Washington Grp Intl, Inc (WGII) - Description of business


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Company Description


Unless otherwise indicated, the terms “we,” “us” and “our” refer to Washington Group International, Inc. (“Washington Group International”) and its consolidated subsidiaries; references to 2006 are to our fiscal year ended December 29, 2006; references to 2005 are to our fiscal year ended December 30, 2005; and references to 2004 are to our fiscal year ended December 31, 2004 .

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (the “SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549, or by calling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, we make copies available to the public free of charge on or through our website at http://www.wgint.com. The information on our website is not incorporated into, and is not part of, this report.

We have adopted a Code of Business Conduct and Ethics (the “Code”) which requires all employees, officers and directors of Washington Group International to act, at all times and places, as law-abiding, responsible and responsive citizens. The Code is published on our website at http://www.wgint.com under Corporate Information: Investor Relations, Company Overview, and Corporate Governance. A copy of the Code is available by contacting us through our website under Investor Relations, or by writing to the Investor Relations Department at the corporate headquarters. We intend to disclose certain amendments to our Code, or any waivers of our Code granted to Executive Officers and Directors, on our website within four business days following the date of such amendment or waiver.

Our principal executive offices are located at 720 Park Boulevard, Boise, Idaho 83712. Our telephone number is (208) 386-5000.

GENERAL

We are an international provider of a broad range of design, engineering, construction, construction management, facilities and operations management, environmental remediation and mining services. We offer our various services separately or as part of an integrated package throughout the life cycle of a customer’s project.

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In providing design and engineering services, we participate in the conceptualization and planning stages of projects that are part of our customers’ overall capital programs. We develop the physical designs and determine the technical specifications. We also devise project configurations to maximize both construction and operating efficiency.


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As a contractor, we are responsible for the construction and completion of each contract in accordance with its specifications and contracting terms (primarily schedule and total cost). In this capacity, we often manage the procurement of materials, subcontractors and craft labor. Depending on the project, we may function as the primary contractor or as a subcontractor to another firm.


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On some projects, we function as a construction manager, engaged by the customer to oversee other contractors’ compliance with design specifications and contracting terms.


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Under operations and maintenance contracts, we provide staffing, technical support, repair, renovation, predictive and preventive services to customer facilities globally. We also offer other facility services, such as general building maintenance and asset management. In addition, we provide inventory and
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product logistics for manufacturing plants, information technology support, equipment servicing and tooling changeover.


On some projects, particularly those of significant size and requiring specialized technology, we partner with other firms, both to increase our opportunity to win the contract and to manage development and execution risk. Partners may include, among others, specialized process engineering firms, engineers, constructors, operations contractors or equipment manufacturers. These partnerships may be structured as joint ventures or consortia, with each participating firm having an economic interest relative to the scope of its work.

We enter into four basic types of contracts with our customers:

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Under a “fixed-price” contract, we provide the customer a total project for an agreed-upon price, subject to project circumstances and changes in scope. We commonly refer to fixed-price contracts under which the total project cost is determined up front as “lump-sum” contracts. Large design-build infrastructure projects are typically awarded on a lump-sum basis.


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Under a “fixed-unit-price” contract, the customer pays us for materials, labor, overhead, equipment rentals or other costs at fixed rates as each unit of work is performed. Mining projects are typically awarded on a fixed-unit-price basis.


·  
Under a “target-price” contract, we provide the customer with a total project at a target price agreed upon by the customer, subject to project circumstances and changes in scope. Should costs exceed the target within the agreed-upon scope, we will generally absorb a portion of those costs to the extent of our expected fee or profit; however, the customer reimburses us for the costs that we incur if costs continue to escalate beyond our expected fee. An additional fee may be earned if costs are below the target.


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Under a “cost-type” contract, a customer reimburses us for the costs that we incur (primarily materials, labor, overhead and subcontractor services), plus a fee. The fee portion of the contract may be a percentage of the costs incurred and/or may be based on the achievement of specific performance incentives or milestones. The fee portion may also be subject to a maximum limit. Engineering, construction management and environmental and hazardous substance remediation contracts, including most of our work for United States (“US”) government customers, are typically awarded pursuant to a cost-type contract.


We generally refer to the first two contract types described above as “fixed-type contracts” and the last two contract types as “cost-reimbursable.”

Some fixed-price contracts require the contractor to provide a surety bond to its customer or a letter of credit. This general industry practice provides indemnification to the customer if the contractor fails to perform its obligations. Surety companies consider factors such as capitalization, available working capital, past performance and management expertise to determine the amount of bonds they are willing to issue on behalf of a particular engineering and construction company.

We participate in construction joint ventures, often as sponsor and manager of projects, which are formed for the sole purpose of bidding, negotiating and completing specific projects. We participate in two incorporated mining ventures: MIBRAG mbH (“MIBRAG”), a company that operates lignite coal mines and power plants in Germany, and Westmoreland Resources, Inc. (“Westmoreland Resources”), a coal mining company in Montana.

BACKGROUND

We were originally incorporated in Delaware on April 28, 1993 under the name Kasler Holding Company. In April 1996, we changed our name to Washington Construction Group, Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation and changed our name to Morrison Knudsen Corporation. The purchase was

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structured as a merger and was an integral part of a bankruptcy plan of reorganization. We have no remaining obligations under that plan of reorganization.

On March 22, 1999, we and BNFL Nuclear Services, Inc. (“BNFL”) acquired the government and environmental services businesses of CBS Corporation (now Viacom, Inc.). We refer to these businesses, together with other government services operations, as the “Government Services Business.” On August 25, 2004, we agreed to acquire BNFL’s interest in the Government Services Business and effective December 30, 2005, we settled all remaining acquisition payments resulting in the termination of BNFL’s interest in our Government Services Business.

On July 7, 2000, we purchased from Raytheon Company and Raytheon Engineers & Constructors International, Inc. (“RECI”), the capital stock of the subsidiaries of RECI and specified other assets of RECI and assumed specified liabilities of RECI. The businesses that we purchased, that we refer to as “RE&C,” provide engineering, design, procurement, construction, operation, maintenance and other services on a global basis. Following the RE&C acquisition, we changed our name to Washington Group International, Inc.

On May 14, 2001, due to near-term liquidity problems resulting from our acquisition of RE&C, we filed for protection under Chapter 11 of the US Bankruptcy Code. On December 21, 2001, the bankruptcy court entered an order confirming the Second Amended Joint Plan of Reorganization of Washington Group International, Inc., et al., as modified (the “Plan of Reorganization”). The Plan of Reorganization became effective and we emerged from bankruptcy protection on January 25, 2002.

The US Bankruptcy Court for the District of Nevada retains jurisdiction to interpret the Plan of Reorganization and to resolve outstanding claims and third party disputes relating thereto. A reorganization plan committee (the “Plan Committee”) was established by the bankruptcy court to evaluate claims of unsecured creditors, prosecute any disputed unsecured claims, determine each unsecured creditor’s distribution under the Plan of Reorganization and generally monitor implementation of the Plan of Reorganization.

