to differentiate our service offerings could be reduced.

 

Additionally, if our technologies become obsolete, we may not be able to differentiate our service offerings, and some of our competitors may be able to offer more attractive services to our clients. For example, we believe that Westinghouse’s AP1000 technology is a leading technology for nuclear power generation plants. However, there are competing technologies, and it is likely that new technologies will be developed in the future. We also believe that our induction pipe bending technology, know how and capabilities favorably influence our ability to compete successfully. Currently, this technology and our proprietary software are not patented. Even though we have some legal protections against the dissemination of this technology, including non-disclosure and confidentiality agreements, our efforts to prevent others from using our technology could be time-consuming, expensive and ultimately may be unsuccessful or only partially successful.

 

Finally, there is nothing to prevent our competitors from independently attempting to develop or obtain access to technologies that are similar or superior to our technology.

 

 

None.

 

At August 31, 2009, our principal properties (those where we occupy over 35,000 square feet) were 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. We believe that our leases are at competitive market rates and do not anticipate any difficulty in leasing suitable additional space upon expiration of any lease.

 

 

For a description of our material pending legal and regulatory proceedings and settlements, see Part II — Item 8 — Financial Statements and Supplementary Data Note 13 — Contingencies and Commitments.

 

 

None.

 

 

Our common stock, no par value, is traded on the NYSE under the symbol “SHAW.” Prior to August 21, 2009, our common stock traded 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, 2009, as reported on the NYSE, was $28.93 per share. On October 26, 2009, we had 287 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 limitations on the payment of dividends under the terms of existing Credit Facilities. For additional information on these prohibitions, see Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Stock Performance Graph

 

The graph below depicts the cumulative five-year total return attained by our shareholders on our common stock, a customized peer group of four companies that includes: Fluor Corp., Jacobs Engineering Group Inc, URS Corporation and us, the S&P 600 SmallCap index, S&P 500 Composite Index (S&P 500) and the Dow Jones US Heavy Construction Industry Index (DJ Heavy). We will discontinue the use of the S&P 600 SmallCap index and the customized peer group in our future SEC filings because our customized peer group is included in the DJ Heavy index, and we believe the S&P 500 is a more meaningful index than the S&P 600 SmallCap index when comparing returns of our shareholders. We continue to show a customized peer group and the S&P 600 SmallCap index because applicable regulations require that the new and old indices be shown if the graph uses a different index from that used the previous year. We believe that using the S&P 500 and the DJ Heavy provides a meaningful comparison of our stock performance to investors, and we plan to use these indices in future filings with the SEC. The graph compares the performance of a $100 investment in our common stock, a customized peer group, the S&P 600 SmallCap index, the S&P 500 Composite Index, and the DJ Heavy index (with the reinvestment of all dividends) from August 31, 2004 to August 31, 2009.

 

This stock performance information is “furnished” and shall not be deemed to be “soliciting material” or subject to Rule 14A, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this report and irrespective of any general incorporation by reference language in any such filing, except to the extent that we specifically incorporate the information by reference.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

 

 

 

THE FOREGOING GRAPH REPRESENTS HISTORICAL STOCK PRICE PERFORMANCE AND IS NOT NECESSARILY INDICATIVE OF ANY FUTURE STOCK PRICE PERFORMANCE.

 

See Part III, Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters with respect to information to be incorporated by reference regarding our equity compensation plans.

 

 

The following table presents selected statements of operations and balance sheet data on a consolidated basis as of and for the periods the dates indicated. The selected historical consolidated financial data for each of the five fiscal years ended August 31 presented below has been derived from our audited consolidated financial statements. KPMG LLP (KPMG), independent registered public accounting firm, audited our consolidated financial statements for the fiscal years ended August 31, 2007, 2008 and 2009. Ernst & Young LLP, independent registered public accounting firm, audited our consolidated financial statements for each of the fiscal years ended August 31, 2005 to August 31, 2006. Such data should be read in conjunction with our Consolidated Financial Statements and related notes thereto included in Part II, Item 8 — Financial Statements and Supplementary Data.

