UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended February 28, 2005
Or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from                      to
	Commission File Number 1-12227

The Shaw Group Inc.

225-932-2500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

Yes þ No o

The number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date, is as follows:

Common stock, no par value, 64,733,893 shares outstanding as of April 1, 2005.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

THE SHAW GROUP INC. AND SUBSIDIARIES

ASSETS

(Continued)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)

LIABILITIES AND SHAREHOLDERS’ EQUITY

The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE SHAW GROUP INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE SHAW GROUP INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE SHAW GROUP INC. AND SUBSIDIARIES

Note 1 – General Information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the interim reporting requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with Generally Accepted Accounting Principles (GAAP) have been condensed or omitted. Readers of this report should, therefore, refer to the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2004, filed with the Securities and Exchange Commission on November 2, 2004.

The financial information of The Shaw Group Inc., including its wholly-owned subsidiaries, its consolidated variable interest entities, and in some cases the proportionate share of its investment in joint ventures as of February 28, 2005 and for the three and six month periods ended February 28, 2005 and February 29, 2004, was not audited by our independent auditors. In the opinion of management, all adjustments (consisting of normal recurring adjustments) which are necessary to fairly present its financial position and its results of operations as of and for these periods have been made.

Our interim results of operations are not necessarily indicative of results of operations that will be realized for the full fiscal year.

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and costs during the reporting periods. Actual results could differ materially from those estimates. On an ongoing basis, we review our estimates based on information currently available, and changes in facts and circumstances may cause us to revise these estimates.

Certain reclassifications have been made to the prior period’s financial statements in order to conform to the current period’s presentation.

Note 2 – Stock-Based Compensation

Our Employee Stock Option Plans allow for the issuance of stock options and restricted stock to employees. We account for options issued under our stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” which provides that no stock-based compensation expense is recognized if stock options are granted at an exercise price equal to the market value of the underlying stock at the date of grant and all other provisions are fixed at the date of grant. Our stock-based compensation consists of the issuance of stock options and restricted stock.

In addition, APB No. 25 provides that compensation expense related to restricted stock grants be measured at the market price of the stock on the date the restricted stock is granted, with no discount provided for the restrictions. The compensation expense is recognized over the periods benefited from the employees’ services which we believe is the period over which the restrictions lapse.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, we compute the pro forma option expense amounts using the Black-Scholes option pricing model as if we had adopted the fair value method of accounting for stock-based compensation and had determined our stock-based compensation cost based on the fair value at the grant date. The impact to our net income (loss) and income (loss) per common share would have approximated the pro forma amounts below (in thousands, except per share amounts):

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The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123 and supersedes APB No. 25 and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R) requires that we measure the value of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. The computed value will be recognized as a non-cash cost over the period the employee is required to provide services. SFAS No. 123(R) is effective for the first interim or annual period beginning after June 15, 2005 (effective September 1, 2005 for us), and provides for two methods of transition: the modified retrospective method (we may restate compensation cost previously reported), and the modified prospective method (there is no restatement of compensation cost reported on a pro forma basis in prior fiscal years, although we may restate prior interim periods of the fiscal year in which SFAS No. 123(R) is adopted).

We have not yet determined the impact that SFAS No. 123(R) will have on our consolidated financial statements as we have not completed our analysis of the potential impact and we cannot predict the level of share-based payments granted in the future, but the adoption will result in a reduction of net income that may be material.

SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

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Restricted Stock

Our 1993 Employee Stock Option Plan and 2001 Employee Incentive Compensation Plan allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. If termination of employment occurs prior to the lapse of these restrictions, the shares must be returned to us related to these restricted stock grants. This unearned stock-based compensation is being amortized to compensation expense over the period the restrictions lapse (generally one to four years).