BUSINESS UNITS

We operate our business through six business units, each of which comprises a separate reportable business segment: Power, Infrastructure, Mining, Industrial/Process, Defense and Energy & Environment.

Power

Our power business unit specializes in design, engineering, construction, modification and maintenance of power generating facilities and the systems that transmit and distribute electricity. Customers include regulated and deregulated utilities, industrial co-generators, independent power producers, original equipment manufacturers (“OEMs”) and governments. These customers generate power in a wide variety of methods, including coal, oil and gas-fired power plants, combustion turbine in both simple cycle and combined cycle configurations, nuclear power, hydroelectric power and waste-to-energy. We provide our services to customers in the US and around the world under both fixed-price and cost-reimbursable, and the work we have pursued recently has reflected an array of commercial arrangements. (See Item 1, “Business - General,” earlier in Part I of this report for a description of types of contracts and corresponding risks). The Power business unit provides a range of services that includes:

Basic Services
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General planning
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Siting and licensing
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Environmental permitting
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Engineering, procurement and construction, startup
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Expansion, retrofit and modification
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Operations and maintenance
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Decontamination and decommissioning


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Basic Markets
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New generation
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Combustion turbine (natural gas, oil)
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Coal
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Nuclear
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Modifications and maintenance
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Fossil: clean air retrofits
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Repowering
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Nuclear: major component replacement
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Maintenance: fossil and nuclear
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Engineering services
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Planning studies and ongoing operations for fossil and nuclear
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Transmission, distribution, and substations


The power industry is in a period of major capital expenditures, led by regulatory-driven retrofits of large clean air systems on targeted coal-fired plants and the gradual reemergence of demand for new capacity, which has prompted a reinvigorated interest in both coal and nuclear technologies. Projects abound in the US and the key global markets of China, the Middle East, and Eastern and Central Europe. Reflecting this growth, there is a growing shortage of qualified professional and field labor personnel, leading to industry-wide challenges to meet talent needs.

Stimulating much of this growth in the US market are legislative changes enacted by the federal government in 2005. The Environmental Protection Agency’s (“EPA”) promulgation of the Clean Air Interstate Rule and the Clean Air Mercury rule has intensified the market for emissions control retrofits, and the Energy Policy Act has provided significant economic stimulus to clean coal programs, integrated gasification combined cycle facilities, renewable energy technologies, and new nuclear facilities.  

The international power industry is also very active. Among the strongest of these markets is the development of vast reserves in the Canadian oil sands region, which ultimately may give North American generators a dependable and stable supply of oil and gas for existing and future operations. We have had a substantial presence in the region for several years, supporting a clean air system retrofit on coking facilities at a production site, and we were recently awarded an engineering, procurement and construction (“EPC”) contract for a 160-megawatt cogeneration station that will supply both electricity and wet steam in support of production operations. Economic growth demands in Asia, particularly in China, India and Southeast Asia, are spawning new, but highly competitive, programs for capacity additions. The nuclear market in China is forecasted to be particularly strong, and we have been engaged by a local utility to enhance their project management program. Environmental concerns in some regions - China, motivated by public image and a growing internal green movement and Central and Eastern Europe, motivated by standards for admission to the European Union - are stimulating clean air system retrofit projects on older coal-fired plants.

The Power business unit pursues a strategy of providing superior performance in new generation projects, major modifications, and long-term technical services while minimizing its exposure to long-term capital risk. New power generation is at the core of our business, and we continue to increase our market presence in each of the technologies at the backbone of the commercial power industry. We have ongoing combustion turbine, combined cycle projects in Wisconsin and Puerto Rico, an ongoing coal-fired project in Wisconsin and a new award of a 400-megawatt coal-fired project in Arizona. We anticipate that the emerging nuclear renaissance will not award a grassroots nuclear generation project until 2009; however, we have in place agreements with two prominent nuclear technology suppliers to support their efforts to gain Nuclear Regulatory Commission design certification and to detail their design standards. We are in a consortium that is studying the restart of a partially constructed unit, and we are managing the largest grassroots nuclear fuel supply construction project in the US

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today, which also is the first new nuclear facility licensed under the Nuclear Regulatory Commission’s new one-step licensing process.

Propelled by either the new EPA regulations, previously signed consent decrees, independent state legislation, or proactive owners, a substantial number of large system retrofits to control sulfur oxides and nitrous oxides have been announced or are under consideration. We continue to secure new awards in this market, including the retrofit of flue gas desulphurization systems for clients in Maryland, Pennsylvania, West Virginia and Wisconsin. We are also continuing work on other emissions control projects in Michigan, Pennsylvania, Wisconsin, and Alberta, Canada.

The existing fleet of nuclear power plants in North America is being revitalized with life-extension strategies that involve significant equipment modifications. Among the most common life-extension strategies is the replacement of steam generators and reactor vessel heads. Through a 50 percent owned joint venture with Framatome-ANP, Inc., we specialize in these replacements and have established ourselves as a leading competitor in the US for this market, holding three world records for short outage durations and winning industry recognition for the Best Nuclear Projects of 2005 and 2006, plus the Energy Construction Project of the Year for 2005. At present we have ongoing projects in California, Florida and New Jersey, plus a consulting assignment in Canada, and in 2006 we were awarded a new assignment in Pennsylvania.

In some cases, the competitive nature of the power generation industry has led to stronger ties between customers seeking engineering solutions to improve output and contractors assuming the responsibility of in-house specialists. We are engaged in several alliance-type relationships at various levels of maturity, including a pacesetting program that has established a full services contract for a total generation system that exceeds 11,000 megawatts, and outsourcing agreements with two utilities in which we are providing engineering services as needed at a total of more than 90 generating facilities.

Another growing market in the US power industry is the full spectrum of power delivery systems, i.e., transmission, distribution, substations and systems control. The Federal Energy Regulatory Commission and the North American Electric Reliability Coalition are both focused on improving the reliability of the power grid. Having realized a successful campaign of revitalizing and rebuilding the electric infrastructure in Iraq, we are refocusing this expertise in this US market. As a result, we have been awarded services contracts with two major power distributors.

Infrastructure

Our Infrastructure business unit provides a full range of infrastructure services to clients globally, including design, engineering, consulting, project management, construction management, construction, project development, design-build and operations and maintenance. The Infrastructure business unit performs as a general contractor or as a joint venture partner with other contractors on domestic and international projects. Typically, design, engineering, consulting, project management, construction management, and operations and maintenance type contracts are performed on a cost-reimbursable basis, while design-build and construction contracts are performed on a fixed-price, target price or cost reimbursable basis.