 

 

 

The following analysis of our financial condition and results of operations should be read in conjunction with Part I of this Form 10-K as well as our Consolidated Financial Statements and the notes thereto. The following analysis contains forward-looking statements about our future revenues, operating results and expectations. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the risks, assumptions and uncertainties affecting these statements as well as Part I, Item 1A — Risk Factors.

 

Overview

 

Fiscal year 2009 was a milestone year for us as we were released to execute two of our domestic EPC AP1000 nuclear power projects and received a partial release on our third domestic EPC AP1000 nuclear power project. Additionally, work continued to progress well in China on the first four AP1000 nuclear reactors to ever be constructed. Our financial results were mixed as we generated record revenues, record operating cash flow, record new awards, cash and a substantially increased backlog of unfilled orders. Earnings

were strong across the majority of our segments. However, we experienced cost overruns on two coal-fired power plant projects in our Fossil, Renewables & Nuclear segment and experienced significant non-operating and non-cash foreign exchange translation losses in our Investment in Westinghouse segment that substantially decreased our reported earnings. Finally, the global economic slowdown negatively impacted the number and value of new awards received by our E&C and F&M segments that may adversely affect the comparative financial results for those businesses in the first half of fiscal year 2010.

 

Our E&I segment generated strong revenue and earnings, primarily driven by increased volume in our federal sector and improved execution. Construction activity on a hurricane protection project for the USACE in southeast Louisiana and our MOX project for the DOE in South Carolina continue to drive E&I’s earnings. U.S. government spending remained strong during 2009 and the E&I segment is well positioned to benefit from an expected increase in government spending in 2010 under the American Recovery and Reinvestment Act of 2009 (ARRA).

 

Our F&M segment had record revenues in fiscal year 2009, primarily driven by the execution of several large projects already in our backlog, as well as sales from our fabrication facility in Mexico which commenced operations during the latter part of fiscal year 2008. While earnings were strong in our F&M segment, we believe the global economic slowdown resulted in increased market pricing pressure and reduced our profit margins. Our bookings of new orders (excluding the transfer of nuclear scope from our Fossil, Renewables & Nuclear segment) declined throughout the year, as many of our clients delayed capital commitments. The decline in new orders is likely to result in comparatively reduced revenues and profits during the first half of fiscal year 2010. Finally, progress continued on our new state-of-the-art module facility that we are constructing in Lake Charles, Louisiana.

 

Our E&C segment had record revenues and earnings in fiscal year 2009 resulting from strong operational execution on several high-margin engineering services contracts executed from their backlog of unfilled orders. However, as with our F&M segment, global economic conditions and the decline in the value of crude oil contributed to a decline in new awards during 2009, and this decline is likely to result in comparatively reduced revenues and profits during the first half of fiscal year 2010.

 

Our Maintenance segment had comparatively reduced revenues and profits in fiscal year 2009 as clients delayed major capital commitments as a result of global economic conditions. The year over year comparative results were adversely impacted as we completed a large capital construction project in fiscal year 2008, which generated margins greater than the routine maintenance services which dominated the 2009 financial results.

 

Our Fossil, Renewables & Nuclear segment’s financial results reflect the continued execution of a number of EPC projects for new coal- and gas-fired power plants, a number of projects targeting emission reductions at existing coal-fired power plants, and a services contract for four new AP1000 reactors in China. We experienced increased field construction labor costs during 2009 on two coal-fired power plant projects which contributed to lower than expected earnings for this segment. During fiscal year 2009, we received notices to proceed with two of our domestic EPC AP1000 nuclear power projects and a partial release on our third domestic EPC AP1000 nuclear power project. All three projects received state public service commission approval during fiscal year 2009. Additionally, one of these projects received an Early Site Permit from the NRC.