The following table represents the shares that were granted and outstanding as of February 28, 2005 and August 31, 2004:

These restricted stock awards were issued to certain employees, including our executive officers. As of February 28, 2005, we have recorded unearned stock-based compensation as a component of shareholders’ equity of $13.4 million. For the three and six months ended February 28, 2005, $0.8 million and $1.8 million of stock-based compensation expense is included in general and administrative expenses and cost of revenues on the accompanying condensed consolidated statements of operations related to these restricted stock grants as compared to $0.5 million and $0.5 million for the three and six months ended February 29, 2004.

Note 3 – Public Capital Stock Transactions

On October 29, 2003, we issued 23 million shares of common stock at $10 per share with related transaction costs of approximately $12.5 million, generating net proceeds of $217.5 million. Approximately $194.7 million of the net proceeds were used to repurchase a portion of our outstanding Liquid Yield Option™ Notes or LYONs (see Note 8). The remaining net proceeds of $22.8 million plus interest earned were held in escrow until they were used to repurchase additional LYONs in May 2004.

Note 4 – Acquisitions

The operating results of acquisitions are included in our condensed consolidated financial statements from the applicable dates of the transactions. Pro forma information has not been disclosed for the fiscal year 2004 acquisitions as the impact on an individual and aggregate basis is not deemed significant for the periods presented. During fiscal 2004, we completed three acquisitions accounted for as purchases including Coastal Engineering and Environmental Consultants, Inc. (Coastal), LFG&E and Energy Delivery Services, Inc. (Shaw EDS). The purchase price allocations for these acquisitions are final as of February 28, 2005.

We finalized our purchase price allocation related to the Shaw EDS acquisition, included in our E&C segment, in the second quarter of fiscal 2005. The total purchase price of $22.4 million was allocated as follows: $11.8 million of goodwill, $0.9 million in other intangibles including tradename and customer relationships, $11.8 million in accounts receivable, $9.6 million of equipment, $0.5 million in other assets, $0.5 million in cash, $5.4 million in capital lease obligations and $7.3 million of other liabilities.

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Note 5 – Goodwill and Other Intangible Assets

Goodwill

The following table reflects the changes in the carrying value of goodwill from September 1, 2004 to February 28, 2005 (in thousands):

During the first quarter of fiscal 2005, we received a $3.9 million income tax refund. This income tax refund relates to income tax returns filed by Stone & Webster’s Canadian entities prior to our acquisition of the assets of Stone & Webster in fiscal 2000. Pursuant to the asset purchase agreement, we are entitled to the income tax refund; however, as the refund relates to income tax uncertainties existing as of the acquisition date, goodwill has been reduced to reflect the refund as of the acquisition date.

During the second quarter of fiscal 2005, we sold the assets of Shaw Power Technologies, Inc. (PTI) for approximately $14 million in cash proceeds and recognized a $2.0 million gain on the sale, which reflects the reduction of goodwill of $7.3 million (see Note 16).

We had tax deductible goodwill of approximately $169.2 million and $184.4 million as of February 28, 2005 and August 31, 2004, respectively.

Other Intangible Assets

At February 28, 2005 and August 31, 2004, amortizable intangible assets, included in other assets, other than contract adjustments, consisted of proprietary ethylene technology, ethyl benzene, cumene and styrene technologies which are being amortized over fifteen to seventeen years and patents which are being amortized over ten years. We also amortize a customer relationship intangible over ten years. In connection with our final purchase price allocation of the EDS acquisition in the second quarter of fiscal 2005, we recorded tradename and customer relationship intangibles which are amortized over three and seven years, respectively. During the second quarter of fiscal 2005, our Badger Technologies, LLC variable interest entity (VIE) purchased Bisphenol-A (BPA) technology for $1.5 million which is being amortized over 15 years. All amortizable intangible assets are amortized using a straight-line method.

The gross carrying values and accumulated amortization of these amortizable intangible assets as of February 28, 2005 and August 31, 2004 are presented below (in thousands):

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During the three months ended February 28, 2005, in connection with the completion of our valuation of intangibles related to our acquisition of EDS, we recognized additional amortization of intangibles to reflect accumulated amortization as if the intangibles had been valued at the final purchase price allocation amounts as of the acquisition date.