Infrastructure serves both private and public sector customers across three major markets:

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Rail and transit : Services include design, project development, construction, and operation and maintenance of light rail, subways, commuter/inter-city railroads, railroads, freight transport, people movers, bus rapid transit, electrification and multimodal facilities. Our current significant projects in this market include:


•  
Hudson-Bergen Light Rail Transit System: We are operating under multiple contracts with a value exceeding $1.2 billion to design, build, operate and maintain the Hudson-Bergen Light Rail Transit System in New Jersey. The design-build phase was completed in 2006. The term of our
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contract to operate and maintain the system extends to 2011, with two five-year extension options.


•  
Metro Gold Line Eastside Extension: A $615 million design-build contract for a six-mile-long extension to the Metro Gold Line light rail system in Los Angeles, California. This contract with the Los Angeles Metropolitan Transportation Authority (“MTA”) is being performed by a joint venture led by us.


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Highways and bridges : Services include design, design-build, construction, operation and maintenance of interstates/freeways, arterial highways/streets, interchanges, bridges, tunnels and intelligent transportation systems. The Infrastructure business unit has made the strategic decision to no longer participate in the public agency highway fixed price “construction only” market sector. The contract and change order administration practices of the client agencies, together with an increase in the number of smaller local bidders has lowered available margins to unacceptable levels. Our significant projects in this market include:


•  
SR-125: A joint venture led by us to design and build the 10-mile privately-funded toll road section of the public-private State Route 125 South Expressway project in San Diego, California, and a 3.5-mile publicly-funded segment of State Route 125 with a total contract value of approximately $390 million.


•  
I-215/91/60 Riverside Interchange: A joint venture led by us to perform a design sequence contract to upgrade and widen a 7.8 mile section of I-215 and connecting highways for the California Department of Transportation in Riverside, California with an approximate contract value of $240 million.


Both of these projects were in a loss position at the end of 2006. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -Business Unit Results- Infrastructure,” in Item 7 of this report.

We are growing our lower risk program management and operations and maintenance capabilities in the highway and bridge market. Our current significant projects in this area include:

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Connecting Idaho GARVEE Program Management: Under a $1 billion program with the Idaho Transportation Department, we lead a team to provide $200 million of highway design and construction management services for highway work throughout the state.


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Florida Toll Services: We are leading an $85 million joint venture operating 100 miles of toll road for the Orlando-Orange County Expressway Authority including full-service toll collection operations and maintenance services.


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Water resource and hydropower : Services include design and construction of hydroelectric power, water supply, flood control, locks and dams, irrigation and drainage, hydraulic structures and environmental and safety analysis. A significant project in this market includes:


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Olmsted Dam: An $855 million cost-reimbursable-plus-base-and-award-fee joint venture for the construction of a 2,700-foot concrete dam across the lower Ohio River.


During 2006, the Infrastructure business unit continued its work for the US Army Corps of Engineers providing design, engineering, and construction services in the Middle East. Infrastructure provided procurement, engineering, and construction services for water treatment, pump stations, and sewer rehabilitation projects in Iraq. Infrastructure also performed repair, installation, and operations and maintenance services for a hospital in Iraq.

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We anticipate growth in domestic infrastructure markets. Federal highway funding is subject to authorization from the Safe, Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users (“SAFETEA-LU”) which is expected to provide long-term funding. State tax revenues are anticipated to increase, which will provide for matching funds for capital programs as well. Certain markets continue to have viable projects and the design-build method of delivery, with its reliance on private capital and potential opportunities for public-private partnerships, continues to grow in popularity.

Mining

The Mining business unit provides a full range of services, concentrating on contract mining and mines management, design/build and engineering, procurement, and construction or construction management to the precious and base metals, energy minerals, and industrial minerals markets globally. These services include a broad spectrum of tasks from mine planning and feasibility studies through engineering, construction, operations planning and execution, to mine reclamation and closure.

Currently, the Mining business unit is providing services to the phosphate industry in Canada and the US, coal mines in the US and Germany, silica and ballast quarry operations in the US, a silver, zinc and lead mine in Bolivia, a gold mine in Mexico, a nickel-cobalt project in Cameroon, and bauxite mines in Jamaica. Mining contracts are typically one to ten years in length and are normally renewed in subsequent bidding cycles throughout the useful life of the mine, which can typically range from 5 to 30 years. Mining contracts are generally fixed-unit price, cost reimbursable, or target price.

In addition to the Mining business unit’s contracted services, we hold ownership interests in two mining ventures:

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MIBRAG (50 percent) is located in Germany and operates two surface lignite coal mines that provide lignite to two utility-owned power generation plants, as well as small commercial plants and three company-owned power plants. Power generated by the company-owned plants is primarily utilized by the mining operations and surplus power is sold at wholesale to the utilities. The mines have lignite reserves and contracts in place for 20 to 40 years of supply. Because of the significance of MIBRAG to our results of operations for the year ended December 29, 2006, the financial statements of MIBRAG have been included in this report on Form 10-K as Exhibit 99.1.


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Westmoreland Resources (20 percent) is a Montana surface coal mine providing sub-bituminous coal to utilities in the upper Midwest.

 

See Note 4, “Ventures,” of the Notes to Consolidated Financial Statements in Item 8 of this report.

Industrial/Process

Our Industrial/Process business unit is a single-source provider of integrated engineering, construction, operations, maintenance, logistics and program management services. A key component of Industrial/Process’ approach is close alignment with our customers to support their business objectives and develop long-term, value-added partnerships and to balance the markets we serve in order to effectively deal with economic cycles that impact industrial and consumer spending.

Services are provided using a variety of commercial terms, including various forms of cost-type, target price and lump sum contracting. The unit’s continuing goal is to maintain an evenly balanced commercial mix between cost-type and fixed-priced contracts in order to optimize the risk/reward profile and improve cash flow.

Organized in three divisions, the Industrial/Process business unit is focused on the following strategic areas: Oil, Gas and Chemicals, Facility Management, and Industrial Services & Life Sciences.

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Oil, Gas & Chemicals. The Oil, Gas & Chemicals division provides services to several markets, including oil production, gas treating, gas monetization, gas storage, refineries and bulk/specialty chemicals producers. Our services span a wide range of offerings including engineering, procurement, construction and operations and maintenance.


Customers include ExxonMobil, ConocoPhillips, ChevronTexaco, BP, Qatar Petroleum, DuPont, Georgia Gulf, El Paso, Dow Corning, PolyOne and Abu Dhabi National Oil Company, among others.

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Facility Management. Our Facility Management division provides life-cycle services allowing our customers to focus on core business activities. As a facility management market leader for industrial customers, we offer management solutions that include operations, production maintenance and facility management across a diverse set of industries to customers seeking to outsource non-core business functions.


Customers include many long-term clients such as Caterpillar, DuPont, IBM, Nissan, Micron and Tektronix.

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Industrial Services & Life Sciences. Our Industrial Services & Life Sciences divisions provide life-cycle services, including design, engineering, construction, quality assurance, logistics, quality programs, and validation for the automotive, manufacturing, food, consumer product, cement, pulp and paper industries.