 

Our consolidated financial results continue to be negatively impacted by significant non-operating foreign exchange translation losses resulting from an appreciation of the JPY against the U.S. Dollar and from certain non-cash expenses resulting from the Toshiba Event, as more fully described in Item 1. We recorded pre-tax charges of $198.1 million and $69.7 million related to foreign currency translation losses on our JPY-denominated bonds for fiscal years 2009 and 2008, respectively. The exchange rate of the JPY to the U.S. Dollar at August 31, 2009 was 92.9 as compared to 108.8 as of August 31, 2008.

 

As a result of the Toshiba Event, we reclassified our Investment in Westinghouse and the corresponding outstanding bonds from long-term to current during the third quarter of fiscal year 2009. Due to the Toshiba Event, we were required to expense the unamortized original issuance bond discount of $22.8 million pre-tax, or $13.9 million after tax, as well as the remaining deferred financing costs of $6.6 million pre-tax, or

$4.0 million after tax, during the third quarter of fiscal year 2009. These non-cash charges are included as interest expense in the financial statements. See Investment in Westinghouse segment for additional details regarding the Toshiba Event.

 

During our fiscal year 2009, we entered into Amendment No. 6 to our Facility to, among other things, extend the maturity from April 25, 2010 to April 25, 2011, and pursuant to such amendment, existing lenders with commitments totaling $874.0 million agreed to the one-year extension. Subsequent to the close of our fiscal year 2009, we entered into an Amended and Restated Credit Agreement (Restated Credit Agreement) which provides new and extended lender commitments of $1,214.0 million, all of which is available for the issuance of performance and financial letters of credit and/or borrowings for working capital needs and general corporate purposes. Specifically, the Restated Credit Agreement makes available $1,214.0 million through April 25, 2010, $1,095.0 million from April 26, 2010 to April 25, 2011 and $1,000.0 million from April 26, 2011 through October 25, 2012. See Note 8 — Debt and Revolving Lines of Credit to our consolidated financial statements beginning on page F-1 and Liquidity and Capital Resources below for additional information regarding our Facility.

 

We generated record consolidated operating cash flow during fiscal year 2009 driven by all operating segments other than Corporate and Investment in Westinghouse. Cash flow was generated from a combination of operating earnings and favorable changes in working capital.

 

Consolidated Results of Operations

 

Consolidated Revenues:

 

 

Consolidated revenues increased during fiscal year 2009 as compared to fiscal year 2008 primarily due to an increase in revenues in our E&I segment, primarily attributable to a hurricane protection project for the USACE in southeast Louisiana. Also contributing to the increase in revenues were higher volumes in our F&M and E&C segments. Included in E&C revenues are client furnished materials for which we recognize no gross profit or loss ($425.1 million in fiscal year 2009 compared to $527.6 million in fiscal year 2008).

 

Consolidated Gross Profit:

 

 

Consolidated gross profit increased during fiscal year 2009 as compared to fiscal year 2008 primarily due to performance in our E&C and E&I segments. E&C’s gross profit increased in fiscal year 2009 as compared to fiscal year 2008 due to an increase in volume of high-margin engineering services projects; and E&I’s increase is primarily related to increased construction activity on a hurricane protection project for the USACE in southeast Louisiana. Additionally, both segments benefitted from an overall improvement in execution.

Consolidated General & Administrative Expenses (G&A):

 

 

Consolidated G&A increased during fiscal year 2009 as compared to fiscal year 2008 in order to support our increasing business activity levels in most areas of the company. Specific areas that contributed to the increase in general and administrative expenses during fiscal year 2009 include higher business development expenses in our E&C segment and the overall expansion of our Nuclear business.

 

Consolidated Interest Expense:

 

 

Consolidated interest expense increased in fiscal year 2009 as compared to fiscal year 2008 primarily due to increased interest expense associated with the JPY denominated bonds. The fiscal year 2009 amount includes the expensing of the original issuance bond discount of $22.8 million pre-tax and the remaining deferred financing cost of $6.6 million pre-tax due to the occurrence of a Toshiba Event.