The annual amortization for our intangible assets not associated with contract adjustments is approximately $3.0 million through fiscal 2010 related to the proprietary technologies, patents and trademarks and approximately $0.3 million through 2010 related to customer relationships.

Contract Adjustments and Accrued Contract Losses

The contract adjustments and accrued contract losses established in purchase accounting (related to the IT Group and Stone & Webster acquisitions) are recognized periodically as adjustments to cost of revenues.

The following table presents the additions to and utilization of contract adjustments and accrued contract losses established in purchase accounting for the periods indicated (in thousands):

The decreases in the contract (asset) adjustments, contract liability adjustments and accrued contract losses for the three and six months ended February 28, 2005 and February 29, 2004 represent the utilization of adjustments related to the IT Group and Stone & Webster acquisitions.

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Accrued contract losses included in advance billings and billings in excess of cost and estimated earnings on Uncompleted Contracts for contracts not acquired in an acquisition were $6.5 million and $3.4 million as of February 28, 2005 and August 31, 2004, respectively.

Contract (asset) adjustments are included in other current assets and accrued contract losses are included in advance billings and billings in excess of cost and estimated earnings on uncompleted contracts.

Note 6 – Inventories and Other Assets

The major components of inventories were as follows (in thousands):

Included in non-current other assets is $20.7 million at February 28, 2005 and $23.9 million at August 31, 2004 representing the carrying value of the Pike project site, including land, materials and equipment, which we obtained in settlement of our claim in the bankruptcy proceeding of our customer in November 2003. During the three months ended February 28, 2005 we utilized $3.2 million of materials and equipment for projects.

Note 7 – Unconsolidated Entities, Joint Ventures and Limited Partnerships

Variable Interest Entities

In accordance with Financial Accounting Series Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” we have analyzed our unconsolidated entities, joint ventures and limited partnerships and applied the consolidation method of accounting for our investments in material Variable Interest Entities (VIEs) of which we are the primary beneficiary.

The following table represents the total assets and liabilities before intercompany eliminations of those VIEs of which we are the primary beneficiary, and therefore consolidate, and the total assets and liabilities before intercompany eliminations of VIEs of which we are not the primary beneficiary (in thousands):

The following disclosure summarizes new or significant changes in the status of VIEs since August 31, 2004:

Consolidated VIEs

•

In August 2004, Liquid Solutions LLC was formed to provide solutions for the management and treatment of wastewater. We have a 50% equity interest in this entity. We have concluded this entity is a VIE and we are the primary beneficiary as we are obligated to absorb the majority of the expected losses and the expected residual returns, if any. This entity had total assets and liabilities of $4.1 million and $5.7 million, respectively, as of February 28, 2005 reflected in our E&I segment. The assets and liabilities as of August 31,

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2004 were not material. On February 28, 2005, this VIE entered into a promissory note for $2.3 million to finance equipment purchases of the VIE. The note is temporary until permanent financing can be obtained as it matures on June 28, 2005. We have issued a letter of credit as collateral for this note payable. Our exposure to losses consists of our letter or credit, equity interest and note receivable with accrued interest totaling $3.9 million as of February 28, 2005.

Unconsolidated VIEs (Equity Method Accounting)