We have long-term alliance partnerships with Anheuser-Busch, Kraft and General Mills/Pillsbury in the foods market. We provide facility and process design solutions for breweries and producers of baked goods, cake mix, cereal, prepared entrees, snack foods, soups and yogurt. In the automotive markets, customers include General Motors, Ford, Daimler/Chrysler and Hyundai.

In Life Sciences, we provide design, engineering, construction, validation and maintenance services to the biotechnology and pharmaceutical industries. An integrated delivery platform is provided in the areas of biologics, chemical synthesis, dosage form and devise manufacturing to create innovative production solutions.

Customers include Amgen, Sanofi-Pateur, Pfizer, Schering Plough, Merck, Eli Lilly, Johnson & Johnson, Novartis and Wyeth.

Defense

The Defense business unit is structured to meet the needs of our major customer, the US government, and, more specifically, the Departments of Defense and Homeland Security. Our Defense business unit manages, integrates and delivers life-cycle services for domestic and international programs under three major markets: Threat Reduction, Defense Services and Homeland Security.

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Threat Reduction. In the Threat Reduction market, we focus on global proliferation prevention and elimination of chemical, biological, radiological, nuclear and high explosives materials and weapon systems. We are a global leader in the elimination of chemical weapons and agents. We provide life-cycle demilitarization services to federal clients, including chemical and biological warfare material elimination and nuclear weapons delivery systems disarmament. This market includes support for the Department of Defense in the destruction of the US chemical weapons stockpile. We are the system contractor for three of the US Army’s four incineration-based chemical weapons destruction facilities. We are also responsible for the start-up, pilot plant testing, operations and maintenance and closure of two additional neutralization-based plants, dealing with intact chemical weapons. All of these facilities are designed to destroy chemical weapons that have been stored for many years in underground bunkers. In
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addition, we have expanded our global reach through destruction of a chemical agent stockpile in Albania.


We provide demilitarization services, funded by the US government, to the former Soviet Union, and have been awarded significant participation in the Cooperative Threat Reduction Integrated Contract thereunder. This contract is financed by the US to prevent proliferation of, and safely eliminate, weapons of mass destruction located in the former Soviet Union. Work performed includes elimination of strategic missiles and related delivery systems, conversion of the Seversk, Russia plutonium production facility into a peacetime electrical power production plant, and construction support for the chemical weapons disposal facility in Shchuch’ye, Russia. We are also assisting the Azerbaijan and Uzbekistan governments in establishing material detection and interdiction capabilities for weapons of mass destruction

A major objective of Threat Reduction is optimizing the value of existing contracts, while our business development efforts are focused on evaluating adjacent market opportunities and selecting higher probability market sectors for development and penetration in the US and abroad.

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Defense Services. Defense Services, principally, addresses Department of Defense needs, offering a wide array of services including engineering, procurement, construction, operation, management and technical services with an objective of reducing the Department’s risk in mission execution due to infrastructure vulnerabilities. We support Department of Defense entities and agencies that operate or maintain major facilities, providing classified and unclassified architectural engineering services, engineering, procurement and construction services, as well as support services. We provide similar services to the Department of State and various intelligence agencies of the US government. We lead one of six teams that provide a wide range of support services under a $10 billion indefinite delivery/indefinite quantity, rapid response contract to the US Air Force under their Contract Augmentation Program (“AFCAP”).


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Homeland Security. Homeland Security provides integrated solutions that reduce vulnerability to terrorist acts or similar hostile acts and that mitigate the consequences of such acts, with emphasis on high-value security systems, force protection and emergency preparedness and response services. We provide threat analysis and mitigation services to a variety of clients, domestic and international. We support one of the highest US priorities, the security of the nation and the safety of US citizens and assets abroad. The market for our services is principally derived from US Federal requirements and international governments and agencies that have similar security concerns and strategic assets that require protection. Concerns about border security have emerged as an area of global interest. We are positioning to serve those needs. With the creation of the Department of Homeland Security, we devote our considerable experience in security research and technologies to compete for resulting business. We are pursuing multiple opportunities for securing transportation systems and other critical infrastructure. Washington Group International is certified by the US Department of Homeland Security to provide anti-terrorism services for cargo-container facilities at ports in the US.


The Defense business unit applies our comprehensive skills to create cost-effective solutions to operational challenges, drawing resources from all of Washington Group International’s business units. Such integration is essential to compete successfully in existing and emerging markets. We perform virtually all Defense work on a cost-reimbursable basis.

Energy & Environment

Our Energy & Environment business unit provides services to the US Department of Energy, which is responsible for maintaining the nation’s nuclear weapons stockpile, performing legacy environmental cleanup and remediation, and leading the development of next generation nuclear power. The services provided include construction, contract management, supply-chain management, quality assurance, waste management, facilities management, decontamination and decommissioning, environmental cleanup and restoration services. Energy &

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Environment provides safety management consulting and waste and environmental technology, engineered products, including radioactive waste containers and technical support services.  

The Energy & Environment business unit also provides products and services to commercial clients, including the design and manufacture of engineered canisters to ship and store spent nuclear fuel, safety planning, integrated safety management consulting, facility operation, hazardous material management and licensing.

The Energy & Environment business unit primarily serves the US Department of Energy in the environmental management market segment, while also serving the National Nuclear Security Agency by managing nuclear operations and the Department of Defense in selected engineering, design, construction, environmental cleanup, and remediation projects. There are currently three market units within Energy & Environment: Management Services, Projects and Consulting Services. We are positioning a fourth market unit, International, to provide the services of the existing three market units to international customers, primarily in the United Kingdom.

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Management Services. Management Services focuses on Department of Energy site management and support contracts, under which key personnel are supplied to effectively manage existing site operations, infrastructure and human resources. Our current emphasis is managing complex, high-hazard facilities and operations using our experience in technology, commercial nuclear operations, safety and operations in a regulatory environment.


Management Services has long-term management contracts with the Department of Energy. We serve three major programs within the Department of Energy, Environmental Management, Science and the National Nuclear Security Agency. The Environmental Management program consists of the environmental cleanup activities (radioactive and hazardous waste), resulting from the US government’s nuclear weapons program. Our key existing contracts include the Savannah River Site in South Carolina, the West Valley Nuclear Services Site in New York, the Idaho Cleanup Project in Idaho, the River Corridor Project in Washington   and the Waste Isolation Pilot Project in New Mexico. The Science program consists of facility and infrastructure management, such as our contract at the Idaho National Laboratory. The National Nuclear Security Agency consists of the Department of Energy’s defense programs and weapons production activities, such as our contracts at Los Alamos National Laboratory and production facilities at the Savannah River Site. These contracts range in term from five to ten years and may include options to renew for up to five years.

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Projects. Projects provides life-cycle services to the Department of Energy and its prime contractors, as well as to other US government agencies. We utilize our skills in environmental remediation, design of complex high-hazard facilities and construction capability to service this market. We provide nuclear and high-hazard facility engineering, procurement and construction; nuclear and high-hazard facility deactivation, decommissioning, decontamination and dismantlement; and environmental characterization, design and remediation. Our work includes mid-level design, construction and environmental projects for the Department of Defense.