 

Consolidated Income Taxes:

 

 

Consolidated effective tax rate for fiscal year 2009 was 37% as compared to 32% for fiscal year 2008. The increase in our effective tax rate was primarily due to the mix of earnings between our domestic and foreign operations, the reduction in certain valuation allowances in fiscal year 2008 and an increased provision for uncertain tax positions in fiscal year 2009.

 

Consolidated Earnings (Losses) from Unconsolidated Entities:

 

 

 

NM — Not meaningful.

 

Earnings from unconsolidated entities decreased in fiscal year 2009 as compared to fiscal year 2008 primarily due to a $5.8 million net of tax reduction in earnings related to our Westinghouse Equity.

Consolidated Net Income (Loss):

 

 

 

NM — Not meaningful.

 

Consolidated net income decreased in fiscal year 2009 as compared to fiscal year 2008 primarily due to changes in estimated costs to complete two coal-fired power plant projects in our Fossil, Renewables & Nuclear segment, as well as increased non-cash foreign currency translation losses in our Investment in Westinghouse segment, as the JPY continued to appreciate against the U.S. Dollar throughout fiscal year 2009. These decreases were partially offset by higher earnings in our E&I and E&C segments in fiscal year 2009 as compared to fiscal year 2008.

 

Segment Results of Operations

 

The comments and tables that follow compare revenues, gross profit and gross profit percentages by operating segment and a discussion of other items, including G&A, interest expense and income, income from unconsolidated subsidiaries and income taxes at the consolidated level for the fiscal years ended August 31, 2009, 2008 and 2007.

Selected summary financial information for our operating segments is as follows (in millions, except for percentages):

 

 

 

NM — Not meaningful.

Our revenues by industry were as follows:

 

 

Our revenues by geographic region were as follows:

 

 

Segment Analysis — Fiscal Year 2009 Compared to Fiscal Year 2008

 

Fossil, Renewables & Nuclear Segment

 

During 2009, our Fossil, Renewables & Nuclear segment continued to execute major electric power generation and air emission reduction projects across the globe. Reduced demand for electricity in the U.S. and the decline in the stock prices for electric utilities during 2009 likely adversely impacted electric utilities’ investment decisions during 2009. However, the segment’s EPC work on three contracts for six new AP1000 nuclear power reactors in the U.S. were either fully or partially released in 2009 while work continued on our services contract for four new AP1000 nuclear power reactors in China. The domestic nuclear EPC contracts significantly increased this segment’s backlog of unfilled orders while new awards for air quality control system contracts and new build coal projects significantly declined. One new build coal / petroleum coke fired generation facility was canceled and removed from backlog in the second quarter of fiscal year 2009. Notwithstanding these changes to the power generation markets, the 2009 results for this segment were driven by EPC projects for new coal-fired, gas and nuclear power plants in the U.S. as well as from air emission reduction projects at existing power plants.

 

Revenues

 

Revenues decreased $73.9 million, or 2.8%, to $2,581.2 million in fiscal year 2009 from $2,655.1 million in fiscal year 2008 primarily due to the completion or near completion of several air quality control system projects in the U.S. However, this decrease is partially offset by increased volume on new coal and gas construction projects, as well as the initial work on the three new nuclear construction projects in the U.S.

 

Gross Profit and Gross Profit Percentage

 

Gross profit decreased $66.1 million, or 43.2%, to $87.0 million in fiscal year 2009 from $153.1 million in fiscal year 2008 and gross profit percentage decreased to 3.4% in fiscal year 2009 from 5.8% in fiscal year

2008. These decreases were primarily due to significantly increased estimated costs to complete two coal-fired power plant projects, one of which amounted to $73.9 million that was recorded in the second quarter of fiscal year 2009. Additionally, the decline in the volume of air quality control system projects in fiscal year 2009 versus fiscal year 2008 contributed to the comparative decline in annual gross profit.