•

In February 2005, we contributed cash of $2.8 million to American Eagle Northwest, LLC for a 50% equity interest. This entity was established to undertake the privatization of military housing for United States Navy personnel and their families under a design, build and rental housing contract in the State of Washington. American Eagle Northwest, LLC has a minority equity interest in Pacific Northwest Communities, LLC (PNC) of which the United States Navy has a majority equity interest. We have concluded that PNC is a VIE. Under the arrangement, American Eagle Northwest, LLC is obligated to absorb the majority of the expected losses from PNC’s contract with the United States Navy; however, we are not the primary beneficiary. We also, along with our American Eagle Northwest, LLC equity partner, have guaranteed certain items of the performance of the VIE under the contract with the United States Navy. We account for American Eagle Northwest, LLC under the equity method. As of February 28, 2005, our maximum exposure to loss consisted of our equity investment of $3.4 million and the exposure related to the guarantee (see Note 16). In February 2005, American Eagle Northwest, LLC successfully obtained financing of approximately $226 million through a private placement bond offering from third-party lenders. The bonds are secured by first liens on the rental properties without recourse to the general credit of the equity partners. As of February 28, 2005, this entity had total assets and liabilities of approximately $252 million and approximately $229 million, respectively.

Unconsolidated Entities, Joint Ventures and Limited Partnerships

The following is a summary of our investments in and advances to unconsolidated entities which are accounted for under the equity method except for one which is accounted for at cost. Upon adoption of FIN 46(R), some of our unconsolidated entities, including Shaw Nass Middle East, W.L.L., were determined to be VIEs for which we are the primary beneficiary and were consolidated as of May 31, 2004.

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Earnings (losses) from unconsolidated entities, net of taxes, are as follows (in thousands):

In connection with our housing privatization joint ventures, we made equity contributions of approximately $4.5 million and $10.5 million during the three and six months ended February 28, 2005, respectively. There were no equity contributions for the three and six months ended February 29, 2004. As of February 28, 2005, we are not scheduled to make any significant equity contributions for the remainder of fiscal 2005. The exact timing of equity contributions is uncertain, as they are dependent on the progress of the underlying projects.

Note 8 – Long-term Debt

Long-term debt consisted of the following (in thousands):

During the first quarter of fiscal 2005, we financed insurance premiums of $8.7 million with a note payable, which $5.9 million had been paid as of February 28, 2005 and the remainder will be paid over the next four months.

The estimated fair value of long-term debt, excluding capital leases, as of February 28, 2005 and August 31, 2004 was approximately $298.9 million and $246.9 million, respectively, based on current market prices of such debt.

For the three and six months ended February 28, 2005, we recognized $1.2 million and $2.3 million, respectively, of interest expense associated with the amortization of financing fees that were incurred with respect to the issuance of our Senior Notes, LYONS and the Credit Facility, as compared to $1.1 million and $2.4 million for the three and six months ended February 29, 2004, respectively. As of February 28, 2005 and August 31, 2004, unamortized deferred financing fees related to the Senior Notes and the Credit Facility were approximately $9.9 million and $11.3 million, respectively.

Senior Notes

On March 17, 2003, we issued and sold $253 million aggregate principal amount at maturity of 10.75% Senior Notes due 2010, or Senior Notes, which mature on March 15, 2010. The Senior Notes were issued at an original discount price of $988.03 per $1,000 maturity value and have a yield to maturity of 11.00%. The notes have a call (repurchase) feature that allows us to repurchase all or a portion of the notes at prices stipulated by the Senior Notes.

Additionally, prior to March 15, 2006, we may, at our option, utilize the net cash proceeds from one or more equity offerings, within ninety days of our receipt of the equity funds, to repurchase up to 35% of the then outstanding amount of Senior Notes at a price of 110.75% of the maturity value of the Senior Notes. Prior to March 15, 2007, we may, at our option, repurchase all of the then outstanding Senior Notes at a price equal to the principal amount of the

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notes plus a specified applicable premium. The Senior Notes are unsecured but are guaranteed by all of our material domestic subsidiaries. Upon the sale of assets exceeding $10 million, we may use the proceeds to either reduce senior debt, borrowings drawn under our Credit Facility, or acquire additional assets within a one year period. To the extent any proceeds remain after one year, we are required to offer to purchase the Senior Notes at their full accreted value.

Revolving Lines Of Credit

In February 2005, our $300 million Credit Facility was amended to extend the Credit Facility expiration date from March 17, 2006 to September 17, 2006 to provide us time to assess our current and future business needs and secure a new credit facility to support us in our business. No other terms of the Credit Facility were amended.

The Credit Facility provides for both revolving credit loans and letters of credit within the $300 million limit. From time to time, we also use the Credit Facility for working capital needs and to fund fixed asset purchases, acquisitions and investments in joint ventures. During the first half of fiscal 2005 and continuing into the third quarter of fiscal 2005, we periodically borrow under our Credit Facility for our daily working capital needs. As of February 28, 2005, we do not have any outstanding borrowings under our Credit Facility.

Under the Credit Facility, interest is computed, at our option for each draw, using either the defined base rate or the defined LIBOR rate, plus a margin. The terms “base rate” and “LIBOR rate” have meanings customary for financings of this type. The margin is adjusted based on our Credit Facility ratings by Standard and Poor’s Rating Services and Moody’s Investor Services or, if the Credit Facility is not rated, the ratings from these services applicable to our senior, unsecured long-term indebtedness. The margins for the Credit Facility draws may be in a range of (i) 1.00% to 3.00% over LIBOR or (ii) 0% to 1.50% over the base rate. On February 28, 2005, the interest rate on the Credit Facility would have been either 7.0% (if the base rate index had been chosen) or 5.7% (if the LIBOR rate index had been chosen). On February 28, 2005, we had outstanding letters of credit of approximately $218.4 million under our Credit Facility as compared to $215.6 million as of August 31, 2004. Fees associated with these letters of credit were approximately $1.8 million and $3.7 million and $1.2 million and $2.2 million for the three and six months ended February 28, 2005 and February 29, 2004, respectively.

We are required, with certain exceptions, to prepay loans outstanding under the Credit Facility with (i) the proceeds of new indebtedness; (ii) net cash proceeds from equity sales to third parties (if not used for acquisitions or other general corporate purposes within 90 days after receipt); and (iii) insurance proceeds or condemnation awards in excess of $5 million that are not used to purchase a similar asset or for a like business purpose within 90 days of the receipt thereof. Further, we are required to obtain the consent of the lenders to prepay or amend the terms of the 10.75% Senior Notes due 2010.

The Credit Facility is secured by, among other things, (i) guarantees by our domestic subsidiaries; (ii) a pledge of all of the capital stock of our domestic subsidiaries and 66% of the capital stock in certain of our foreign subsidiaries; and (iii) a security interest in all of our property and the property of our domestic subsidiaries (including equipment and real estate).

We also have the ability to obtain unsecured performance letters of credit outside of the Credit Facility of up to $150 million.

The Credit Facility contains certain financial covenants, including:

	•	A maximum leverage ratio of 3.5x through May 31, 2005 and 3.0x thereafter;
	•	a minimum fixed charge coverage ratio of 2.0x;
	•	a minimum net worth as defined by the Credit Facility;
	•	a defined minimum earnings before interest expense, income taxes, depreciation and amortization (EBITDA). EBITDA, as defined in the Credit Facility, is adjusted for certain non-cash items and for the pro forma impact of acquisitions and dispositions of operations (Adjusted EBITDA). The minimum Adjusted EBITDA covenant requires a trailing twelve months of EBITDA of $110 million; and

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•

a minimum working capital ratio requirement, as defined by the Credit Facility, of 1.0 to 1.0.

The Credit Facility also imposes restrictions on annual capital expenditures to 25% of annual EBITDA, as defined, among other restrictions.

As of February 28, 2005, we were in compliance with the covenants contained in the Credit Facility.

The leverage ratio limits the amount of cash that we can borrow. As of February 28, 2005, the maximum amount that we could borrow under the leverage ratio is approximately $208 million, subject to the overall availability under the Credit Facility which was $81.6 million as of February 28, 2005, after consideration for outstanding letters of credit.

The following table provides information related to our foreign subsidiaries as of the dates indicated (in thousands):

In December 2004, one of our consolidated VIEs expanded its existing credit facility with a total capacity of $18.1 million consisting of $9.1 million in committed short-term revolving lines of credit, $5.3 million in performance bond and letter of credit capacity and a term loan of $3.7 million. As of February 28, 2005, borrowings under the short-term revolving lines of credit and term loan were $4.0 million and $3.7 million, respectively, with outstanding performance bonds of $1.5 million. Interest rates under this credit facility vary but range from 5.4% to 5.6% as of February 28, 2005. We have provided a 50% guarantee related to this credit facility. As of August 31, 2004, this VIE had a committed short-term revolving line of credit of $4.0 million with borrowings of $3.5 million at a weighted average interest rate of 5.75%.

Note 9 – Comprehensive Income (Loss)

Comprehensive income (loss) for a period encompasses net income (loss) and all other changes in a company’s equity other than changes from transactions with the company’s owners. Comprehensive income (loss) was comprised of the following for the periods indicated (in thousands):

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The foreign currency translation adjustments relate to the varying strength of the U.S. dollar in relation to the British pound, Venezuelan Bolivar, Mexican peso, Australian and Canadian dollars and the Euro. Our hedging activities, which are generally limited to foreign exchange transactions, during the three and six months ended February 28, 2005 and February 29, 2004, were not material.

Note 10 – Business Segments

Effective September 1, 2004, we segregated our business activities into four operating segments: Energy & Chemicals (E&C) segment, Maintenance segment, Environmental & Infrastructure (E&I) segment, and Fabrication, Manufacturing & Distribution (F&M) segment. The primary change from our previously reported segments is the split of our former Engineering, Construction & Maintenance (ECM) segment into the newly created E&C segment and Maintenance segment. We allocated goodwill between the newly created business segments using the relative fair value of each segment’s operations based on the estimated discounted operating cash flows of the segments.

The following table presents information about segment results of operations and assets. Certain reclassifications have been made to conform the February 2004 financial information to the February 2005 presentation basis (in thousands):

Corporate allocates depreciation which is included in the segment results of operations above while the assets remain at the Corporate level. The total allocated depreciation is as follows (in thousands):

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A reconciliation of total segment assets to total consolidated assets for the periods indicated follows (in thousands):

Note 11 – Earnings (Loss) Per Common Share

The computation of basic and diluted earnings per share (in thousands, except per share data) is set forth below.

The following table includes weighted-average incremental shares excluded from the calculation of diluted income (loss) per share because they were antidilutive (in thousands):

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Note 12 – Claims on Major Projects

Claims include amounts in excess of the original contract price (as it may be adjusted for approved change orders) that we seek to collect from our customers for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs and are included in estimated revenues. Backcharges and claims against vendors, subcontractors and others are included in our cost estimates as a reduction in total estimated costs when recovery of the amounts is probable and the costs can be reasonably estimated. We refer to these claims from customers and backcharges and claims against vendors, subcontractors and others as “claims.” As a result, the recording of claims increases gross margin or reduces gross loss on the related projects in the periods the claims are reported. Claims receivable are included in costs in excess of estimated earnings and billings on uncompleted contracts on the accompanying condensed consolidated balance sheets.

If we collect amounts different than the amounts that we have recorded as claims receivable, that difference will be recognized as income or loss. Timing of claim collections is uncertain and depends on negotiated settlements, trial date scheduling and other dispute resolution processes pursuant to the contracts. As a result, we may not collect our claims receivable within the next twelve months.

The following disclosure provides a summary and update of significant changes, if any, from August 31, 2004, related to our significant claims. Readers should refer to Note 20 of the notes to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 31, 2004 filed with the Securities and Exchange Commission on November 2, 2004 for a more detailed description of each claim.