We offer a broad portfolio of services and technologies to the Department of Energy, the Department of Defense and the EPA, with five distinct clients within the agencies. In the Department of Energy, we serve Environmental Management and the National Nuclear Security Agency. In the Department of Defense, our customers include the US Air Force Center for Environmental Excellence (“AFCEE”), the US Army Corps of Engineers and the US Navy Facilities Engineering Command. The Defense and Infrastructure business units are executing AFCEE contracts in Iraq.

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Consulting Services . Consulting Services provides services to most Department of Energy sites. These services are also provided to other governmental agencies or commercial clients. The core products and services include safety analysis, regulatory services, criticality and radiological engineering, safeguards and security management and environmental services. We self-perform for our sites, support other sites and are equipped to provide services throughout the life cycle of a project.
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Consulting Services is primarily concentrated in the Washington Safety Management Solutions LLC. Washington Safety Management Solutions LLC takes the expertise developed through our experience in the Department of Energy Management Services business and develops programs that are utilized at other Department of Energy and governmental sites and with commercial clients. The Department of Energy facilities are our principal customers.

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International. International addresses new markets for our core services internationally, primarily in the United Kingdom, which is actively seeking such services to address their environmental legacies. We are currently providing cleanup support to several sites in the United Kingdom and are supporting project work with the Atomic Weapons Establishment. We believe we are well-positioned to compete for this work given our experience and the scope of our projects in the hazardous environmental management field in the US.


For financial information about each of our business units, geographic areas in which we operate, and additional disclosures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business Unit Results” in Item 7 of this report and Note 10, “Operating Segment, Geographic and Customer Information,” of the Notes to Consolidated Financial Statements in Item 8 of this report.

MATERIAL CUSTOMERS

During 2006, ten percent or more of our total consolidated revenue was derived from contracts and subcontracts performed by the Power, Infrastructure, Industrial/Process, Defense and Energy & Environment business units for the following customers:

   
Percent of Consolidated Revenue
 
Department of Defense
   
27
%
Department of Energy
   
23
%


Although we presently have positive relationships with the Department of Defense and the Department of Energy, the loss of these customers, or significant reductions in government funding, could have a material adverse effect primarily on our Defense and Energy & Environment business units as well as on our company as a whole. See Item 1A, “Risk Factors,” later in this report.

GOVERNMENT CONTRACTS AND BACKLOG

Government funded contracts continue to be a significant part of our business.   We derived 51 percent of our consolidated operating revenue in 2006 from contracts with the US government, including 10 percent from work performed in Iraq. We also have a number of US government contracts that extend beyond one year and for which government funding has not yet been approved. All US government contracts and some foreign contracts are subject to unilateral termination at the convenience of the customer.

Backlog represents the total value of all awarded contracts that have not been completed and will be recognized as revenue or as equity in income over the life of the project. Backlog includes our proportionate share of non-consolidated construction joint venture contracts. Backlog for government contracts includes only two years’ worth of the portions of such contracts that are currently funded or that we are highly confident will be funded. Backlog associated with mining service contracts and ventures is limited to the revenue and equity in income to be recognized during the next five years. The reported backlog excludes $3.1 billion of government contracts for work to be performed beyond December 2008 and $0.8 billion of mining service contracts and equity in income from mining ventures beyond 2011.

We have indefinite delivery/indefinite quantity (“ID/IQ”) contracts that are signed contracts under which we perform work only when the client issues specific task orders. The terms of these contracts include a maximum

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contract value and a specified time period that may include renewal option periods at the client’s discretion. While we believe that we will continue to receive work over the entire term, because of the uncertainty of the renewals and our dependence on the issuance of individual task orders for new projects, we cannot be assured that we will ultimately realize the maximum contract value for any particular contract. Only those task orders that are signed and funded are included in backlog.

Backlog at December 29, 2006, totaled $5.6 billion compared with backlog of $4.9 billion at December 30, 2005. Approximately $1.8 billion of the backlog at December 29, 2006, was comprised of US government contracts that are subject to termination by the government, $0.5 billion of which had not yet been funded. Historically, we have not experienced significant reductions in funding of US government contracts once they have been awarded. Terminations for the convenience of the government generally provide for recovery of contract costs and related earnings. Approximately $2.9 billion, or 52 percent, of backlog at December 29, 2006, is expected to be recognized as contract revenue or as equity in income in 2007, compared to $2.4 billion, or 50 percent, at December 30, 2005.

Although backlog reflects business that we consider to be firm, cancellations or scope adjustments may occur.

 

Composition of backlog
(In millions)
Year Ended
December 29, 2006
Year Ended
December 30, 2005
Cost-type and target-price contracts
$4,484.7
80%
$3,465.8
71%
Fixed-price and fixed-unit-price contracts
1,120.1
20%
1.414.5
29%
Total backlog
$5,604.8
100%
$4,880.3
100%


   For additional information about backlog of our business units, see “Managements Discussion and Analysis of Financial Condition and Results of Operations - Business Unit New Work and Backlog” in Item 7 of this report.

COMPETITION

We are engaged in highly competitive businesses in which customer contracts are typically awarded through competitive bidding processes. We compete primarily based on price, reputation and reliability with other general and specialty contractors, both foreign and domestic, including large international contractors and small local contractors. Success or failure in our lines of business is, in large measure, based upon the ability to compete successfully for contracts and to provide the engineering, planning, procurement, construction, operations and project management and project financing skills required to complete them in a timely and cost-efficient manner. Some competitors have greater financial and other resources than we do, which, in some instances, could give them a competitive advantage over us.

EMPLOYEES

Our global employment varies widely with the volume, type and scope of operations at any given time. In December 2006, our workforce totaled approximately 25,000 employees. Approximately 15 percent of our employees are covered either by one of our regional labor agreements, which expire between June 2007 and June 2010, or by specific project labor agreements, each of which expires upon completion of the relevant project.

RAW MATERIALS

We can purchase most of the raw materials and components necessary to operate our businesses from numerous sources. However, the price and availability of raw materials and components may vary widely from year to year due to customer demand, production capacity, market conditions and material shortages. We do not anticipate any unavailability of raw materials or components that would have a material adverse effect on our businesses in the foreseeable future.

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ENVIRONMENTAL MATTERS

Our environmental and hazardous substance remediation and contract mining services involve risks of liability under federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). We perform environmental remediation at Superfund sites as a response action contractor for the EPA and, in such capacity, are exempt from liability under any federal law, including CERCLA, unless our conduct is negligent. Moreover, we may be entitled to indemnification from agencies of the US government against liability arising out of the negligent performance of work in such capacity. We do not own any of the CERCLA sites.

We are subject to risks of liability under federal, state and local environmental laws and regulations, as well as common law. These laws and regulations and the risk of attendant litigation can cause significant delays to a project and add significantly to its cost. Violations of these laws and regulations could subject us to civil and criminal penalties and other liabilities, including liabilities for property damage, costs of investigation and cleanup of hazardous or toxic substances on property currently or previously owned by us or arising out of our current and past remediation, waste management and contract mining activities.

For additional information regarding environmental matters, see Item 1A, “Risk Factors,” later in this report.

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ITEM 1A. RISK FACTORS

We are subject to a number of risks, including those enumerated below. Any or all of these risks could have a material adverse effect on our business, financial condition, results of operations and cash flows and on the market price of our common stock. See also “Note Regarding Forward-Looking Information” preceding Part I of this report.

The documents governing our indebtedness restrict our ability and the ability of some of our subsidiaries to engage in some business transactions.

We have a senior secured revolving credit facility (the “Credit Facility”) that provides for up to $350 million of loans and other financial accommodations. The credit agreement governing the Credit Facility restricts or places certain limits on our ability and the ability of some of our subsidiaries to, among other things:

·   incur or guarantee additional indebtedness;

·   declare or pay dividends on, redeem or purchase capital stock;

 
·

make investments;


 
·

incur or permit liens to exist;


 
·

enter into transactions with affiliates;


 
·

make material changes in the nature or conduct of our business;


 
·

merge or consolidate with, or acquire substantially all of the stock or assets of, other companies;


 
·

transfer or sell assets; and


 
·

engage in sale-leaseback transactions.


The Credit Facility contains covenants that are typical for credit facilities of its size, type and tenor, such as requirements that we meet specified financial ratios and financial condition tests. Our ability to borrow under the Credit Facility depends upon satisfaction of these covenants. Our ability to meet these covenants and requirements may be affected by events beyond our control.

Our failure to comply with obligations under the Credit Facility could result in an event of default under the facility. A default, if not cured or waived, could permit acceleration of any outstanding indebtedness. We cannot be certain that we will be able to remedy any default. If our indebtedness is accelerated, we cannot be certain that we will have funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all.

Economic downturns and reductions in government funding could have a negative impact on our businesses.

Demand for the services offered by us has been, and is expected to continue to be, subject to significant fluctuations due to a variety of factors beyond our control, including economic conditions. During economic downturns, the ability of both private and governmental entities to make expenditures may decline significantly. We cannot be certain that economic or political conditions will be generally favorable or that there will not be significant fluctuations adversely affecting our industry as a whole or key markets targeted by us. In addition, our operations are, in part, dependent upon government funding. Significant changes in the level of government

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funding could have an unfavorable impact on our business, financial position, results of operations and cash flows.

Our success depends on attracting and retaining qualified personnel in a competitive environment.

We are dependent upon our ability to attract and retain highly qualified managerial, technical and business development personnel. Competition for key personnel is intense. We cannot be certain that we will retain our key managerial, technical and business development personnel or that we will attract or assimilate key personnel in the future. Failure to retain or attract such personnel could adversely affect our businesses, financial position, results of operations and cash flows.

We are engaged in highly competitive businesses and must typically bid against competitors to obtain engineering, construction and service contracts.

We are engaged in highly competitive businesses in which customer contracts are typically awarded through competitive bidding processes. We compete with other general and specialty contractors, both foreign and domestic, including large international contractors and small local contractors. Some competitors have greater financial and other resources than we do, which, in some instances, could give them a competitive advantage over us.

Our fixed-price contracts subject us to the risk of increased project costs.

Our fixed-price contracts involve risks relating to our inability to receive additional compensation in the event the costs of performing those contracts prove to be greater than anticipated. Our cost of performing the contracts may be greater than anticipated due to uncertainties inherent in estimating contract completion costs, contract modifications by customers resulting in claims, failure of subcontractors and joint venture partners to perform and other unforeseen events and conditions. At December 29, 2006, approximately 20 percent,   or $1.1 billion, of our backlog represented fixed-price and fixed-unit-price contracts. Any one or more of these risks could result in reduced profits or increased losses on a particular contract or contracts.

We have seen an increase in our claims against project owners for payment and our failure to recover adequately on these and future claims could have a material effect on us.

We have over the past few years seen an increase in the volume and the amount of claims brought by us against project owners for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as owner-caused delays or changes from the initial project scope, both of which may result in additional costs, both direct and indirect. Often, these claims can be the subject of lengthy arbitration or litigation proceedings, and it is difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we have used significant working capital in projects to cover cost overruns pending the resolution of the relevant claims. A failure to promptly recover on these types of claims could have a negative impact on our liquidity and financial condition.

The US government can audit and disallow costs reimbursed under our government contracts and can terminate those contracts without cause.

Government contracts, primarily with the US Departments of Energy and Defense, are, and are expected to continue to be, a significant part of our business. We derived approximately 51 percent of our consolidated revenue in 2006 from contracts funded by the US government. Allowable costs under government contracts are subject to audit by the US government. To the extent that these audits result in determinations that costs claimed as reimbursable are not allowable costs or were not allocated in accordance with federal government regulations, we could be required to reimburse the US government for amounts previously received. In addition, if we were to lose and not replace our revenue generated by one or more of the US government contracts, our businesses, financial condition, results of operations and cash flows could be adversely affected.

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We have a number of contracts and subcontracts with agencies of the US government, principally for environmental remediation, threat reduction, restoration and operations work, which extend beyond one year and for which government funding has not yet been approved. We cannot be certain that funding will be approved. All contracts with agencies of the US government and some commercial and foreign contracts are subject to unilateral termination at the convenience of the customer. In the event of a termination, we would not receive projected revenue or profits associated with the terminated portion of those contracts.

In addition, government contracts are subject to specific procurement regulations, contract provisions and a variety of other socioeconomic requirements relating to the formation, administration, performance and accounting for these contracts. Many of these contracts include express or implied certifications of compliance with applicable laws and contract provisions. As a result of our government contracting, claims for civil or criminal fraud may be brought by the government for violations of these regulations, requirements or statutes. We may also be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for up to treble damages. Further, if we fail to comply with any of these regulations, requirements or statutes, our existing government contracts could be terminated, we could be suspended from government contracting or subcontracting, including federally funded projects at the state level, and our ability to participate in foreign projects funded by the US government could be adversely affected. If one or more of our government contracts are terminated for any reason, or if we are suspended from government work, we could suffer a significant reduction in expected revenue and earnings.

Our dependence on one or a few customers could adversely affect us.

One or a few clients have in the past and may in the future contribute a significant portion of our consolidated revenue in any one year or over a period of several consecutive years. In 2006, approximately 27 percent of our revenue was from the US Department of Defense and approximately 23 percent of our revenue was from the US Department of Energy. As our backlog frequently reflects multiple projects for individual clients, one major customer may comprise a significant percentage of our backlog at any point in time. For example, the US Department of Defense, with which we have 78 contracts, represented an aggregate of 21 percent of our backlog at December 29, 2006, and the US Department of Energy, with which we have 240 contracts, represented an aggregate of 14 percent of our backlog at December 29, 2006.

Because these significant customers generally contract with us for specific projects, we may lose these customers from year to year as their projects with us are completed. If we do not replace them with other customers or other projects, our business could be materially adversely affected.

Additionally, we have long-standing relationships with many of our significant customers. Our contracts with these customers, however, are on a project-by-project basis, and the customers may unilaterally reduce or discontinue their purchases at any time. The loss of business from any one of such customers could have a material adverse effect on our business or results of operations.

Changes in environmental laws, regulations and programs, could reduce demand for our environmental services, which could negatively impact our revenue.

Our environmental business is driven by federal, state, local and foreign laws, regulations and programs related to pollution and environmental protection. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could result in a decline in demand for environmental services that could negatively impact our revenue.

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Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future earnings.

As of December 29, 2006, our backlog was approximately $5.6 billion. We cannot assure that the revenue projected in our backlog will be realized or, if realized, will result in profits. Projects may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. Although we have not experienced any significant cancellations, project terminations, suspensions or reductions in scope, these could occur from time to time with respect to contracts reflected in our backlog. Such backlog reductions would adversely affect the revenue and profit we actually receive from contracts reflected in our backlog.

Our businesses involve many project-related and contract-related risks.

Our businesses are subject to a variety of project-related risks, including changes in political and other circumstances, particularly since contracts for major projects are performed over extended periods of time. These risks include the failure of applicable governing authorities to take necessary actions, opposition by third parties to particular projects and the failure by customers to obtain adequate financing for particular projects. Due to these factors, losses on a particular contract or contracts could occur, and we could experience significant changes in operating results on a quarterly or annual basis.

We may also be adversely affected by various risks and hazards, including industrial accidents, labor disputes, geological conditions, environmental hazards, acts of terrorism or war, weather and other natural phenomena such as earthquakes and floods.

We could be subject to liabilities as a result of our performance.

The nature of our engineering and construction businesses exposes us to potential liability claims and contract disputes that may reduce our profits.

We engage in engineering and construction activities for large industrial facilities where design, construction or systems failures can result in substantial injury or damage to third parties. Any liability in excess of our insurance limits at locations designed or constructed by us, where our products are installed or where our services are performed, could result in significant liability claims against us, which claims may reduce our earnings. In addition, if a customer disputes our performance of project services, the customer may decide to delay or withhold payment to us. If we were ultimately unable to collect on these payments, our profits would be reduced.

Our dependence on subcontractors and equipment manufacturers could adversely affect us.

We rely on third-party subcontractors as well as third-party equipment manufacturers to complete our projects. To the extent that we cannot engage subcontractors or acquire equipment or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price, fixed-unit-price or target-price contracts, we could experience reduced profit or losses in the performance of these contracts. In addition, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services, equipment or materials were needed.

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Strikes, work stoppages and other similar events, as well as resulting increases in operating costs, would have a negative impact on our operations and financial results.

We are party to several regional labor agreements that expire between June 2007 and June 2010, as well as project-specific labor agreements that commit us to use union building trades on certain projects. If we were unable to negotiate with any of the unions, it could result in strikes, work stoppages or increased operating costs as a result of higher than anticipated wages or benefits. If the unionized workers engage in a strike or other work stoppage, or other employees become unionized, we could experience a disruption of our operations and higher ongoing labor costs, which could adversely affect portions of our business, and our financial position, results of operations and cash flows. See Item 1 “Business - Employees” earlier in Part I of this report.

`

If we guarantee to a customer the timely completion or performance standards of a project, we could incur additional costs to meet our guarantee obligations.

In certain instances, including in some of our fixed-price contracts, we guarantee a customer that we will complete a project by a scheduled date. We sometimes also provide that the project, when completed, will achieve certain performance standards. If we subsequently fail to complete the project as scheduled, or if the project subsequently fails to meet the guaranteed performance standards, we may be held responsible for cost impacts to the client resulting from any delay or the costs incurred by the project to achieve the performance standards. In most cases where we fail to meet contract-defined performance standards, we may be subject to agreed-upon liquidated damages. To the extent that these events occur, the total costs for the project would exceed our original estimates and we could experience reduced profits or in some cases a loss for that project.

The success of our joint ventures is dependent on the performance of our joint venture partners of their contractual obligations.

We enter into various joint ventures as part of our engineering and construction business and project specific joint ventures. Success of these joint ventures depends largely on the satisfactory performance by our partners of their contractual obligations. If our joint venture partners fail to perform their contractual obligations as a result of financial or other difficulties, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or in losses for us.

Our international operations involve special risks.

We pursue project opportunities internationally through foreign and domestic subsidiaries as well as through agreements with domestic and foreign joint venture partners. Our international operations accounted for approximately 21 percent of our revenue in 2006, including 10 percent from work performed in Iraq. Our foreign operations are subject to special risks, including:

·   unstable political, economic, financial and market conditions;

·   potential incompatibility with foreign joint venture partners;

·   foreign currency fluctuations;

·   trade restrictions and governmental regulations;

·   restrictions on repatriating foreign profits back to the US;

·   increases in taxes;

·   civil disturbances and acts of terrorism, violence or war in the US or elsewhere; and

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·

changes in labor conditions, labor strikes and difficulties in staffing and managing international operations.


Events outside of our control may limit or disrupt operations, restrict the movement of funds, result in the deprivation of contract rights, increase foreign taxes or limit repatriation of earnings. In addition, in some cases, applicable law and joint venture or other agreements may provide that each joint venture partner is jointly and severally liable for all liabilities of the venture.

Our international operations may require our employees or subcontractors to travel to high security risk countries, which may result in employee injury, repatriation costs or other unforeseen costs.

As a global provider of engineering, construction and management services, we dispatch employees and subcontractors to various countries around the world. A country may represent a high security risk because of its political, social or economic upheaval such as war, civil unrest or ongoing acts of terrorism. Senior level employees and other key employees and subcontractors have been, and may continue to be, deployed to provide services in high security risk countries. As a result, it is possible that our employees or subcontractors may suffer injury or death, repatriation problems or other unforeseen costs and risks in the course of their international responsibilities, which could negatively impact our operations.

Actual results could differ from the estimates and assumptions used to prepare our financial statements.

In order to prepare financial statements in conformity with accounting principles generally accepted in the United States of America, our management is required to make estimates and assumptions as of the date of the financial statements. These estimates and assumptions affect the reported values of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities. Areas requiring significant estimates by our management include:

·  
determination of new work awards and backlog;


·  
recognition of contract revenue, costs, profit or losses in applying the principles of percentage-of-completion accounting;


·  
recognition of recoveries under contract change orders or claims;


·  
collectibility of billed and unbilled accounts receivable and the need and amount of any allowance for doubtful accounts;


·  
the amount of reserves necessary for self-insured risks;


·  
the determination of liabilities under pension and other post-retirement benefit programs;


·  
estimated amounts for expected project losses, reclamation costs, warranty costs or other contract close-out costs;


·  
recoverability of goodwill and other intangible assets;


·  
provisions for income taxes and realizability of deferred tax assets;


·  
accruals for other estimated liabilities, including litigation reserves.


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

As more fully discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview” in Item 7 of this report and in Note 2, “Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this report, a substantial portion of our revenue is recognized using the percentage-of-completion method of accounting. Generally, the percentage-of-completion accounting practices we utilize result in our recognizing contract revenues and earnings ratably, based on the proportion of costs incurred to total estimated contract costs or on the proportion of labor hours or labor costs incurred to total estimated labor hours or labor costs. For certain long-term contracts, completion is measured on estimated physical completion or units of production.

The cumulative effect of revisions to contract revenue and estimated completion costs, including incentive awards, penalties, change orders, claims and anticipated losses, is recorded in the accounting period in which the amounts become known and can be reasonably estimated. Such revisions could occur at any time and the effects could be material. A change order is included in total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated. Estimated contract revenue associated with change orders may include amounts in excess of costs (profit) when appropriate. Claims are included in total estimated contract revenue, only to the extent that contract costs related to the claim have been incurred, when it is probable that the claim will result in a bona fide addition to contract value and can be reliably estimated, which generally occurs when amounts have been received or awarded.

Although we have a history of making reasonably dependable estimates of the extent of progress towards completion of contract revenue and of contract completion costs on our long-term engineering and construction contracts, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates, and it is possible that such variances could be material to our operating results.

If we have to write off a significant amount of intangible assets, our earnings will be negatively impacted.

Goodwill and other intangible assets totaling $120.6 million are included in our consolidated balance sheet at December 29, 2006. We must evaluate our goodwill and other intangible assets for impairment at least annually. If our goodwill and other intangible assets were to become impaired, we would be required to write-off the impaired amount. The write-off would negatively impact our earnings; however, it would not impact our cash flows. As of December 29, 2006, all of our goodwill and other intangible assets relate to our Defense and Energy & Environment business units, which are almost entirely dependent on continued spending by the US government. See Note 2, “Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this report.

The significant demands on our cash resources could affect our ability to achieve our business plan.

We have substantial demands on our cash resources in addition to operating expenses, principally capital expenditures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition and Liquidity” in Item 7 of this report.

Our ability to fund working capital requirements will depend upon our future operating performance, which, in turn, will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. If we are unable to fund our businesses, we will be forced to adopt an alternative strategy that may include:

·   reducing or delaying capital expenditures;

·   limiting our growth;

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·   seeking additional debt financing or equity capital; or

·   selling assets.

We cannot provide assurance that any of these strategies could be affected on favorable terms or at all.

If we experience delays and/or defaults in customer payments, we could suffer liquidity problems or we could be unable to recover all expenditures.  

Because of the nature of our contracts, at times we commit resources to projects prior to receiving payments from the customer in amounts sufficient to cover expenditures on client projects as they are incurred. Delays in customer payments may require us to make a working capital investment. If a customer defaults in making its payments on a project in which we have devoted significant resources, it could have an adverse effect on our financial position, results of operations and cash flows.

We could be subject to liability under environmental laws and regulations.

We are subject to a variety of environmental, health and safety laws and regulations governing, among other things, discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. These laws and regulations and the risk of attendant litigation can cause significant delays to a project and add significantly to its cost. Violations of these environmental, health and safety laws and regulations could subject us and our management to civil and criminal penalties and other liabilities. These laws and regulations may become more stringent, or be more stringently enforced, in the future.

Various federal, state and local environmental laws and regulations, as well as common law, may impose liability for property damage and costs of investigation and cleanup of hazardous or toxic substances on property currently or previously owned by us or arising out of our waste management or environmental remediation activities. These laws may impose responsibility and liability without regard to knowledge of or causation of the presence of contaminants. The liability under these laws is joint and several. We have potential liabilities associated with our past waste management and contract mining activities and with our current and prior ownership of various properties.

Our organizational documents, some of our agreements and provisions of Delaware law could inhibit a change in control.

We are subject to various restrictions and other requirements that may have the effect of delaying, deterring or preventing the ability of others to acquire control of us, even if such a change in control would provide a premium for shareholders. These include the following, among others:

 
·

Our certificate of incorporation and bylaws provide that vacancies on the Board only can be filled by other Directors, restrict the ability of our shareholders to call special meetings and to nominate a Director for election, and require supermajority votes for amendments to our certificate of incorporation or bylaws.


 
·

The disbursing agreement that we entered into in connection with our emergence from bankruptcy requires the disbursing agent to vote the shares held by the disbursing agent as recommended by our Board of Directors, unless the Plan Committee established in connection with our bankruptcy directs it to vote the shares in proportion to the votes cast and abstentions claimed by all other stockholders eligible to vote on the particular matter. As of February 21, 2007, 871,713 shares of our common stock were held by the disbursing agent pending future distribution to unsecured creditors.


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·   Section 203 of the Delaware General Corporation Law generally limits the ability of major stockholders to engage in specified transactions with us that may be intended to effect a change in control.

 
·

Our Board of Directors has the power to determine the price and terms under which additional capital stock may be issued and to fix the terms of preferred stock. Existing stockholders will not have preemptive rights with respect to any of those shares.


Exercise of our outstanding stock options may dilute the ownership interests of our existing stockholders and could adversely affect the market price of our common stock.

We have issued stock options to our directors and key employees under our long-term incentive program. As of December 29, 2006, we had 5,100,852 outstanding options to purchase common shares at a weighted-average exercise price of $31.95 per share. The exercise of these options may dilute the ownership interests of our existing stockholders. Furthermore, any sales in the public market of the common stock issuable upon exercise of the options could adversely affect the prevailing market price of our common stock.

See additional information on our outstanding stock options in Note 13, “Capital Stock, Stock Purchase Warrants and Stock Compensation Plans,” of the Notes to Consolidated Financial Statements in Item 8 of this report.

Adequate bonding is necessary for us to successfully win new work awards on some types of contracts.

In line with industry practice, we are often required, primarily in our Infrastructure business unit, to provide performance and surety bonds to customers under fixed-price contracts. These bonds indemnify the customer should we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. We have bonding capacity but, as is typically the case, the issuance of a bond is at the surety’s sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional cost. There can be no assurance that bonds will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new work could have a material adverse effect on our businesses, financial condition, results of operations and cash flows. Of $4.2 billion of new work awarded during 2006, 2 percent required bonding.

Unavailability of insurance coverage could have a negative impact on our operations and results.

We maintain insurance coverage as part of our overall risk management strategy and due to requirements to maintain specific coverage in our financing agreements and in most of our construction contracts. Although we have been able to obtain insurance coverage to meet our requirements in the past, there is no assurance that such insurance coverage will be available in the future.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

We do not have any unresolved written comments from the staff of the SEC regarding our periodic or current reports under the Exchange Act.


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