 

Income (loss) before income taxes, minority interest, and earnings (losses) from unconsolidated entities

 

Income before income taxes, minority interest, and earnings from unconsolidated entities decreased $83.4 million, or 74.0%, to $29.3 million in fiscal year 2009 from $112.7 million in fiscal year 2008. This decrease was primarily due to the factors affecting gross profit discussed above, as well as an increase in general and administrative expenses as our domestic nuclear work continues to advance.

 

E&I Segment

 

The financial results of our E&I segment significantly improved during fiscal year 2009 as compared to fiscal year 2008, driven primarily by our hurricane protection project for the USACE in southeast Louisiana. The E&I segment benefited from increased U.S. government spending during fiscal 2009 and is well positioned to compete for projects that may be funded under the ARRA in fiscal year 2010.

 

Revenues

 

Revenues increased $373.4 million, or 25.5%, to $1,835.5 million in fiscal year 2009 from $1,462.1 million in fiscal year 2008 primarily due to increased volumes of services provided to the U.S. Government, led by increased construction activity on the hurricane protection project for the USACE in southeast Louisiana and our MOX project.

 

Gross Profit and Gross Profit Percentage

 

Gross profit increased $55.8 million, or 52.7%, to $161.7 million in fiscal year 2009 from $105.9 million in fiscal year 2008 while gross profit percentage increased to 8.8% in fiscal year 2009 from 7.2% in fiscal year 2008. The increase in gross profit is primarily due to increased construction activity on a hurricane protection project noted above. Gross profit and gross profit percentage also increased due to overall improved project execution and increased amounts of overhead chargeable to contracts that results when the volume of project activity increases.

 

Income (loss) before income taxes, minority interest and earnings (losses) from unconsolidated entities

 

Income before income taxes, minority interest, and earnings from unconsolidated entities increased $51.7 million, or 131.6%, to $91.0 million in fiscal year 2009 from $39.3 million in fiscal year 2008. This increase was primarily due to the factors affecting gross profit discussed above

 

E&C Segment

 

E&C experienced record revenues and earnings during fiscal year 2009 as we worked off a number of high-margin engineering projects in backlog. However, E&C’s record performance on existing projects was coupled with an increasingly challenging marketplace, as the global recession had a substantial and negative impact on the investment decisions of clients in the oil and petrochemical markets. Many of our clients delayed large capital investments during fiscal year 2009, and E&C’s bookings of new contracts declined as compared to 2008. The decline in bookings, combined with the work-off of many high-margin engineering services projects throughout fiscal year 2009, led to a gradual decline in volume and profits in the second half of fiscal year 2009 and we expect this trend to continue into fiscal year 2010. However, we are seeing signs of renewed client interest in the early phases of major capital investments such as studies and front end engineering and design contracts which precede the engineering, procurement and construction phase of major projects. We remain optimistic that bookings in the E&C segment may increase if and to the extent that global economic conditions improve.

Revenues

 

Revenues increased $88.2 million, or 6.9%, to $1,371.5 million in fiscal year 2009 from $1,283.3 million in fiscal year 2008 due primarily to an overall increase in the volume of engineering services projects in general and on a major international petrochemical project in Asia. Included in E&C’s revenues were $425.1 million and $527.6 million in fiscal years 2009 and 2008, respectively, of reimbursable client furnished materials for which we recognize no gross profit or loss.

 

Gross Profit and Gross Profit Percentage

 

Gross profit increased $74.4 million, or 59.9%, to $198.7 million in fiscal year 2009 from $124.3 million in fiscal year 2008 while gross profit percentage increased to 14.5% in fiscal year 2009 from 9.7% in fiscal year 2008. The increase in gross profit and gross profit percentage is primarily due to increased engineering service activity, increased activity on the major international petrochemical project noted above, strong project execution, and reduced estimated costs at completion related to foreign withholding taxes. Our fiscal year 2008 results included an increase in gross profit of $13.0 million due to the release of performance guarantees at a consolidated joint venture.

 

Income (loss) before income taxes, minority interest, earnings (losses) from unconsolidated entities

 

Income before income taxes, minority interest, and earnings from unconsolidated entities increased $55.6 million, or 57.1%, to $153.0 million in fiscal year 2009 from $97.4 million in fiscal year 2008. This increase was primarily due to the factors affecting gross profit discussed above. However, the increase was partially offset by increased general and administrative expenses, primarily related to business development and proposal activities.