A summary of our net claims receivable position on the Covert & Harquahala, Wolf Hollow, and the Freeport, Texas projects discussed below is as follows (in millions):

During the second quarter of fiscal 2005, we reached settlements with equipment vendors for disputes related to the Covert and Harquahala projects and with a customer on one other project in Freeport, Texas. These settlements resulted in cash proceeds to us of approximately $26 million and reduced our claims receivable from owners, equipment vendors, subcontractors and others in the second quarter of fiscal 2005. These settlement amounts were approximately the amount of the recorded claims receivable related to these disputes, and, therefore, did not result in a material gain or loss. Under these settlements, we are also required to return approximately $17 million in amounts we collected by drawing on letters of credit which will impact the net claims receivable balance in the third quarter of fiscal 2005.

Covert & Harquahala Projects

During the first quarter of fiscal 2005, the arbitration proceedings with the owners had been bifurcated, at our request, whereby arbitration regarding the owners’ assessment of liquidated damages was scheduled for April 2005, while arbitration regarding claims for additional work was scheduled for the fall of 2005. However, the owners requested an extension of time, and this issue will now be combined with arbitration regarding claims for additional work, which is scheduled for the fall of 2005. As discussed above, we reached settlements with the turbine manufacturers on both the Covert and Harquahala projects in the second quarter of fiscal 2005.

We continue to believe we have a strong basis for our claims and backcharges for amounts in excess of the recorded amounts; however, recovery of the claims and other amounts is dependent upon negotiations with the applicable parties, which are ongoing, and the results of arbitration. We cannot provide absolute assurance as to the timing or outcome of these negotiations or results of arbitration.

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Wolf Hollow Project

The arbitration hearing against the heavy equipment manufacturer is scheduled to begin in May 2005. During the second quarter of fiscal 2005, the Court trial against the owners was rescheduled to start in October 2005. There have been no material changes to our claims against the owners, equipment vendors, subcontractors and others since August 31, 2004.

We continue to believe that we have a strong basis for our claims and backcharges for amounts in excess of the recorded amounts; however, recovery of the claims and other amounts is dependent upon negotiations with the applicable parties, which are ongoing, and the results of litigation. We cannot provide absolute assurance as to the timing or outcome of these negotiations or results of arbitration.

Marcus Hook Project

In addition to the claims above, there have been no material changes to our claims against FPL-Energy (“FPLE”) since August 31, 2004. We continue to believe any amounts that we incur related to this project, including legal costs to pursue issues with any subcontractors and vendors, are recoverable from FPLE under the terms of the EPC contract while FPLE disputes whether the costs are fully reimbursable. We continue attempts to resolve this dispute with FPLE; however, we cannot provide absolute assurance as to the timing or outcome of the mediation or results of the litigation, or disputes with FPLE or with the subcontractors.

Other

During the second quarter of fiscal 2005, we reached a settlement related to a project to construct a chemical processing facility in Freeport, Texas and received a cash payment related to the settlement.

Also on one of our projects, a client is claiming damages of approximately $7 million related to the troubleshooting, shutdown, repairs and loss of production. We are contesting the amount of damages claimed, and we believe amounts owed to the client, if any, are covered by applicable insurance. However, we can provide no assurance that these amounts will be adequately covered by insurance. In the event any such damages are not covered by insurance, there could be a material adverse effect on our financial position.

Accounts Receivable

Accounts receivable on the accompanying consolidated balance sheets as of February 28, 2005 and August 31, 2004 include the following (in thousands):

Unbilled accounts receivable become billable according to the contract terms which vary significantly but usually consider the passage of time, achievement of certain milestones or completion of the project. We believe that substantially all such unbilled amounts will be billed and collected over the next twelve months. Retainage represents amounts that are typically withheld from progress billings by our customers until the completion of a project and, in some instances, for even longer periods. Retainage may also be subject to specific restriction conditions such as performance or fulfillment guarantees (see Note 15).

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Note 13 – Government Contracting

The following table presents amounts due from government agencies or entities owned by the U.S. Government, along with revenues related to these governmental agencies and entities (in millions):

Note 14 – Income Taxes

The components of our deferred tax position are as follows (in thousands):