 

Maintenance Segment

 

Our Maintenance segment experienced reduced activity in fiscal year 2009 versus fiscal year 2008, as the global recession adversely impacted the primary markets this segment serves. We performed fewer refueling outages for our nuclear electric utility clients in fiscal year 2009 as compared to fiscal year 2008, and we also performed fewer projects for our refining, chemical, and petrochemical clients who we believe delayed capital commitments because of economic conditions.

 

Revenues

 

Revenues decreased $154.1 million, or 15.1%, to $864.1 million in fiscal year 2009 from $1,018.2 million in fiscal year 2008. This decrease in revenues is primarily due to lower volume of activity in both our power and process business lines. Additionally, we completed a major capital construction project in fiscal year 2008 that was not replaced in 2009.

 

Gross Profit and Gross Profit Percentage

 

Gross profit decreased $31.6 million, or 64.0%, to $17.8 million in fiscal year 2009 from $49.4 million in fiscal year 2008 and gross profit percentage decreased to 2.1% in fiscal year 2009 from 4.9% in fiscal year 2008. The decreases in gross profit and gross profit percentage were primarily due to lower overall business volume as well as reduced margin resulting from the impact of a dispute resolution reached in the second quarter of fiscal 2009 with the owner of a major domestic power project. Also contributing to the comparative decline in annual gross profit and gross profit percentage was the fact that we completed a major capital construction project in fiscal year 2008, which produced higher gross profits when compared to the maintenance services provided in fiscal year 2009.

 

Income (loss) before income taxes, minority interest, earnings (losses) from unconsolidated entities

 

Income before income taxes, minority interest, and earnings from unconsolidated entities decreased $27.1 million, or 80.2%, to $6.7 million in fiscal year 2009 from $33.8 million in fiscal year 2008. This

decrease was primarily due to the factors affecting gross profit discussed above, partially offset by lower general and administrative expenses resulting from various cost-savings initiatives.

 

F&M Segment

 

Our F&M segment achieved record business volume levels in fiscal year 2009, as we continued to service global demand for our industry-leading pipe and steel fabrication services, as well as for our manufacturing and distribution products. However, toward the end of fiscal year 2009, the global economic downturn began to negatively impact our end markets, particularly clients in the oil refining and chemical/petrochemical industries. As a result, our non-nuclear bookings and profits declined in the second half of fiscal 2009. We expect the recent downturn in volume and profits to continue into the first half of fiscal year 2010 but subsequently to improve to the extent that the modular assembly and pipe fabrication work associated with the AP1000 work subcontracted from our Fossil, Renewables & Nuclear segment commences.

 

Revenues

 

Revenues increased $46.8 million, or 8.1%, to $623.4 million in fiscal year 2009 from $576.6 million in fiscal year 2008. The increase in revenues is primarily due to the execution of several large projects in our backlog as well as sales from our Mexico facility, which commenced operation in late fiscal year 2008.

 

Gross Profit and Gross Profit Percentage

 

Gross profit decreased $12.0 million, or 8.0%, to $138.0 million in fiscal year 2009 from $150.0 million in fiscal year 2008. Gross profit percentage decreased to 22.1% in fiscal year 2009 from 26.0% in fiscal year 2008. The decreases in gross profit and gross profit percentage were primarily due to reduced client demand for pipe fabrication services which increased available capacity in our competitors’ facilities and resulted in a more competitive pricing environment

 

Income (loss) before income taxes, minority interest, earnings (losses) from unconsolidated entities

 

Income before income taxes, minority interest, and earnings from unconsolidated entities decreased $20.2 million, or 15.9%, to $106.6 million in fiscal year 2009 from $126.8 million in fiscal year 2008 primarily due to the factors affecting gross profit discussed above.

 

Investment in Westinghouse Segment

 

The Investment in Westinghouse segment includes the financial results of our Westinghouse Equity and the corresponding JPY denominated debt that funded the investment which occurred on October 16, 2006. The total impact from the Investment in Westinghouse segment on our income before taxes and other items for fiscal years 2009 and 2008, were losses of $267.0 million and $107.9 million, pre-tax, and $155.3 million and $50.7 million, net of tax, respectively.

 

The losses were primarily attributable to increased non-cash foreign currency translation losses resulting from revaluing the JPY debt to the U.S. Dollar equivalent at each quarter’s end as the JPY appreciated against the U.S. Dollar in fiscal year 2009. In addition, the losses include $29.4 million pre-tax interest on the charges attributable to the expensing of the original issuance bond discount of $22.8 million pre-tax and the remaining deferred financing cost of $6.6 million pre-tax during fiscal year 2009 as a result of the Toshiba Event described in Item 1. Business above.

 

Income before tax from our Westinghouse Equity decreased $13.2 million, or 53.4%, to $11.5 million in fiscal year 2009 from $24.7 million in fiscal year 2008. This decrease was related to a decline in Westinghouse’s profits associated with Westinghouse’s nuclear fuel sales and non EPC related services.

 

We enter into foreign currency forward contracts from time-to-time to hedge the impact of exchange rate changes on our JPY cash interest payments on the Westinghouse Bonds. We normally focus our hedge transactions to the JPY interest payments due within the following twelve months.

Westinghouse maintains its accounting records for reporting to its majority owner, Toshiba, on a calendar quarter basis with a March 31 fiscal year end. Financial information about Westinghouse’s operations is available to us for Westinghouse’s calendar quarter periods. As a result, we record our 20% of Westinghouse’s earnings (loss) as reported to us by Westinghouse based upon Westinghouse’s calendar quarterly reporting periods, or two months in arrears of our current reporting periods. Under this policy, the results of Westinghouse’s operations from July 1, 2008, through their calendar quarter ended June 30, 2009, were included in our financial statements for the twelve months ended August 31, 2009; and the results of Westinghouse’s operations from July 1, 2007, through their calendar quarter ended June 30, 2008, were included in our financial statements for the twelve months ended August 31, 2008.

 

Corporate

 

General and Administrative Expenses (G&A)

 

Corporate G&A increased $3.5 million, or 4.0%, to $91.3 million in fiscal year 2009 from $87.8 million in fiscal year 2008. This increase was primarily related to increased labor and compensation costs, non-income-related tax expenses and certain employee-related insurance costs. However, this increase was substantially offset by a significant reduction in external consulting fees incurred in fiscal year 2008 associated with the remediation of material weaknesses in internal control over financial reporting that existed at the time and lower fuel, repairs and maintenance costs associated with our Corporate aircraft. Additionally, we initiated cost-savings initiatives throughout fiscal year 2009.

 

Segment Analysis — Fiscal Year 2008 Compared to Fiscal Year 2007

 

Fossil, Renewables & Nuclear Segment

 

Our Fossil, Renewables & Nuclear segment experienced growth in demand in the areas of emissions control and new coal fired power generation facilities for regulated electric power utilities in the U.S. Additionally, we are performing early engineering work for six new nuclear power reactors in the U.S. Our international work in this segment increased due to a major services project in China.

 

Revenues

 

Revenues increased $1,000 million, or 62.3%, in fiscal year 2008 as compared to fiscal year 2007 primarily due to:

 

 

The increase in revenues was partially offset by revenue declines attributable to several AQCS projects nearing substantial completion in the fiscal year.

 

Gross Profit and Gross Profit Percentage

 

Gross profit increased $78.1 million, or 104.1% for fiscal year 2008 as compared to fiscal year 2007. Our gross profit percentage rose to 5.8% in fiscal year 2008 from 4.6% in fiscal year 2007. The increases in our gross profit and gross profit percentage were primarily due to:

 

 

 

The increases in gross profit and gross profit percentage were partially offset by: