Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - SHAW GROUP INC | c03319exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - SHAW GROUP INC | c03319exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - SHAW GROUP INC | c03319exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - SHAW GROUP INC | c03319exv32w2.htm |
EX-10.48 - EXHIBIT 10.48 - SHAW GROUP INC | c03319exv10w48.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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 May 31, 2010
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.
(Exact name of registrant as specified in its charter)
Louisiana | 72-1106167 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
4171 Essen Lane, Baton Rouge, Louisiana | 70809 | |
(Address of principal executive offices) | (Zip Code) |
225-932-2500
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of registrants common stock outstanding as of July 7, 2010 was 84,448,425
shares.
TABLE OF CONTENTS
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EXHIBIT INDEX |
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Exhibit 10.48 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SHAW GROUP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2010 AND 2009
(In thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
$ | 1,789,254 | $ | 1,848,442 | $ | 5,272,028 | $ | 5,416,392 | ||||||||
Cost of revenues |
1,637,569 | 1,685,457 | 4,820,466 | 4,962,956 | ||||||||||||
Gross profit |
151,685 | 162,985 | 451,562 | 453,436 | ||||||||||||
Selling, general and administrative expenses |
74,726 | 78,634 | 222,823 | 222,144 | ||||||||||||
Operating income |
76,959 | 84,351 | 228,739 | 231,292 | ||||||||||||
Interest expense |
(1,322 | ) | (950 | ) | (4,122 | ) | (3,798 | ) | ||||||||
Interest expense on Japanese Yen-denominated bonds including
accretion and amortization |
(9,408 | ) | (39,450 | ) | (28,042 | ) | (60,170 | ) | ||||||||
Interest income |
5,037 | 1,899 | 10,450 | 8,140 | ||||||||||||
Foreign currency translation gains (losses) on Japanese
Yen-denominated bonds, net |
34,080 | (33,224 | ) | (28,872 | ) | (163,485 | ) | |||||||||
Other foreign currency transaction gains, net |
1,469 | 1,300 | 3,613 | 1,953 | ||||||||||||
Other income (expense), net |
2,509 | 347 | 5,262 | (2,399 | ) | |||||||||||
Income before income taxes and earnings (losses) from
unconsolidated entities |
109,324 | 14,273 | 187,028 | 11,533 | ||||||||||||
Provision for income taxes |
40,762 | 6,845 | 67,493 | 6,825 | ||||||||||||
Income before earnings (losses) from unconsolidated entities |
68,562 | 7,428 | 119,535 | 4,708 | ||||||||||||
Income from 20% Investment in Westinghouse, net of income taxes |
3,934 | 4,342 | 6,392 | 11,340 | ||||||||||||
Earnings (losses) from unconsolidated entities, net of income taxes |
(117 | ) | 509 | 521 | 841 | |||||||||||
Net income |
72,379 | 12,279 | 126,448 | 16,889 | ||||||||||||
Noncontrolling interests in income of consolidated subsidiaries,
net of tax |
4,016 | 4,381 | 14,844 | 12,573 | ||||||||||||
Net income attributable to Shaw |
$ | 68,363 | $ | 7,898 | $ | 111,604 | $ | 4,316 | ||||||||
Net income attributable to Shaw per common share: |
||||||||||||||||
Basic |
$ | 0.81 | $ | 0.09 | $ | 1.33 | $ | 0.05 | ||||||||
Diluted |
$ | 0.79 | $ | 0.09 | $ | 1.30 | $ | 0.05 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
84,280 | 83,295 | 83,872 | 83,218 | ||||||||||||
Diluted |
86,121 | 84,647 | 85,672 | 84,225 |
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 2010 AND AUGUST 31, 2009
(In thousands, except share amounts)
May 31, | August 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 454,435 | $ | 1,029,138 | ||||
Restricted and escrowed cash and cash equivalents |
60,017 | 81,925 | ||||||
Short-term investments |
839,850 | 342,219 | ||||||
Restricted short-term investments |
277,751 | 80,000 | ||||||
Accounts receivable, net |
856,603 | 815,862 | ||||||
Inventories |
234,063 | 262,284 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts, including
claims |
657,267 | 599,741 | ||||||
Deferred income taxes |
292,465 | 270,851 | ||||||
Investment in Westinghouse |
973,596 | 1,008,442 | ||||||
Prepaid expenses and other current assets |
68,530 | 62,786 | ||||||
Total current assets |
4,714,577 | 4,553,248 | ||||||
Investments in and advances to unconsolidated entities, joint ventures and limited
partnerships |
12,335 | 21,295 | ||||||
Property and equipment, net of accumulated depreciation of $278,819 and $250,796,
respectively |
469,811 | 385,606 | ||||||
Goodwill |
498,428 | 501,305 | ||||||
Intangible assets |
18,769 | 20,957 | ||||||
Deferred income taxes |
13,420 | | ||||||
Other assets |
97,287 | 74,763 | ||||||
Total assets |
$ | 5,824,627 | $ | 5,557,174 | ||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 843,246 | $ | 859,753 | ||||
Accrued salaries, wages and benefits |
124,574 | 175,750 | ||||||
Other accrued liabilities |
225,109 | 187,020 | ||||||
Advanced billings and billings in excess of costs and estimated earnings on
uncompleted contracts |
1,444,222 | 1,308,325 | ||||||
Japanese Yen-denominated bonds secured by Investment in Westinghouse |
1,417,361 | 1,387,954 | ||||||
Interest rate swap contract on Japanese Yen-denominated bonds |
27,801 | 31,369 | ||||||
Short-term debt and current maturities of long-term debt |
10,145 | 15,399 | ||||||
Total current liabilities |
4,092,458 | 3,965,570 | ||||||
Long-term debt, less current maturities |
1,064 | 7,627 | ||||||
Deferred income taxes |
48,052 | 26,152 | ||||||
Other liabilities |
97,891 | 109,835 | ||||||
Total liabilities |
4,239,465 | 4,109,184 | ||||||
Contingencies and commitments (Note 11) |
||||||||
Shaw shareholders equity |
||||||||
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and
outstanding |
| | ||||||
Common stock, no par value, 200,000,000 shares authorized; 90,198,885 and 89,316,057
shares issued, respectively; and 84,444,581 and 83,606,808 shares outstanding,
respectively |
1,265,348 | 1,237,727 | ||||||
Retained earnings |
535,255 | 423,651 | ||||||
Accumulated other comprehensive loss |
(142,644 | ) | (121,966 | ) | ||||
Treasury stock, 5,754,304 and 5,709,249 shares, respectively |
(117,398 | ) | (116,113 | ) | ||||
Total Shaw shareholders equity |
1,540,561 | 1,423,299 | ||||||
Noncontrolling interests |
44,601 | 24,691 | ||||||
Total equity |
1,585,162 | 1,447,990 | ||||||
Total liabilities and equity |
$ | 5,824,627 | $ | 5,557,174 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
THE SHAW GROUP INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY
(In thousands)
Accumulated | ||||||||||||||||||||||||||||
Treasury | Other | Total | ||||||||||||||||||||||||||
Common | Stock | Comprehensive | Retained | Shaw | Noncontrolling | Total | ||||||||||||||||||||||
Stock Amount | Amount | Loss | Earnings | Equity | Interests | Equity | ||||||||||||||||||||||
Balance, August 31, 2008 |
$ | 1,204,914 | $ | (114,951 | ) | $ | (9,609 | ) | $ | 409,376 | $ | 1,489,730 | $ | 29,082 | $ | 1,518,812 | ||||||||||||
Net income |
| | | 4,316 | 4,316 | 12,573 | 16,889 | |||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||
Foreign currency translation adjustments |
| | (9,738 | ) | | (9,738 | ) | | (9,738 | ) | ||||||||||||||||||
Change in unrealized net loss on hedging
activities, net of tax |
| | (10,625 | ) | | (10,625 | ) | | (10,625 | ) | ||||||||||||||||||
Equity in Westinghouses pre-tax other
comprehensive income, net of tax |
| | (113,811 | ) | | (113,811 | ) | | (113,811 | ) | ||||||||||||||||||
Pension liability, not yet recognized in
net periodic pension expense, net of tax |
| | (3,504 | ) | | (3,504 | ) | | (3,504 | ) | ||||||||||||||||||
Total comprehensive income (loss) |
| | | | (133,362 | ) | 12,573 | (120,789 | ) | |||||||||||||||||||
Adjustment for Westinghouses cumulative
effect upon initial adoption of SFAS 158,
net of tax |
| | | (719 | ) | (719 | ) | | (719 | ) | ||||||||||||||||||
Exercise of options |
740 | | | | 740 | | 740 | |||||||||||||||||||||
Shares exchanged for taxes on stock based
compensation |
(274 | ) | (1,110 | ) | | | (1,384 | ) | | (1,384 | ) | |||||||||||||||||
Tax benefits from stock based compensation |
(1,134 | ) | | | | (1,134 | ) | | (1,134 | ) | ||||||||||||||||||
Stock-based compensation |
24,662 | | | | 24,662 | | 24,662 | |||||||||||||||||||||
Distributions to noncontrolling parties, net |
| | | | | (18,606 | ) | (18,606 | ) | |||||||||||||||||||
Balance, May 31, 2009 |
$ | 1,228,908 | $ | (116,061 | ) | $ | (147,287 | ) | $ | 412,973 | $ | 1,378,533 | $ | 23,049 | $ | 1,401,582 | ||||||||||||
Balance, August 31, 2009 |
$ | 1,237,727 | $ | (116,113 | ) | $ | (121,966 | ) | $ | 423,651 | $ | 1,423,299 | $ | 24,691 | $ | 1,447,990 | ||||||||||||
Net income |
| | | 111,604 | 111,604 | 14,844 | 126,448 | |||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||
Foreign currency translation adjustments |
| | (11,348 | ) | | (11,348 | ) | | (11,348 | ) | ||||||||||||||||||
Change in unrealized net loss on hedging
activities, net of tax |
| | 2,191 | | 2,191 | | 2,191 | |||||||||||||||||||||
Equity in Westinghouses pre-tax other
comprehensive income, net of Shaws tax |
| | (13,402 | ) | | (13,402 | ) | | (13,402 | ) | ||||||||||||||||||
Pension liability, not yet recognized in
net periodic pension expense, net of tax |
| | 2,429 | | 2,429 | | 2,429 | |||||||||||||||||||||
Unrealized loss on securities, net of tax |
| | (548 | ) | | (548 | ) | | (548 | ) | ||||||||||||||||||
Total comprehensive income |
| | | | 90,926 | 14,844 | 105,770 | |||||||||||||||||||||
Exercise of options |
6,822 | | | | 6,822 | | 6,822 | |||||||||||||||||||||
Shares exchanged for taxes on stock based
compensation |
(6,213 | ) | (1,285 | ) | | | (7,498 | ) | | (7,498 | ) | |||||||||||||||||
Tax benefits from stock based compensation |
1,031 | | | | 1,031 | | 1,031 | |||||||||||||||||||||
Stock-based compensation |
25,981 | | | | 25,981 | | 25,981 | |||||||||||||||||||||
Acquisition of noncontrolling parties |
| | | | | 10,027 | 10,027 | |||||||||||||||||||||
Distributions to noncontrolling parties, net |
| | | | | (4,961 | ) | (4,961 | ) | |||||||||||||||||||
Balance, May 31, 2010 |
$ | 1,265,348 | $ | (117,398 | ) | $ | (142,644 | ) | $ | 535,255 | $ | 1,540,561 | $ | 44,601 | $ | 1,585,162 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
THE SHAW GROUP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 2010 AND 2009
(In thousands)
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 126,448 | $ | 16,889 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
45,423 | 40,608 | ||||||
Provision for (benefit from) deferred income taxes |
14,790 | (68,853 | ) | |||||
Stock-based compensation expense |
25,981 | 24,662 | ||||||
Earnings from unconsolidated entities, net of tax |
(6,913 | ) | (12,181 | ) | ||||
Distributions from unconsolidated entities |
14,679 | 28,894 | ||||||
Foreign currency transaction losses, net |
25,259 | 161,532 | ||||||
Amortization of original issue discount and deferred offering costs on Westinghouse bonds |
| 34,991 | ||||||
Other noncash items |
9,937 | 3,251 | ||||||
Changes in assets and liabilities, net of effects of acquisitions and consolidation of variable
interest entities: |
||||||||
Increase in receivables |
(46,913 | ) | (198,621 | ) | ||||
Increase in costs and estimated earnings in excess of billings on uncompleted contracts,
including claims |
(56,778 | ) | (22,809 | ) | ||||
(Increase) decrease in inventories |
28,065 | (10,054 | ) | |||||
Increase in other current assets |
(15,011 | ) | (4,962 | ) | ||||
Decrease in accounts payable |
(8,928 | ) | (16,267 | ) | ||||
Increase (decrease) in accrued liabilities |
(50,821 | ) | 2,849 | |||||
Increase in advanced billings and billings in excess of costs and estimated earnings on
uncompleted contracts |
141,802 | 465,526 | ||||||
Net change in other assets and liabilities |
1,826 | 16,249 | ||||||
Net cash provided by operating activities |
248,846 | 461,704 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(152,234 | ) | (95,341 | ) | ||||
Proceeds from sale of businesses and assets, net of cash surrendered |
22,910 | 25,120 | ||||||
Investments in, advances to and return of equity from unconsolidated entities and joint ventures |
15,197 | (1,170 | ) | |||||
Purchases of variable interest entity debt |
(19,915 | ) | | |||||
Cash withdrawn from restricted and escrowed cash |
122,244 | 136,046 | ||||||
Cash deposited into restricted and escrowed cash |
(98,967 | ) | (274,165 | ) | ||||
Purchases of short-term investments |
(1,032,078 | ) | | |||||
Proceeds from sale and redemption of short-term investments |
549,306 | | ||||||
Purchases of restricted short-term investments |
(195,109 | ) | | |||||
Net cash used in investing activities |
(788,646 | ) | (209,510 | ) | ||||
Cash flows from financing activities |
||||||||
Purchase of treasury stock |
(1,285 | ) | (1,110 | ) | ||||
Repayment of debt and capital leases |
(18,452 | ) | (6,028 | ) | ||||
Payment of deferred financing costs |
(9,716 | ) | (2,753 | ) | ||||
Issuance of common stock |
6,822 | 740 | ||||||
Excess tax benefits from exercise of stock options and vesting of restricted stock |
1,830 | 77 | ||||||
(Distributions paid to) contributions received from noncontrolling interests, net |
(4,961 | ) | (18,606 | ) | ||||
Net cash used in financing activities |
(25,762 | ) | (27,680 | ) | ||||
Effects of foreign exchange rate changes on cash |
(9,141 | ) | (1,932 | ) | ||||
Net change in cash and cash equivalents |
(574,703 | ) | 222,582 | |||||
Cash and cash equivalents beginning of year |
1,029,138 | 927,756 | ||||||
Cash and cash equivalents end of period |
$ | 454,435 | $ | 1,150,338 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 General Information
The Shaw Group Inc. (a Louisiana corporation) and its wholly-owned and majority-owned
subsidiaries (collectively referred to herein as the Company, Shaw, we, us or our) is a leading
global provider of technology, engineering, procurement, construction, maintenance, fabrication,
manufacturing, consulting, remediation and facilities management services to a diverse client base
that includes multinational oil companies and industrial corporations, regulated electric
utilities, independent and merchant power producers, government agencies and equipment
manufacturers. We have developed and acquired significant intellectual property, including
downstream petrochemical technologies, induction pipe bending technology and environmental
decontamination technologies.
We have evaluated all events and transactions occurring after the balance sheet date but
before the financial statements were issued and have included the appropriate disclosures in this
Quarterly Report on Form 10-Q.
Basis of Presentation
In the opinion of management, the accompanying balance sheets and related interim statements
of operations, cash flows and changes in shareholders equity include all adjustments, consisting
only of normal recurring items necessary for their fair presentation in conformity with United
States (U.S.) generally accepted accounting principles (GAAP). Preparing financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Examples of such estimates and assumptions include the
percentage of completion method of revenue recognition, unapproved change orders and claims,
estimates of loss contingencies, stock-based compensation forfeiture rates, the potential outcome
of future tax consequences of events that have been recognized in our financial statements or tax
returns, estimates of the fair value and/or goodwill impairment for our reporting units and
determining when investment impairments are other-than-temporary. Actual results and outcomes may
differ from managements estimates and assumptions.
Interim results are not necessarily indicative of results for a full year. These unaudited
consolidated financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended August 31, 2009 (2009 Form 10-K) filed with the Securities and Exchange Commission (SEC).
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Marketable Securities
We categorize our marketable securities as either trading or available-for-sale. These
investments are recorded at fair value and are classified as short-term investments in the
accompanying consolidated balance sheets. Investments are made based on the Companys investment
policy and restrictions contained in our credit facility, which specifies eligible investments and
credit quality requirements.
Trading securities are investments held in trust to satisfy obligations under our deferred
compensation plans. The changes in fair values on trading securities are recorded as a component of
net income in other income (expense), net.
Available-for-sale securities consist of money market mutual funds, U.S. government and agency
obligations, corporate notes and bonds, foreign government and foreign government guaranteed
securities and certificates of deposit at major banks. The changes in fair values, net of
applicable taxes, on available-for-sale securities are recorded as unrealized gains (losses) as a
component of accumulated other comprehensive income (loss) in stockholders equity. When fair value
of an investment decreases below its cost or amortized cost and in managements opinion that
decline is other-than-temporary, the investments cost or amortized cost is written down to its
fair value and the amount written down is recorded in the statement of operations in other income
(expense), net. Management usually considers a decline other than temporary if, among other
relevant factors, the fair value is significantly below cost for a period of time. The amount of
any write-down is determined by the difference between cost or amortized cost of the investment and
its fair value at the time management makes the other-than-temporary determination. During the
three months ended May 31, 2010, no other-than-temporary impairment was recognized.
7
Table of Contents
Foreign Currency Translation
The majority of our foreign subsidiaries conduct business in their local currencies. Our
financial statements report results in U.S. Dollars (USD) and include the results of these
subsidiaries translated into USD. Our accounting policy for foreign currency translation is
different depending on whether the economy in which our foreign subsidiary operates has been
designated by management as highly inflationary or not. Economies with a three-year cumulative
inflation rate of more than 100% are considered highly inflationary. Beginning December 1, 2009, we
designated Venezuelas economy as highly inflationary, and we consolidate our Venezuelan
subsidiaries results subsequent to that date using our accounting policy for subsidiaries
operating in highly inflationary economies. Venezuelas change in designation to highly
inflationary had no material impact on our consolidated statement of operations or financial
position, as our operations in Venezuela are immaterial to our worldwide operations.
Recently Adopted Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued the Accounting Standards
Codification (ASC) as the sole source of authoritative nongovernmental GAAP. The ASC supersedes
all non-grandfathered, non-SEC accounting literature but does not change how we account for
transactions or the nature of related disclosures made. When referring to guidance issued by the
FASB, we now reference ASC topics rather than individual pronouncements. This change affects
financial statements issued for interim and annual periods ending after September 15, 2009 and did
not have a material effect on our consolidated financial statements.
On September 1, 2009, we adopted authoritative guidance for business combinations in
accordance with ASC 805, Business Combinations. The guidance retains the fundamental requirements
that companies use the acquisition method of accounting (previously referred to as the purchase
method of accounting) for all business combinations but introduced a number of changes, including
the way assets and liabilities are valued, recognized and measured as a result of business
combinations. ASC 805 requires an acquisition date fair value measurement of assets acquired and
liabilities assumed. It also requires the fair value capitalization of in-process research and
development and requires acquisition-related costs to be expensed as incurred. Adoption of ASC 805
did not have a material impact on our consolidated financial statements.
On September 1, 2009, we adopted authoritative guidance that changes the accounting and
reporting for non-controlling interests in accordance with ASC 810, Consolidation.
Non-controlling interests are now reported as a component of equity separate from the parents
equity, and purchases or sales of equity interests that do not result in a change in control are to
be accounted for as equity transactions. In addition, net income attributable to a non-controlling
interest is now included in net income, and upon a loss of control, the interest sold, as well as
any interest retained, is now recorded at fair value with any gain or loss recognized in net
income. Adoption of ASC 810 did not have a material impact on our consolidated financial
statements.
On September 1, 2009, we adopted the authoritative guidance on fair value measurement for
nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually) in accordance with ASC
820, Fair Value Measurements and Disclosures. Adoption of ASC 820 did not have a material impact
on our consolidated financial statements.
On September 1, 2009, we adopted Accounting Standards Update (ASU) 2009-05, Measuring
Liabilities at Fair Value. ASU 2009-05, issued August 2009, provides amendments to ASC 820, Fair
Value Measurements and Disclosure, for the fair value measurement of liabilities. Adoption of ASU
2009-05 had no impact on our consolidated financial statements.
On September 1, 2009, we adopted authoritative guidance on share-based payments in accordance
with ASC 260, Earnings per Share. ASC 260 addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and therefore, need to be
included in the earnings allocation in computing earnings per share. Adoption of ASC 260 had no
impact on our consolidated financial statements.
On September 1, 2009, we adopted authoritative guidance on accounting for nonrefundable
maintenance deposits in accordance with ASC 840, Leases. ASC 840 requires a maintenance deposit
paid by a lessee under an arrangement accounted for as a lease and refunded only if the lessee
performs specified maintenance activities, to be accounted for as a deposit asset. Adoption of ASC
840 did not have a material impact on our consolidated financial statements.
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On September 1, 2009, we adopted authoritative guidance for collaborative arrangements in
accordance with ASC 808, Collaborative Arrangements. ASC 808 applies to participants in
collaborative arrangements that are conducted without the creation of a separate legal entity for
the arrangement. Adoption of ASC 808 had no impact on our consolidated financial statements.
On September 1, 2009, we adopted authoritative guidance on pension disclosures in accordance
ASC 715, Compensation Retirement Benefits. ASC 715 provides guidance on an employers
disclosures about plan assets of a defined benefit pension or other postretirement plan. The
additional disclosure requirements include expanded disclosure about an entitys investment
policies and strategies, the categories of plan assets, concentrations of credit risk and fair
value measurements of plan assets. ASC 715 is effective for our fiscal year ending August 31, 2010.
We will amend our disclosures accordingly beginning with our consolidated financial statements
included in our fiscal year 2010 Form 10-K.
On September 1, 2009, we adopted authoritative guidance on fair value disclosures in
accordance with ASC 825, Financial Instruments. ASC 825 requires disclosures about fair value of
financial instruments in interim financial statements as well as in annual financial statements.
Adoption of ASC 825 did not have a material impact on our consolidated financial statements.
On February 1, 2010, we adopted ASU 2010-02, Consolidation (Topic 810) Accounting and
Reporting for Decreases in Ownership of a Subsidiary A Scope Clarification. ASU 2010-02, issued
January 2010, clarifies the scope of the decrease in ownership provisions of Subtopic 810-10 and
related guidance. The amendments in ASU 2010-02 expand the disclosure requirements about
deconsolidation of a subsidiary or derecognition of a group of assets. ASU 2010-02 was effective
beginning in the first interim or annual reporting period ending on or after December 15, 2009, and
should be applied retrospectively to the first period that an entity adopts FASB Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB 51 (now
included in Subtopic 810-10). Adoption of ASU 2010-02 had no impact on our consolidated financial
statements as we have had no such decreases in ownership of our subsidiaries.
On February 1, 2010, we adopted ASU 2010-01, Equity (Topic 505) Accounting for
Distributions to Shareholders with Components of Stock and Cash. ASU 2010-01, issued January 2010,
clarifies that the stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is reflected in earnings
per share prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a retrospective
basis. Adoption of ASU 2010-01 had no impact on our consolidated financial statements.
On March 1, 2010, we adopted ASU 2010-06, Improving Disclosure about Fair Value
Measurements. ASU 2010-06, issued January 2010, requires additional disclosures regarding fair
value measurements, amends disclosures about post-retirement benefit plan assets and provides
clarification regarding the level of disaggregation of fair value disclosures by investment class.
The ASU is effective for interim and annual reporting periods beginning after December 15, 2009,
except for certain Level 3 activity disclosure requirements that will be effective for reporting
periods beginning after December 15, 2010. Adoption of ASU 2010-06 did not have a material impact
on our consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
In October 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue Arrangements, a
consensus of the FASB Emerging Issues Task Force. This update provides amendments to the criteria
of ASC 605, Revenue Recognition, for separating consideration in multiple-deliverable
arrangements. The amendments to this update establish a hierarchy for determining the selling price
of a deliverable. ASU 2009-13 is effective prospectively for financial statements issued for years
beginning on or after June 15, 2010. We are currently evaluating the impact that the adoption of
ASU 2009-13 will have on our consolidated financial statements but do not expect the adoption will
have a material impact on our consolidated financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 167,
Amendments to FASB Interpretation No. (FIN) 46(R), codified as ASU 2009-17. ASU 2009-17 amends
FIN 46R and requires a company to perform an analysis to determine whether its interest in a
variable interest entity gives it a controlling financial interest. This analysis requires a
company to assess whether it has the power to direct the activities of the variable interest entity
and if it has the obligation to absorb losses or the right to receive benefits that could
potentially be significant to the variable interest entity. ASU 2009-17 eliminates the quantitative
approach previously required for determining the primary beneficiary of a variable interest entity,
requires an ongoing reassessment of whether a company is the primary beneficiary of a variable
interest entity and significantly enhances disclosures. ASU 2009-17 may be applied retrospectively
in previously issued financial statements with a cumulative-effect adjustment to retained earnings
as of the beginning of the first year restated. ASU-17 is effective for fiscal years beginning
after November 15, 2009. We are currently evaluating the impact that the adoption of ASU 2009-17
will have on our consolidated financial statements.
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Reclassifications
Certain prior year balances have been reclassified to conform to the current years
presentation. Such reclassifications had no impact on total revenues, operating income or net
income.
Note 2 Cash, Cash Equivalents and Short-term Investments
We consider all highly liquid investments with original maturities of three months or less to
be cash equivalents.
Our major categories of investments are as follows:
Money market mutual funds We invest in money market funds that seek to maintain a stable net
asset value of $1 per share, while limiting overall exposure to credit, market and liquidity risks.
Certificates of deposit Certificates of deposit are short-term interest-bearing debt
instruments issued by various financial institutions with which we have an established banking
relationship.
U.S. government and agency securities We invest in U.S. government secured debt instruments
that are publicly traded and valued.
Foreign government and foreign government guaranteed securities We invest in foreign
government and foreign government guaranteed securities that are publicly traded and valued. Losses
in this category are primarily due to market liquidity and interest rate increases.
Corporate notes and bonds We evaluate our corporate debt securities based on a variety of
factors including, but not limited to, the credit rating of the issuer. On the date of settlement,
our corporate debt securities are rated at least A by Standard & Poors Rating Service (S&P) and
have maturities not exceeding two years. Losses in this category are due primarily to market
liquidity and interest rate increases.
At May 31, 2010, the components of our cash, cash equivalents and short-term investments were
as follows (in thousands):
Balance Sheet | ||||||||||||||||||||||||
Classification | ||||||||||||||||||||||||
Cash and | ||||||||||||||||||||||||
Cost | Unrealized | Unrealized | Recorded | Cash | Short-term | |||||||||||||||||||
Basis | Gain | (Loss) | Basis | Equivalents | Investments | |||||||||||||||||||
Cash |
$ | 285,878 | $ | | $ | | $ | 285,878 | $ | 285,878 | $ | | ||||||||||||
Money market mutual funds |
139,490 | | | 139,490 | 139,490 | | ||||||||||||||||||
Certificates of deposit |
355,989 | | | 355,989 | 29,067 | 326,922 | ||||||||||||||||||
Available-for-sale debt
securities: |
||||||||||||||||||||||||
U.S. government and agency
securities |
19,591 | 74 | | 19,665 | | 19,665 | ||||||||||||||||||
Foreign government and
foreign government
guaranteed securities |
117,965 | 231 | (113 | ) | 118,083 | | 118,083 | |||||||||||||||||
Corporate notes and bonds |
376,265 | 377 | (1,462 | ) | 375,180 | | 375,180 | |||||||||||||||||
Total |
$ | 1,295,178 | $ | 682 | $ | (1,575 | ) | $ | 1,294,285 | $ | 454,435 | $ | 839,850 | |||||||||||
Gross realized gains and losses from sales of available-for-sale securities are determined
using the specific identification method and are included in other income (expense), net. During
the three and nine months ended May 31, 2010, the proceeds and realized gains and losses were as
follows (in thousands):
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
Proceeds |
$ | 35,139 | $ | 84,427 | ||||
Realized gains |
$ | 38 | $ | 125 | ||||
Realized losses |
$ | (21 | ) | $ | (21 | ) |
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There were no transfers of securities from one category to another during the three and nine
months ended May 31, 2010.
We evaluate whether unrealized losses on investments in securities are other-than-temporary,
and if we believe the unrealized losses are other-than-temporary, we record an impairment charge.
No other-than-temporary impairment losses were recognized during the three and nine months ended
May 31, 2010.
Gross unrealized losses on investment securities and the fair value of those securities that
have been in a continuous loss position for which we have not recognized an impairment charge at
May 31, 2010 were as follows (in thousands):
Less than 12 Months | ||||||||
Fair | Unrealized | |||||||
Value | Loss | |||||||
Available-for-sale: |
||||||||
Foreign government guaranteed securities |
$ | 7,259 | $ | (16 | ) | |||
Corporate notes and bonds |
63,936 | (735 | ) | |||||
$ | 71,195 | $ | (751 | ) | ||||
At May 31, 2010, maturities of debt securities classified as available-for-sale were as
follows (in thousands):
Cost | Estimated | |||||||
Basis | Fair Value | |||||||
Due in one year or less |
$ | 117,100 | $ | 117,047 | ||||
Due in one to two years |
396,721 | 395,881 | ||||||
$ | 513,821 | $ | 512,928 | |||||
See Note 3 for information on our restricted and escrowed cash and equivalents and restricted
short-term investments.
Note 3 Restricted and Escrowed Cash and Equivalents and Restricted Short-term Investments
At May 31, 2010, the components of our restricted and escrowed cash and restricted short-term
investments were as follows (in thousands):
Balance Sheet | ||||||||||||||||
Classification | ||||||||||||||||
Restricted and | ||||||||||||||||
Holding | Escrowed Cash | Restricted | ||||||||||||||
Recorded | Period | and Cash | Short-term | |||||||||||||
Basis | (Loss) | Equivalents | Investments | |||||||||||||
Cash |
$ | 19,526 | $ | | $ | 19,526 | $ | | ||||||||
Money market mutual funds |
40,491 | | 40,491 | | ||||||||||||
Certificates of deposit |
251,749 | | | 251,749 | ||||||||||||
Trading securities: |
||||||||||||||||
Stock and bond mutual funds |
8,206 | (807 | ) | | 8,206 | |||||||||||
U.S. government agency and corporation
securities |
4,383 | (94 | ) | | 4,383 | |||||||||||
Corporate bonds and notes |
13,413 | (290 | ) | | 13,413 | |||||||||||
Total |
$ | 337,768 | $ | (1,191 | ) | $ | 60,017 | $ | 277,751 | |||||||
At May 31, 2010 and August 31, 2009, our restricted and escrowed cash and equivalents and
restricted short-term investments were restricted for the following (in thousands):
May 31, 2010 | August 31, 2009 | |||||||
Contractually required by projects |
$ | 8,507 | $ | 23,111 | ||||
Voluntarily used to secure letters of credit |
265,525 | 138,085 | ||||||
Secure contingent obligations in lieu of letters of credit |
25,461 | | ||||||
Held in trust to satisfy obligations under certain deferred compensation plans |
27,256 | | ||||||
Other |
11,019 | 728 | ||||||
$ | 337,768 | $ | 161,924 | |||||
We are able to access cash we posted to secure various letters of credit by delivering to a
third party a new letter of credit under our credit facility.
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Note 4 Accounts Receivable, Concentrations of Credit Risk and Inventories
Accounts Receivable
Our accounts receivable, net of allowance for doubtful accounts, were as follows (in
thousands):
May 31, 2010 | August 31, 2009 | |||||||
Trade accounts receivable, net |
$ | 661,170 | $ | 671,324 | ||||
Unbilled accounts receivable |
27,609 | 11,382 | ||||||
Retainage |
167,824 | 133,156 | ||||||
Accounts receivable, net |
$ | 856,603 | $ | 815,862 | ||||
Analysis of the change in the allowance for doubtful accounts follows (in thousands):
Beginning balance, August 31, 2009 |
$ | 28,269 | ||
Provision |
7,878 | |||
Write offs |
(8,379 | ) | ||
Other |
(899 | ) | ||
Ending balance, May 31, 2010 |
$ | 26,869 | ||
Included in our trade accounts receivable, net at May 31, 2010 and August 31, 2009, were
approximately $9.0 million of outstanding invoices due from a local government entity resulting
from revenues earned in providing disaster relief, emergency response and recovery services. The
local government entity has challenged the appropriateness of our invoiced amounts, and we are
currently in litigation with the government entity. The amounts we ultimately collect could differ
materially from amounts currently recorded.
Concentrations of Credit
Amounts due from U.S. government agencies or related entities were $101.1 million and $110.3
million at May 31, 2010 and August 31, 2009, respectively.
Costs and estimated earnings in excess of billings on uncompleted contracts includes $313.0
million and $217.1 million at May 31, 2010 and August 31, 2009, respectively, related to U.S.
government agencies or related entities.
Inventories
Major components of inventories were as follows (in thousands):
May 31, 2010 | August 31, 2009 | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Average | FIFO | Total | Average | FIFO | Total | |||||||||||||||||||
Raw Materials |
$ | 12,452 | $ | 98,208 | $ | 110,660 | $ | 13,940 | $ | 110,469 | $ | 124,409 | ||||||||||||
Work in Process |
2,348 | 32,516 | 34,864 | 2,778 | 40,923 | 43,701 | ||||||||||||||||||
Finished Goods |
88,539 | | 88,539 | 94,174 | | 94,174 | ||||||||||||||||||
$ | 103,339 | $ | 130,724 | $ | 234,063 | $ | 110,892 | $ | 151,392 | $ | 262,284 | |||||||||||||
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Note 5 Equity Method Investments
We execute certain contracts with third parties through joint ventures, limited partnerships
and limited liability companies. If a joint venture is determined to be a variable interest entity
(VIE) as defined by ASC 810 and we are the primary beneficiary, the joint venture is consolidated
in accordance with ASC 810. If consolidation of the VIE or joint venture is not required, we
generally account for these joint ventures using the equity method of accounting with our share of
the earnings (losses) from these investments reflected on one line in the consolidated statement of
operations.
Our significant unconsolidated subsidiary that is accounted for using the equity method of
accounting is our investment in Westinghouse (Investment in Westinghouse). On October 16, 2006, we
acquired a 20% equity interest (Westinghouse Equity) in two companies, which, together with their
subsidiaries, are collectively referred to as the Westinghouse Group (Westinghouse) for
approximately $1.1 billion. We financed this investment partially through our subsidiary Nuclear
Energy Holdings, LLC (NEH), issuing limited recourse to us (except NEH) Japanese Yen
(JPY)-denominated bonds (Westinghouse Bonds) for USD equivalent of approximately $1.0 billion. The
various agreements are described in Note 6 of our 2009 Form 10-K.
In connection with our Investment in Westinghouse, we entered into JPY-denominated Put Option
Agreements (Put Option) with Toshiba Corporation (Toshiba), providing us the option to sell to
Toshiba all or part of our Westinghouse Equity during a defined Exercise Period. Per the Put
Option, the Exercise Period commenced upon the occurrence of a Toshiba Event which is caused by,
among other things, certain Toshiba financial metrics. Toshiba notified us on May 11, 2009, that it
experienced a Toshiba Event as of May 8, 2009, because it failed to maintain a minimum consolidated
net worth, as defined in the Put Option, of JPY 800 billion. Due to the Toshiba Event, the
Westinghouse Bond holders, who maintain a security interest in the Put Option, now have the
opportunity to direct us to exercise the Put Option.
Under GAAP, the Put Option is not considered a freestanding financial instrument or a
derivative instrument and, consequently, is not separated from our equity investment in
Westinghouse. Therefore, neither the Put Option nor its foreign currency component is revalued at
current exchange rates. However, the JPY-denominated Westinghouse Bonds must be revalued at each
quarters end to USD at current exchange rates.
See Note 7 Debt and Revolving Lines of Credit for additional information regarding our
Investment in Westinghouse, the Put Option and the Toshiba Event.
Westinghouse maintains its accounting records for reporting to its majority owner, Toshiba,
and us on a calendar quarter basis with a March 31 fiscal year end. Consequently, we record our 20%
interest of the equity earnings (loss) and other comprehensive income (loss) reported to us by
Westinghouse two months in arrears of our current periods. Under this policy, Westinghouses
operating results for the three and nine months ended March 31, 2010 and 2009 are included in our
financial results for the three and nine months ended May 31, 2010 and 2009, respectively.
Summarized unaudited income statement information for Westinghouse, before applying our
Westinghouse Equity Interest, was as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Revenues |
$ | 1,248,356 | $ | 1,167,804 | $ | 3,233,102 | $ | 2,606,308 | ||||||||
Gross profit |
305,704 | 244,007 | 694,791 | 551,695 | ||||||||||||
Income before income taxes |
95,794 | 50,759 | 132,889 | 79,056 | ||||||||||||
Net income (loss) |
52,529 | 32,234 | 72,543 | 43,732 |
As part of our Investment in Westinghouse, we entered into shareholder agreements on October
4, 2006 that set a target minimum dividend of approximately $24.0 million annually for the first
six years we hold our Westinghouse Equity. Under the shareholder agreements, the shareholders are
due to receive as dividends agreed percentages of no less than 65%, but not to exceed 100%, of
Westinghouses net income. If the shareholders receive less than the target minimum dividend amount
in any year during the first six years, the shortfall accrues to the extent Westinghouse earns net
income in the future. Our right to receive any shortfalls between the target minimum dividend
amount and the dividends actually paid by Westinghouse during the first six years of our investment
(or such shorter period in the event of earlier termination) survives the sale of our Westinghouse
Equity, although this right is dependent upon Westinghouse earning net income at some future time.
We have received dividends totaling $59.9 million to date. At May 31, 2010, the dividend shortfall
totaled $12.1 million.
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Our investments in and advances to unconsolidated entities, joint ventures and limited
partnerships and our overall percentage ownership of those ventures that are accounted for under
the equity method were as follows (in thousands, except percentages):
Ownership | May 31, | August 31, | ||||||||||
Percentage | 2010 | 2009 | ||||||||||
Investment in Westinghouse |
20 | % | $ | 973,596 | $ | 1,008,442 | ||||||
Other |
23% 50 | % | 12,335 | 21,295 | ||||||||
Total investments in and
advances to
unconsolidated entities,
joint ventures and
limited partnerships |
$ | 985,931 | $ | 1,029,737 | ||||||||
Earnings from unconsolidated entities, net of income taxes, for the three months and nine
months ended May 31, 2010 and May 31, 2009, are summarized as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Investment in Westinghouse, net of income taxes of $6,572,
$2,105, $8,117 and $(2,594), respectively |
$ | 3,934 | $ | 4,342 | $ | 6,392 | $ | 11,340 | ||||||||
Other unconsolidated entities, net of income taxes of $(74),
$325, $328 and $539, respectively |
(117 | ) | 509 | 521 | 841 | |||||||||||
Total earnings from unconsolidated entities, net of income taxes |
$ | 3,817 | $ | 4,851 | $ | 6,913 | $ | 12,181 | ||||||||
In December 2009, we purchased a loan from a third party for $19.9 million that was due from a
VIE accounted for under the equity method. The purchase of the loan resulted in an additional
variable interest in the entity and we consolidated the entity effective December 2009.
Note 6 Goodwill and Other Intangible Assets
Goodwill
Goodwill is reviewed at least annually for impairment by comparing the fair value of each
reporting unit with its carrying value (including attributable goodwill). The estimated fair value
for our reporting units is calculated based on the average of the projected discounted cash flows
and the estimated market value of each reporting unit at the date we perform the impairment tests
(implied fair value). Inherent in the development of the discounted cash flow projections are
assumptions and estimates derived from a review of our expected revenue growth rates, profit
margins, business plans, cost of capital and tax rates. We also make certain assumptions about the
future market conditions our reporting units operate in, market prices, interest rates and changes
in business strategies.
In accordance with current accounting guidance, we identified seven reporting units for the
purpose of conducting our goodwill impairment review. In determining our reporting units, we
considered (i) whether an operating segment or a component of an operating segment was a business,
(ii) whether discrete financial information was available, and (iii) whether the financial
information is regularly reviewed by management of the operating segment. We evaluated the carrying
value of our goodwill at March 1, 2010, and our annual review did not indicate an impairment of
goodwill for any of our reporting units. The excess of the fair value of our reporting units over
their respective carrying values ranged from 12% to 107%. The reporting unit with 12% excess of
fair value over carrying value has approximately $70.2 million of goodwill allocated to it. The
discounted cash flow projections of this reporting unit benefited from recent awards.
Changes in assumptions or estimates used in our goodwill impairment testing could materially
affect the determination of the fair value of a reporting unit, and therefore could eliminate the
excess of fair value over carrying value of a reporting unit and, in some cases, could result in
impairment. Such changes in assumptions could be caused by a loss of one or more significant
contracts, reductions in government and/or private industry spending or a decline in the demand for
our services due to changing economic conditions. Given the nature of our business, if we are
unable to win or renew contracts, unable to estimate and control our contract costs, fail to
adequately perform to our clients expectations, fail to procure third-party subcontractors, heavy
equipment and materials or fail to adequately secure funding for our projects, our profits,
revenues and growth over the long-term would decline and such a decline could significantly affect
the fair value assessment of our reporting units and cause our goodwill to become impaired.
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The following table reflects the changes in the carrying value of goodwill by segment from
August 31, 2009 to May 31, 2010 (in thousands):
Fossil, | ||||||||||||||||||||||||
Renewables | ||||||||||||||||||||||||
& Nuclear | Maintenance | E&I | E&C | F&M | Total | |||||||||||||||||||
Balance at August 31, 2009 |
$ | 139,177 | $ | 42,027 | $ | 189,808 | $ | 112,575 | $ | 17,718 | $ | 501,305 | ||||||||||||
Currency translation adjustments |
| | | (1,356 | ) | (1,521 | ) | (2,877 | ) | |||||||||||||||
Balance at May 31, 2010 |
$ | 139,177 | $ | 42,027 | $ | 189,808 | $ | 111,219 | $ | 16,197 | $ | 498,428 | ||||||||||||
We had tax-deductible goodwill of approximately $80.9 million and $92.1 million at May 31,
2010 and August 31, 2009, respectively. The difference between the carrying value of goodwill and
the amount deductible for taxes is primarily due to the amortization of goodwill allowable for tax
purposes.
Other Intangible Assets
The gross carrying values and accumulated amortization of amortizable intangible assets are
presented below (in thousands):
Proprietary Technologies, | ||||||||||||||||
Patents and Tradenames | Customer Relationships | |||||||||||||||
Gross Carrying | Accumulated | Gross Carrying | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
Balance at August 31, 2009 |
$ | 43,954 | $ | (23,534 | ) | $ | 2,016 | $ | (1,479 | ) | ||||||
Adjustments |
| 45 | | | ||||||||||||
Amortization |
| (2,082 | ) | | (151 | ) | ||||||||||
Balance at May 31, 2010 |
$ | 43,954 | $ | (25,571 | ) | $ | 2,016 | $ | (1,630 | ) | ||||||
The following table presents the scheduled future annual amortization for our customer
relationships and intangible assets (in thousands):
Proprietary Technologies, | Customer | |||||||
Patents and Tradenames | Relationships | |||||||
Remainder of fiscal 2010 |
$ | 693 | $ | 50 | ||||
2011 |
2,772 | 202 | ||||||
2012 |
2,770 | 134 | ||||||
2013 |
2,766 | | ||||||
2014 |
2,766 | | ||||||
Thereafter |
6,616 | | ||||||
Total |
$ | 18,383 | $ | 386 | ||||
Note 7 Debt and Revolving Lines of Credit
Our debt (including capital lease obligations) at May 31, 2010 and August 31, 2009, consisted
of the following (in thousands):
May 31, 2010 | August 31, 2009 | |||||||||||||||
Short-term | Long-term | Short-term | Long-term | |||||||||||||
Notes payable on purchases of equipment;
0% to 1.3% interest; payments discounted
at imputed rate of 5.9% interest; due
September 2010 through April 2011 |
$ | 7,947 | $ | | $ | 10,610 | $ | 2,146 | ||||||||
Notes payable on purchases of equipment;
5.2% to 6.0% interest; due June 2011
through July 2012, and paid in full
October 2009 |
| | 1,188 | 1,824 | ||||||||||||
Other notes payable |
1,671 | | 2,805 | 2,277 | ||||||||||||
Capital lease obligations |
527 | 1,064 | 796 | 1,380 | ||||||||||||
Subtotal |
10,145 | 1,064 | 15,399 | 7,627 | ||||||||||||
Westinghouse Bonds (see description below) |
1,417,361 | | 1,387,954 | | ||||||||||||
Total |
$ | 1,427,506 | $ | 1,064 | $ | 1,403,353 | $ | 7,627 | ||||||||
Westinghouse Bonds
To partially finance our Investment in Westinghouse, in the first quarter of fiscal year 2007,
our subsidiary NEH issued JPY-denominated Westinghouse Bonds for USD equivalent net proceeds of
approximately $1.0 billion. The Westinghouse Bonds are limited recourse to us (except NEH) and are
collateralized primarily by the Westinghouse Equity and the Put Option. We entered into the
JPY-denominated Put Option which, if exercised, requires Toshiba to pay us at least JPY 124.7
billion (approximately 97% of our
original JPY-equivalent purchase price), and under certain circumstances, up to JPY 129.0
billion, which must be used to repay the Westinghouse Bonds.
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As discussed in Note 5 Equity Method Investments, in May 2009 Toshiba failed to maintain a
minimum consolidated net worth of JPY 800 billion, which was a Toshiba Event under the Put Option
and triggered the Exercise Period, allowing us to exercise the Put Option at any time through
February 28, 2013. A Toshiba Event is not an event of default or other violation of the Bond
Trust Deed or the Put Option, but due to the Toshiba Event, the Westinghouse Bond holders now have
the opportunity to direct us to exercise the Put Option. To do so, a supermajority of the holders
representing a majority of not less than an aggregate 75% of the principal amount outstanding must
pass a resolution instructing the bond trustee to direct us to exercise the Put Option.
Specifically, in order for the bond trustee to direct us to exercise the Put Option, the
Westinghouse Bond holders must convene a meeting with a quorum of holders representing no less than
75% of the Westinghouse Bonds principal amount outstanding during which a 75% majority of the
required quorum approves a resolution instructing the bond trustee to take such action.
Alternatively, a written resolution instructing the bond trustee to direct us to exercise the Put
Option and signed by holders representing no less than 75% of the Westinghouse Bond principal
amount outstanding shall have the same effect (collectively, an Extraordinary Resolution).
If we decide to exercise the Put Option due to the Toshiba Event or an Extraordinary
Resolution directs us to exercise the Put Option, Toshiba is required to pay us approximately JPY
129.0 billion (equal to 100% of the face value of the Westinghouse Bonds currently outstanding).
However, if we exercise the Put Option under other provisions of the Put Option, we would be
required to fund the estimated 3% difference (equal to JPY 4.3 billion, or approximately $46.8
million using exchange rates at May 31, 2010) between the anticipated Put Option proceeds and the
principal amount owed on the Westinghouse Bonds. If the Put Option expires unexercised on February
28, 2013, we will be required to repay the Westinghouse Bonds using some combination of internally
generated cash flows, additional or new borrowings or proceeds from the issuance of equity. We may
not be able to obtain credit in the future on terms similar to the terms reflected in the
Westinghouse Bonds should we elect to pursue such financing.
In connection and concurrent with the acquisition of our Investment in Westinghouse, we also
executed a Commercial Relationship Agreement (CRA) with Toshiba that provides us with certain
exclusive opportunities to bid on projects where we would perform engineering, procurement and
construction services on future Westinghouse advanced passive AP1000TM nuclear power
plants, along with other commercial opportunities, such as the supply of piping for those units.
Neither our nor Toshibas obligations under the CRA will be affected should we exercise the Put
Option at the direction of an Extraordinary Resolution through its expiration in 2013.
At May 31, 2010 and August 31, 2009, the Westinghouse Bonds were as follows (in thousands):
May 31, | August 31, | |||||||
2010 | 2009 | |||||||
Westinghouse Bonds, face value JPY 50.98 billion due March 15, 2013; interest only
payments; coupon rate of 2.20% |
$ | 426,875 | $ | 426,875 | ||||
Westinghouse Bonds, face value JPY 78 billion due March 15, 2013; interest only
payments; coupon rate of 0.70% above the six-month JPY LIBOR rate (0.45% and 0.60% at
May 31, 2010 and August 31, 2009, respectively) |
653,125 | 653,125 | ||||||
Increase in debt due to foreign currency translation adjustments since date of issuance |
337,361 | 307,954 | ||||||
Total Westinghouse debt |
$ | 1,417,361 | $ | 1,387,954 | ||||
On October 16, 2006, we entered into an interest rate swap agreement through March 15, 2013 in
the aggregate notional amount of JPY 78 billion. We designated the swap as a hedge against changes
in cash flows attributable to changes in the benchmark interest rate. Under the agreement, we make
fixed interest payments at a rate of 2.398%, and we receive a variable interest payment equal to
the six-month JPY London Interbank Offered Rate (LIBOR) plus a fixed margin of 0.7%, effectively
fixing our interest rate on the floating rate portion of the JPY 78 billion Westinghouse Bonds at
2.398%. At May 31, 2010 and August 31, 2009, the fair value of the swap totaled approximately $27.8
million and $31.4 million, respectively, and is included as a current liability and in accumulated
other comprehensive loss, net of deferred taxes, in the accompanying consolidated balance sheets.
There was no material ineffectiveness of our interest rate swap for the period ended May 31, 2010.
Credit Facility
On April 25, 2005, we entered into a five year $450.0 million Senior Secured Credit Facility
(Facility), which we have subsequently amended on a number of occasions in response to our evolving
credit needs. From the effective date, the Facility has been available for issuing performance
letters of credit and financial letters of credit as well as revolving credit loans. The terms
performance letter of credit and financial letter of credit have meanings customary for
financings of this type.
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On September 24, 2009, we entered into the Amended and Restated Credit Agreement (Restated
Agreement) with a group of lenders that provided new and extended lender commitments to the
Facility of $1,214.0 million, all of which is available for the issuance of performance and
financial letters of credit and/or borrowings for working capital needs and general corporate
purposes. Amounts outstanding as performance and financial letters of credit reduce the amount
otherwise available for borrowing under the Facility. The Restated Agreement included new lenders
to the Facility as well as certain existing lenders who will exit the Facility in 2010 or 2011,
following the expiration of their existing commitments. Accordingly, the Restated Agreement
contemplates three groups of lenders, the 2010 Lenders, the 2011 Lenders and the 2012
Lenders, with the Facility terminating with respect to such lenders on April 25, 2010, April 25,
2011 and October 25, 2012, respectively. The Restated Agreement makes available $1,214.0 million in
commitments through April 25, 2010 (up from $1,053.0 million), $1,095.0 million from April 26, 2010
through April 25, 2011, and $1,000.0 million from April 26, 2011 through October 25, 2012. The
Facility is available for working capital needs to fund fixed asset purchases, acquisitions,
investments in joint ventures and general corporate purposes. See Note 8 of our 2009 Form 10-K for
additional information on the Restated Agreement.
The following table presents the outstanding and available amounts under our Facility at May
31, 2010 (in millions):
Total Facility |
$ | 1,095.0 | ||
Less: outstanding performance letters of credit |
(257.8 | ) | ||
Less: outstanding financial letters of credit |
(99.6 | ) | ||
Less: outstanding revolving credit loans |
| |||
Remaining availability under the Facility |
$ | 737.6 | ||
At May 31, 2010, the portion of the Facility available for financial letters of credit and/or
revolving credit loans was $737.6 million, representing the total Facility ($1,095.0 million at May
31, 2010) less outstanding letters of credit ($357.4 million at May 31, 2010). Total fees
associated with these letters of credit under the Facility were approximately $2.9 million and $9.3
million for the three and nine months ended May 31, 2010, respectively, as compared to $3.1 million
and $9.5 million for the three and nine months ended May 31, 2009, respectively.
Under the Restated Agreement, interest is computed, at our option for each revolving credit
loan, using 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 the ratings of the Facility by S&P or Moodys Investors Service (Moodys) or, if the Facility is
not rated, the margin is based on our leverage ratio as defined in the agreement. The margins for
revolving credit loans under the Facility may be in a range of: (1) LIBOR plus 1.50% to 3.00% for
the 2010 Lenders and the 2011 Lenders and LIBOR plus 2.5% to 4.25% for the 2012 Lenders; or (2) the
defined base rate plus 0.00% to 0.50% for the 2010 Lenders and the 2011 Lenders and 1.0% to 2.75%
for the 2012 Lenders. Although there were no borrowings at May 31, 2010, the interest rate that
would have applied to any base rate borrowings under the Facility was 4.5%.
For the three and nine months ended May 31, 2010, we recognized $1.2 million and $3.4 million,
respectively, of interest expense associated with the amortization of financing fees related to our
Facility, as compared to $0.8 million and $2.3 million, respectively, for the three months and nine
months ended May 31, 2009. At May 31, 2010 and August 31, 2009, unamortized deferred financing fees
related to our Facility were approximately $11.5 million and $5.0 million, respectively.
At May 31, 2010, we were in compliance with the financial covenants required in the Restated
Agreement.
Other Revolving Lines of Credit
Shaw Nass, a consolidated VIE located in Bahrain, has an available credit facility (Bahrain
Facility) with a total capacity of 3.0 million Bahraini Dinars (BHD) or approximately $8.0 million,
of which BHD 1.5 million is available for bank guarantees and letters of credit. At May 31, 2010,
Shaw Nass had no borrowings under its revolving line of credit and approximately $1.2 million in
outstanding bank guarantees under the Bahrain Facility. The interest rate applicable to any
borrowings is a variable rate (1.32% at May 31, 2010) plus 2.25% per annum. We have provided a 50%
guarantee related to the Bahrain Facility.
We have an uncommitted, unsecured standby letter of credit facility with a bank. Fees under
this facility are paid quarterly. At May 31, 2010 and August 31, 2009, there were $22.6 million and
$24.8 million of letters of credit outstanding under this facility, respectively.
A bank has extended to us a $50.0 million uncommitted, unsecured bilateral line of credit for
issuing performance letters of credit in Saudi Arabia. Fees under this facility are paid quarterly.
At May 31, 2010 and August 31, 2009, there were $29.8 million of letters of credit outstanding
under this facility.
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Note 8 Income Taxes
Our consolidated effective tax rate for the three and nine months ended May 31, 2010 was 37%
and 36%, respectively. In determining the quarterly provision for income taxes, we use an estimated
annual effective tax rate based on forecasted annual pre-tax income and permanent items, statutory
tax rates and tax planning opportunities in the various jurisdictions in which we operate.
The impact of significant discrete items is separately recognized in the quarter in which they
occur. We recognize foreign currency translation gains and losses on the JPY-denominated
Westinghouse Bonds as discrete items in each reporting period due to their volatility and the
difficulty in estimating such gains and losses reliably. The third quarter included other discrete
items relating to a provision for uncertain tax benefits of $9.1 million and other adjustments for
$0.4 million partially offset by the benefit of research tax credits included in filed returns or
claims submitted to taxing authorities of $8.4 million and adjustments to reconcile tax returns to
provisions of $0.3 million.
We expect the fiscal 2010 annual effective tax rate, excluding discrete items, applicable to
forecasted pre-tax income to be approximately 36%. Significant factors that could impact the annual
effective tax rate include managements assessment of certain tax matters, the location and amount
of our taxable earnings, changes in certain non-deductible expenses and expected credits.
We adopted the provisions of ASC 740-10, Income Taxes, effective September 1, 2007. Under
ASC 740-10, we provide for uncertain tax positions and the related interest and adjust unrecognized
tax benefits and accrued interest accordingly. We recognize potential interest and penalties
related to unrecognized tax benefits in income tax expense.
During the third quarter of fiscal 2010, unrecognized tax benefits increased $9.1 million. The
increase was related to research tax credits included in filed returns or claims for the tax years
ended August 31, 2007, 2008 and 2009 totaling $8.4 million, additional tax provision of $0.4
million for various issues and accrued interest of $0.3 million. For the nine months of fiscal
2010, unrecognized tax benefits increased $1.6 million primarily due to research tax credits for
the years ended August 31, 2007, 2008 and 2009 of $8.4 million, additional tax provision of
$0.8 million for various issues and accrued interest of $0.4 million partially offset by the
reevaluation of temporary positions that are no longer uncertain of $7.1 million and a settlement
with a state tax authority for $1.0 million. As of May 31, 2010, our unrecognized tax benefits were
$53.7 million, of which $43.1 million would, if recognized, affect our effective tax rate.
Our subsidiaries file income tax returns in numerous tax jurisdictions, including U.S.
federal, most U.S. states and certain foreign jurisdictions. Tax returns are also filed in certain
jurisdictions where our subsidiaries execute project-related work. The statute of limitations
varies by the various jurisdictions in which we operate. With a few exceptions, we are no longer
subject to U.S. (including federal, state and local) or foreign income tax examinations by tax
authorities for years before fiscal year 2004. Although we believe our calculations for our tax
returns are correct and the positions taken thereon are reasonable, the outcome of tax audits could
be materially different from the resolution we currently anticipate, and those differences could
result in significant costs or benefits to us.
Certain tax years are under audit by relevant tax authorities including an examination of our
U.S. federal tax returns for fiscal years 2006-2008 by the Internal Revenue Service (IRS). We have
extended the statute of limitations on our U.S. federal returns for the 2004 and 2005 fiscal years
involved in an IRS appeal (see Note 11 Contingencies and Commitments). In addition, many
U.S. states suspend the state statute of limitations for any year for which the U.S. federal
statute has been extended.
While the IRS appeal of fiscal years 2004 and 2005 may be concluded in the foreseeable future,
it is not possible at this time to estimate the impact of changes in unrecognized tax benefits over
the next 12 months.
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Note 9 Accumulated Other Comprehensive Income (Loss)
The after-tax components of accumulated other comprehensive income (loss) are as follows for
the quarterly periods presented below (in thousands):
Equity in | ||||||||||||||||||||||||
Westinghouses | ||||||||||||||||||||||||
Pre-tax other | Change in | Accumulated | ||||||||||||||||||||||
Foreign | Comprehensive | Unrealized Net | Other | |||||||||||||||||||||
Currency | Income (Loss), | Loss On | Pension | Unrealized | Comprehensive | |||||||||||||||||||
Translation | Net of | Hedging | Liability | Gain (Loss) | Income | |||||||||||||||||||
Adjustments | Shaws tax | Activities | Adjustments | on Securities | (Loss) | |||||||||||||||||||
Balance at August 31, 2008 |
$ | 417 | $ | 26,060 | $ | (5,360 | ) | $ | (30,726 | ) | $ | | $ | (9,609 | ) | |||||||||
Three months ended November 30, 2008 |
(15,258 | ) | (27,210 | ) | (7,273 | ) | 579 | | (49,162 | ) | ||||||||||||||
Balance at November 30, 2008 |
$ | (14,841 | ) | $ | (1,150 | ) | $ | (12,633 | ) | $ | (30,147 | ) | $ | | $ | (58,771 | ) | |||||||
Three months ended February 28, 2009 |
(4,645 | ) | (74,169 | ) | (4,240 | ) | (4,951 | ) | | (88,005 | ) | |||||||||||||
Balance at February 28, 2009 |
$ | (19,486 | ) | $ | (75,319 | ) | $ | (16,873 | ) | $ | (35,098 | ) | $ | | $ | (146,776 | ) | |||||||
Three months ended May 31, 2009 |
10,165 | (12,432 | ) | 888 | 868 | | (511 | ) | ||||||||||||||||
Balance at May 31, 2009 |
$ | (9,321 | ) | $ | (87,751 | ) | $ | (15,985 | ) | $ | (34,230 | ) | $ | | $ | (147,287 | ) | |||||||
Balance at August 31, 2009 |
$ | (9,922 | ) | $ | (54,657 | ) | $ | (19,217 | ) | $ | (38,170 | ) | $ | | $ | (121,966 | ) | |||||||
Three months ended November 30, 2009 |
2,444 | (3,061 | ) | (41 | ) | 982 | 242 | 566 | ||||||||||||||||
Balance at November 30, 2009 |
$ | (7,478 | ) | $ | (57,718 | ) | $ | (19,258 | ) | $ | (37,188 | ) | $ | 242 | $ | (121,400 | ) | |||||||
Three months ended February 28, 2010 |
(7,138 | ) | (1,238 | ) | (1,132 | ) | 653 | 817 | (8,038 | ) | ||||||||||||||
Balance at February 28, 2010 |
$ | (14,616 | ) | $ | (58,956 | ) | $ | (20,390 | ) | $ | (36,535 | ) | $ | 1,059 | $ | (129,438 | ) | |||||||
Three months ended May 31, 2010 |
(6,654 | ) | (9,103 | ) | 3,364 | 794 | (1,607 | ) | (13,206 | ) | ||||||||||||||
Balance at May 31, 2010 |
$ | (21,270 | ) | $ | (68,059 | ) | $ | (17,026 | ) | $ | (35,741 | ) | $ | (548 | ) | $ | (142,644 | ) | ||||||
The translation adjustments relate primarily to changes in the value of the USD in relation to
other currencies such as the British Pounds Sterling (GBP), Mexican Pesos, Canadian Dollars and the
Euro.
Note 10 Share-Based Compensation
Restricted stock units totaling 561,956 shares were granted during the nine months ended May
31, 2010, at a weighted-average per share price of $27.95 vesting over approximately four years.
Restricted stock units totaling 2,387,423 shares were granted during the nine months ended May 31,
2009, at a weighted-average per share price of $18.01, vesting over approximately three to four
years. Of these grants, approximately 1,270,000 restricted stock units were classified as liability
awards at November 30, 2008, due to the limited availability of shares under our share-based
compensation plans. As a result of shareholder approval of the 2008 Omnibus Incentive Plan on
January 29, 2009, these liability awards were modified for accounting purposes to be equity awards.
On January 28, 2009, the price used to re-measure the liability awards was our closing stock price
of $29.39, and the modified equity awards have a weighted-average price per share of $29.39.
During the nine months ended May 31, 2010 and May 31, 2009, options for the purchase of
820,173 shares at a weighted-average price of $27.89 per share and 1,201,791 shares at a
weighted-average price of $18.25 per share, respectively, were awarded, vesting over approximately
four years. The contractual lives of the awards during the nine months ended May 31, 2010 are
consistent with those of prior years. There were no significant changes in the assumptions or
estimates used in the valuation of options awarded subsequent to our year-end August 31, 2009.
During the nine months ended May 31, 2010 and May 31, 2009, options were exercised for the
purchase of 337,479 shares at a weighted-average exercise price of $20.22 per share and 46,068
shares at a weighted-average exercise price of $16.11 per share, respectively.
For additional information related to these share-based compensation plans, see Note 11
Share-Based Compensation of our consolidated financial statements in our 2009 Form 10-K.
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Note 11 Contingencies and Commitments
Tax Matters
In connection with the IRS examination of our U.S. federal tax returns for the 2004 and 2005
fiscal years, we have protested adjustments covering approximately $13.0 million of additional
federal and state income taxes, for which the interest would begin running from fiscal 2007. Tax
and interest accrual provisions have been made in our financial statements for the agreed
adjustments in the IRS audit covering the 2004 and 2005 fiscal years and for uncertain tax
provisions as discussed in Note 8 Income Taxes.
While management cannot predict the ultimate outcome of the above matters, provisions have
been made in our financial statements where appropriate. The matters, if decided adversely to us or
settled by us, individually or in the aggregate, could have a material adverse effect on our
financial statements.
In a separate matter, certain cases concerning Louisiana franchise tax matters for fiscal
years 2001 through 2009 have been ordered dismissed by reason of joint requests made by the
Louisiana Department of Revenue and Shaw.
Liabilities Related to Contracts
Our contracts often contain provisions relating to the following matters:
| warranties, requiring achievement of acceptance and performance testing levels; | ||
| liquidated damages, if the project does not meet predetermined completion dates; and | ||
| penalties or liquidated damages for failure to meet other cost or project performance measures. |
We attempt to limit our exposure under the penalty or liquidated damage provisions and attempt
to pass certain cost exposure for craft labor and/or commodity-pricing risk to clients. We also
have claims from clients as well as vendors, subcontractors and others that are subject to
negotiation or the contractual dispute resolution processes defined in the contracts (see Note 15
Long-Term Construction Accounting for Revenue and Profit/Loss Recognition Including Claims,
Unapproved Change Orders and Incentives for further discussion).
Guarantees
Our Facility lenders issue letters of credit on our behalf to clients or sureties in
connection with our contract performance and, in limited circumstances, on certain other
obligations of third parties. We are required to reimburse the issuers of these letters of credit
for any payments that they make pursuant to these letters of credit. The aggregate amount of
outstanding financial and performance letters of credit (including foreign and domestic, secured
and unsecured and cash collateralized) was $659.8 million and $790.3 million at May 31, 2010 and
August 31, 2009, respectively. Of the amount of outstanding letters of credit at May 31, 2010,
$475.8 million are performance letters of credit issued to our clients. Of the $475.8 million, five
clients held $308.5 million or 64.8% of the outstanding letters of credit. The largest letter of
credit issued to a single client on a single project is $117.5 million. Our borrowing capacity
under our Facility is reduced by the aggregate amount of our outstanding performance and financial
letters of credit.
In the ordinary course of business, we enter into various agreements providing financial or
performance assurances to clients on behalf of certain unconsolidated partnerships, joint ventures,
consortiums or other jointly executed contracts. These agreements are entered into primarily to
support the project execution commitments of these entities and are generally a guaranty of our own
performance. These assurances have various expiration dates ranging from mechanical completion of
the facilities being constructed to a period extending beyond contract completion. The maximum
potential payment amount of an outstanding performance guarantee is the remaining cost of work to
be performed by or on behalf of third parties under engineering and construction contracts. Amounts
that may be required to be paid in excess of our estimated cost to complete contracts in progress
are not estimable. For cost reimbursable contracts, amounts that may become payable pursuant to
guarantee provisions are normally recoverable from the client for work performed under the
contract. For fixed price contracts, this amount is the cost to complete the contracted work less
amounts remaining to be billed to the client under the contract. Remaining billable amounts could
be greater or less than the cost to complete. In those cases where cost exceeds the remaining
amounts payable under the contract, we may have recourse to third parties such as owners,
co-venturers, subcontractors or vendors.
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Legal Proceedings
In connection with an international services contract signed in 2000 for the construction of
two nuclear power plants in Asia, we asserted claims against our client before the host countrys
arbitration association. In that arbitration, we sought an approximate $49.6 million increase in
the contract target price that, if awarded, would eliminate potential penalties associated with
cost incentive/penalty provisions set forth in the contract. If the arbitration association failed
to award the target cost increase or it awarded an increase less than the requested amount, we
faced an assessment of up to approximately $13.6 million in such penalties. Further, we sought from
the client approximately $22.2 million for reimbursement of severance and pension payments, unpaid
invoices, increased overhead and outstanding fixed fee amounts. The client presented a counterclaim
asserting $4.3 million in damages relating to alleged defective work and an additional $23.6
million for completion damages, though the contract limits such damages to $20.0 million. The
client has further sought to keep $7.2 million in cash drawn on a previously issued letter of
credit against the claims asserted. On September 3, 2008, the arbitration association rendered an
award granting most of our claims and dismissing all of the clients counterclaims. We have
initiated proceedings to enforce the award in both the host country and in the U.S. District Court
for the Middle District of Louisiana. The proceedings in the U.S. District Court ended when the
Court declined jurisdiction based on a finding of forum non conveniens. The client has initiated
proceedings in the host country to contest the awards validity, oppose our enforcement actions and
overturn the award. In the first ruling by the host countrys court addressing the validity of the
arbitration award, the court denied the clients petition to nullify the award and the client
appealed that ruling. The other proceedings initiated by the client to contest the award or oppose
its enforcement have been stayed pending the outcome of the nullification petition now on appeal
before the host countrys appellate court. We have made provisions in our financial statements
based on managements judgment about the probable outcome of this case. If the client prevails on
its counterclaim for defective work and completion damages and/or its challenge of the existing
award to us to increase the target contract price and other claims for compensation, the individual
or combined rulings could have a material adverse effect on our financial statements.
We filed a Request for Arbitration with the London Court of International Arbitration (LCIA)
in connection with an international fixed price contract executed by our Fossil, Renewables &
Nuclear segment that is subject to a schedule of rates for changes and where our services include
fabrication, erection and construction. In the request, as amended in a January 2010 filing with
the LCIA, we currently seek claims of approximately $25.9 million in additional compensation from
our client, the prime contractor on the project, related to delay and disruption, loss of profit on
descoped areas and changed labor practices. In addition, we have requested additional compensation
relative to remeasurements of quantities and scope variations from our client of approximately
$12.7 million. On February 5, 2009, the client, who holds a $1.9 million performance letter of
credit from us, filed a response that denied our claims and stated it had counterclaims totaling
approximately $57.2 million related to certain alleged costs associated with completing work that
the client removed from our scope and damages suffered because of our alleged failure to complete
work in a timely manner. On August 12, 2009, the client filed a Statement of Defense and
Counterclaim, which was subsequently amended on June 2, 2010 in response to our January 2010
amendment, and wherein the clients counterclaims were reduced to $22.7 million. Within this
counterclaim, the client also identified $17.8 million it was owed for descopes of work, but agreed
in principal to change orders for remeasurements and variations valued at $10.5 million. We have
evaluated our claims and our clients counterclaims and made provisions in our financial statements
based on managements judgment about the probable outcome of this arbitration. While we expect a
favorable resolution to these matters, the dispute resolution process could be lengthy, and if the
client were to prevail completely or substantially in this matter, the outcome could have a
material adverse effect on our statements of operations and cash flows. The USD value of the claims
and our letter of credit stated herein fluctuate due to changes in the exchange rate of the GBP.
Our subsidiary, Stone & Webster, Inc. (S&W), is nearing completion of work for Xcel Energy
(d/b/a Public Service of Colorado) on Xcels Comanche project in Colorado. There are material
claims by S&W against Xcel for contract changes relating to coordination of the work, delays and
resulting impacts on our ability to perform. The resulting change order request submitted by S&W
was denied. As a result, S&W filed a lawsuit, 2009-CV-6913, in the District Court, City and County
of Denver, Colorado, against Xcel on July 14, 2009, seeking damages in excess of $71.0 million. We
anticipate our claims will ultimately exceed $100.0 million. Xcel counterclaimed, alleging nearly
$56.0 million in damages or set-offs against S&W and recent disclosures by Xcel indicate its claim
will also likely increase. We have evaluated our position and believe we are entitled to amounts in
excess of the July 14, 2009 filed claims. On June 3, 2010, Xcel made a partial draw of $29.7
million on a $41.3 million letter of credit, alleging S&W had failed to perform its obligations
under the EPC contract. We believe the allegations are without merit and will pursue full recovery
of the funds. We have evaluated our claims and our clients counterclaims and made provisions in
our financial statements based on managements judgment about the probable outcome of this
arbitration. While we expect a favorable resolution to these matters, the dispute resolution
process could be lengthy, and if the client were to prevail completely or substantially in this
matter, the outcome could have a material adverse effect on our financial statements.
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In connection with a contract executed by our Fossil, Renewables & Nuclear segment for the
engineering, procurement and construction of a 600 MW steam turbine electrical generation plant in
the U.S., we have commenced an arbitration proceeding with our equipment and services supplier on
the project. We contend that one of our suppliers failed to comply with certain contractual
obligations. This failure disrupted and delayed our work, significantly increased our costs and
exposed us to the imposition of liquidated damages by the owner. On December 30, 2009, we presented
claims to our supplier in a preliminary Notice of Claim. Our supplier did not respond to this
Notice of Claim and instead filed a Demand for Arbitration dated January 13, 2010, which requested
declaratory relief, injunctive relief and damages in an amount to be determined. We served our own
Demand for Arbitration on January 18, 2010, followed by a Detailed Statement of Claim on May 17,
2010, identifying damages of approximately $69.0 million. Also on May 17, 2010, the supplier filed
a More Definitive Statement of Claim for approximately $31.0 million with time extension and
claimed legal expenses still to be determined. We have evaluated our claims and our suppliers
counterclaims and made provisions in our financial statements based on managements judgment about
the probable outcome of this arbitration. While we expect a favorable resolution to these matters,
the dispute resolution process could be lengthy, and if our supplier were to prevail completely or
substantially in this matter, the outcome could have a material adverse effect on our consolidated
statement of operations.
See Note 15 Long-Term Construction Accounting for Revenue and Profit/Loss Recognition
Including Claims, Unapproved Change Orders and Incentives for additional information related to our
claims on major projects.
Environmental Liabilities
The LandBank Group, Inc., a subsidiary of our Environmental and Infrastructure (E&I) segment,
acquires and remediates environmentally impaired real estate. The real estate is recorded at cost,
which typically reflects some degree of discount due to environmental issues related to the real
estate. As remediation efforts are expended, the book value of the real estate is increased to
reflect improvements made to the asset. We had $52.7 million and $17.7 million of such real estate
assets recorded in other assets on the accompanying balance sheets at May 31, 2010 and August 31,
2009, respectively. The increase of $35.0 million relates to the consolidation in the current
fiscal year of a VIE formerly accounted for under the equity method. Additionally, LandBank records a
liability for estimated remediation costs for real estate that is sold, but for which the
environmental obligation is retained. We also record an environmental liability for properties held
by LandBank if funds are received from transactions separate from the original purchase to pay for
environmental remediation costs. At May 31, 2010, our E&I segment had $4.3 million of environmental
liabilities recorded in other liabilities in the accompanying balance sheets as compared to $5.0
million at August 31, 2009.
Note 12 Supplemental Disclosure to Earnings (Loss) Per Common Share
Weighted average shares outstanding for the three and nine months ended May 31, 2010 and May
31, 2009 were as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic |
84,280 | 83,295 | 83,872 | 83,218 | ||||||||||||
Stock options |
1,174 | 733 | 1,027 | 614 | ||||||||||||
Restricted stock |
667 | 619 | 773 | 393 | ||||||||||||
Diluted |
86,121 | 84,647 | 85,672 | 84,225 | ||||||||||||
The following table includes weighted-average shares excluded from the calculation of diluted
income per share for the three and nine months ended May 31, 2010 and May 31, 2009 because they
were anti-dilutive (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Stock options |
1,205 | 1,174 | 1,222 | 1,824 | ||||||||||||
Restricted stock |
80 | 155 | 110 | 327 |
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Note 13 Employee Benefit Plans
The following table sets forth the net periodic pension expense for the three foreign defined
benefit plans we sponsor for the three and nine months ended May 31, 2010 and May 31, 2009 (in
thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost |
$ | 34 | $ | 63 | $ | 102 | $ | 1,036 | ||||||||
Interest cost |
1,938 | 1,853 | 6,046 | 5,904 | ||||||||||||
Expected return on plan assets |
(1,741 | ) | (1,419 | ) | (5,419 | ) | (4,859 | ) | ||||||||
Amortization of net loss |
789 | 665 | 2,473 | 1,742 | ||||||||||||
Curtailment gain |
| | | (2,725 | ) | |||||||||||
Other |
10 | 8 | 29 | 26 | ||||||||||||
Total net pension expense |
$ | 1,030 | $ | 1,170 | $ | 3,231 | $ | 1,124 | ||||||||
We expect to contribute $12.6 million to our defined benefit plans in fiscal year 2010. As of
May 31, 2010, we contributed $11.5 million to these plans, including an $8.3 million voluntary cash
contribution to our underfunded pension plan in the United Kingdom.
Multi-employer Plans
We participate in various multi-employer pension plans under union and industry-wide
agreements. Generally, these plans provide defined benefits to substantially all employees covered
by collective bargaining agreements. Under the Employee Retirement Income Security Act (ERISA), a
contributor to a multi-employer plan may be liable, upon termination or withdrawal from a plan, for
its proportionate share of a plans unfunded vested liability.
Note 14 Related Party Transactions
As discussed in Note 5 Equity Method Investments, our significant unconsolidated subsidiary
that is accounted for using the equity method of accounting is our Investment in Westinghouse. We
operate in a consortium that includes Westinghouse on several new build nuclear power projects. We
also provide services to Westinghouse as part of its arrangements with its clients. To date, the
revenues and expenses recorded on transactions between Westinghouse and us have not been material.
Note 15 Long-Term Construction Accounting for Revenue and Profit/Loss
Recognition Including Claims, Unapproved Change Orders and
Incentives
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 clients 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 when recovery of the claimed amounts is probable and the costs can be reasonably
estimated. 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. As a result, recording claims increases gross profit or
reduces gross loss on the related projects in the period the claims are recorded. However, profit
recognition on the individual claim is deferred until the change order has been approved or the
disputed amounts have been settled. Claims receivable are included in costs and estimated earnings
in excess of billings on uncompleted contracts, including claims on the accompanying consolidated
balance sheets.
We enter into cost-reimbursable arrangements in which the final outcome or overall estimate at
completion may be materially different from the original contract value. While the terms of such
contracts indicate costs are to be reimbursed by our clients, we typically process change notice
requests to document agreement as to scope and price. Due to the nature of these items, we have not
classified and disclosed the amounts as unapproved change orders. While we have no history of
significant losses on this type of work, potential exposure exists relative to costs incurred in
excess of agreed upon contract value.
Unapproved Change Orders and Claims
Our consolidated revenues include amounts for unapproved change orders and claims on projects
recorded on a percentage-of-completion basis. For the three and nine months ended May 31, 2010, the
portion of unapproved change orders and claims recognized
as revenues increased by approximately $14.1 million and $19.3 million, respectively, as
compared to $10.0 million and $30.0 million, respectively, for the three and nine months ended May
31, 2009.
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The table below (in millions) summarizes information related to the total value of our
significant unapproved change orders and claims from project owners that we have recorded on a
total project basis at May 31, 2010 and May 31, 2009, respectively, and excludes all unrecorded
amounts and non-significant unapproved change orders and claims.
Fiscal Year | Fiscal Year | |||||||
2010 | 2009 | |||||||
Amounts included in project estimates-at-completion at September 1 |
$ | 222.9 | $ | 63.6 | ||||
Changes in estimates-at-completion |
39.5 | 172.3 | ||||||
Approved by client |
(35.9 | ) | (34.5 | ) | ||||
Amounts included in project estimates-at-completion at May 31 |
$ | 226.5 | $ | 201.4 | ||||
Amounts accrued in revenues on a total project basis at May 31 |
$ | 106.2 | $ | 75.4 | ||||
Included in our project estimates-at-completion (EAC) at May 31, 2010, and shown in the table
above are expected cost recoveries associated with a claim of approximately $100.0 million for
price adjustments on a construction project for which our contract includes escalation provisions.
We have reached an agreement with our client to replace certain index-based adjustments with fixed
annual escalation percentages. The resulting amendment is subject to approval by the state Public
Service Commission, which we understand is currently reviewing our clients filing. Also included
in our project EAC for this new construction project are expected cost recoveries associated with
change requests of approximately $30.0 million. To date, we have recorded less than $6.0 million in
revenue in our financial statements related to these two items.
As part of the application process for our clients to obtain combined operating licenses (COL)
for the domestic AP 1000 nuclear power plants, the Nuclear Regulatory Commission is
conducting technical reviews of the proposed design of the facilities. These reviews could result
in changes to the proposed design, which may result in additional costs to complete the facilities.
We believe we have contractual entitlement to recover additional costs related to these design
changes. At this time we are unable to reliably estimate those costs, if any, and as a result they
are not included in our current estimated at completion revenue or costs.
In addition, we have incorporated in our project EAC at May 31, 2010, approximately $36.0
million related to unapproved change orders associated with permitting delays on a coal-plant
construction project. Not included as an unapproved change order and claim in amounts disclosed in
the table above are assumed recoveries in our EAC of approximately $21.2 million for cost
escalation on commodities for which we have entitlement under the existing terms of the contract.
The difference between the amounts included in project EAC used in determining contract profit
or loss and the amounts recorded in revenues (or reductions to contract costs) on uncompleted
contracts are the forecasted costs for work which has not yet been incurred (i.e. remaining
percentage-of-completion revenue to be recognized on the related project).
If we collect amounts different than the amounts that we have recorded as unapproved change
orders/claims receivable, that difference will be reflected in the EAC used in determining contract
profit 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 unapproved change orders/claims receivable within the next twelve
months.
Also included in unapproved change orders and claims are two matters currently in arbitration
or litigation. See Note 11 Contingencies and Commitments for additional information.
In addition to the unapproved change orders and claims discussed above, we have recorded as a
reduction to costs at May 31, 2010 approximately $23.7 million in expected recoveries for
backcharges, liquidated damages and other cost exposures resulting from supplier or subcontractor
caused impediments to our work. Such impediments may be caused by the failure of suppliers or
subcontractors to provide services, materials or equipment compliant with provisions of our
agreements, resulting in delays to our work or additional costs to remedy. See Note 11
Contingencies and Commitments for information with respect to vendor backcharges.
Should we not prevail in these matters, the outcome could have an adverse effect on our
statement of operations and statement of cash flows.
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Project Incentives
Our contracts contain certain incentive and award fees that provide for increasing or
decreasing our revenue based on some measure of contract performance in relation to agreed upon
performance targets. The recognition of revenues on contracts containing provisions for incentive
and award fees provides that all components of contract revenues, including probable incentive
payments such as performance incentives and award fees, should be considered in determining total
estimated revenues.
Our revenue EACs include an estimate of amounts that we expect to earn if we achieve a number
of agreed upon criteria. At May 31, 2010 and August 31, 2009, our project estimates included $51.5
million and $32.9 million, respectively, related to amounts at risk for the estimated achievement
of these criteria. On a percentage-of-completion basis, we have recorded $41.2 million and $29.4
million of these estimated amounts in revenues for the related contracts and equal amounts in costs
and estimated earnings in excess of billings on uncompleted contracts in the accompanying
consolidated balance sheets based on our progress as of May 31, 2010, and August 31, 2009,
respectively. Included in these amounts are incentives tied to performance guarantees for which
realization is expected upon project completion in approximately two years. If we do not achieve
the criteria at the amounts we have estimated, project revenues and profit may be materially
reduced. These incentive revenues are recognized using the percentage-of-completion method of
accounting.
Note 16 Business Segments
Our reportable segments are Fossil, Renewables & Nuclear; Maintenance; Environmental &
Infrastructure (E&I); Energy and Chemicals (E&C); Fabrication and Manufacturing (F&M); Investment
in Westinghouse and Corporate.
The Fossil, Renewables & Nuclear segment provides a range of project-related services,
including design, engineering, construction, procurement, technology and consulting services,
primarily to the global fossil, renewable and nuclear power generation industries.
The Maintenance segment performs routine and outage/turnaround maintenance, predictive and
preventative maintenance, as well as construction and major modification services, to clients
facilities in the industrial markets primarily in North America.
The E&I segment provides integrated engineering, design and construction services and executes
remediation solutions for contaminants in soil, air and water for government and private sector
clients worldwide.
The E&C segment provides a range of project-related services, including design, engineering,
construction, procurement, technology and consulting services, primarily to the oil and gas,
refinery, petrochemical and chemical industries.
The F&M segment provides integrated piping systems and services for new construction, site
expansion and retrofit projects for energy and chemical plants. We operate several pipe fabrication
facilities in the U.S. and abroad. We also operate two manufacturing facilities that provide
products for our pipe fabrication services operations, as well as to third parties. In addition, we
operate several distribution centers in the U.S., which distribute our products to our clients.
The Investment in Westinghouse segment includes our Westinghouse Equity and the Westinghouse
Bonds. Westinghouse serves the domestic and international nuclear electric power industry by
supplying advanced nuclear plant designs and equipment, fuel and a wide range of other products and
services to the owners and operators of nuclear power plants. Please see Notes 5 and 7 for
additional information with respect to the circumstances in which the Westinghouse Bond holders may
direct us to exercise the Put Option and sell the Westinghouse Equity to Toshiba.
The Corporate segment includes corporate management and expenses associated with managing the
overall company. These expenses include compensation and benefits of corporate management and
staff, legal and professional fees and administrative and general expenses that are not allocated
to the business units. Our Corporate assets primarily include cash and cash equivalents held by the
corporate entities, property and equipment related to the corporate facility and certain
information technology costs.
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Our segments revenues, gross profit and income (loss) before income taxes and earnings from
unconsolidated entities for the three and nine months ended May 31, 2010 and May 31, 2009 were as
follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
(in millions, except percentages) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues: |
||||||||||||||||
Fossil, Renewables & Nuclear |
$ | 574.1 | $ | 644.5 | $ | 1,705.3 | $ | 1,873.1 | ||||||||
Maintenance |
252.9 | 232.5 | 723.5 | 739.3 | ||||||||||||
E&I |
568.0 | 451.8 | 1,584.5 | 1,303.1 | ||||||||||||
E&C |
266.7 | 339.0 | 893.2 | 992.0 | ||||||||||||
F&M |
127.6 | 179.4 | 365.4 | 505.3 | ||||||||||||
Corporate |
| 1.2 | 0.1 | 3.6 | ||||||||||||
Total revenues |
$ | 1,789.3 | $ | 1,848.4 | $ | 5,272.0 | $ | 5,416.4 | ||||||||
Gross profit: |
||||||||||||||||
Fossil, Renewables & Nuclear |
$ | 42.0 | $ | 34.1 | $ | 93.7 | $ | 54.7 | ||||||||
Maintenance |
13.4 | 5.9 | 42.0 | 16.1 | ||||||||||||
E&I |
55.7 | 36.5 | 148.5 | 111.3 | ||||||||||||
E&C |
21.6 | 40.9 | 102.8 | 154.0 | ||||||||||||
F&M |
18.4 | 44.3 | 63.1 | 113.7 | ||||||||||||
Corporate |
0.6 | 1.3 | 1.5 | 3.6 | ||||||||||||
Total gross profit |
$ | 151.7 | $ | 163.0 | $ | 451.6 | $ | 453.4 | ||||||||
Gross profit percentage: |
||||||||||||||||
Fossil, Renewables & Nuclear |
7.3 | % | 5.3 | % | 5.5 | % | 2.9 | % | ||||||||
Maintenance |
5.3 | 2.5 | 5.8 | 2.2 | ||||||||||||
E&I |
9.8 | 8.1 | 9.4 | 8.5 | ||||||||||||
E&C |
8.1 | 12.1 | 11.5 | 15.5 | ||||||||||||
F&M |
14.4 | 24.7 | 17.3 | 22.5 | ||||||||||||
Corporate |
NM | NM | NM | NM | ||||||||||||
Total gross profit percentage |
8.5 | % | 8.8 | % | 8.6 | % | 8.4 | % | ||||||||
Income before income taxes
and earnings (losses) from
unconsolidated entities: |
||||||||||||||||
Fossil, Renewables & Nuclear |
$ | 29.1 | $ | 22.0 | $ | 52.2 | $ | 12.2 | ||||||||
Maintenance |
11.2 | 3.2 | 35.0 | 7.4 | ||||||||||||
E&I |
41.4 | 18.7 | 99.8 | 62.4 | ||||||||||||
E&C |
8.9 | 29.2 | 66.7 | 124.2 | ||||||||||||
F&M |
10.7 | 35.5 | 39.8 | 91.9 | ||||||||||||
Investment in Westinghouse |
24.7 | (72.7 | ) | (57.0 | ) | (223.9 | ) | |||||||||
Corporate |
(16.7 | ) | (21.6 | ) | (49.5 | ) | (62.7 | ) | ||||||||
Total income before income
taxes and earnings (losses)
from unconsolidated entities |
$ | 109.3 | $ | 14.3 | $ | 187.0 | $ | 11.5 | ||||||||
NM Not Meaningful
Our segments assets were as follows:
May 31, | August 31, | |||||||
(in millions) | 2010 | 2009 | ||||||
Assets |
||||||||
Fossil, Renewables & Nuclear |
$ | 1,887.3 | $ | 1,629.9 | ||||
Maintenance |
205.6 | 180.7 | ||||||
E&I |
1,089.5 | 1,002.8 | ||||||
E&C |
750.4 | 853.4 | ||||||
F&M |
688.3 | 698.0 | ||||||
Investment in Westinghouse |
1,148.8 | 1,171.2 | ||||||
Corporate |
909.6 | 846.9 | ||||||
Total segment assets |
6,679.5 | 6,382.9 | ||||||
Elimination of investment in consolidated subsidiaries |
(412.1 | ) | (412.1 | ) | ||||
Elimination of intercompany receivables |
(442.4 | ) | (414.0 | ) | ||||
Income taxes not allocated to segments |
(0.4 | ) | 0.4 | |||||
Total consolidated assets |
$ | 5,824.6 | $ | 5,557.2 | ||||
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Major Customers
Revenues related to U.S. government agencies or entities owned by the U.S. government were
$478.8 million and $1,351.7 million, respectively, for the three and nine months ended May 31,
2010, representing approximately 26.8% and 25.6%, respectively, of our total revenues for each
period. For the three and nine months ended May 31, 2009, we recorded revenues related to the U.S.
government of approximately $398.0 million and $1,100.4 million, respectively, representing
approximately 21.5% and 20.3%, respectively, of our total revenues for each period. These revenues
were primarily related to work performed in our E&I segment.
Note 17 Fair Value Measurements
We follow the authoritative guidance set forth in ASC 820-10 (SFAS 157) for fair value
measurements relating to financial and nonfinancial assets and liabilities, including presentation
of required disclosures in our condensed consolidated financial statements. This guidance defines
fair value as the price that would be received to sell an asset or paid to transfer a liability (an
exit price) in an orderly transaction between market participants at the measurement date. The
guidance also establishes a fair value hierarchy, which requires maximizing the use of observable
inputs when measuring fair value.
The three levels of inputs that may be used are:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market
data.
Level 3: Significant unobservable inputs that are not corroborated by market data.
There have been no material changes to the valuations techniques utilized in the fair value
measurement of assets and liabilities presented on the Companys balance sheet as compared to those
disclosed in our 2009 Form 10-K.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents information at May 31, 2010, about our financial assets and financial
liabilities that are measured at fair value on a recurring basis and indicates the fair value
hierarchy of the valuation techniques utilized to determine such fair value (in thousands):
Fair | Fair Value Measurements Using | |||||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Short-term and Restricted Short-term Investments |
||||||||||||||||
Certificates of deposit |
$ | 578,671 | $ | | $ | 578,671 | $ | | ||||||||
Stock and bond mutual funds |
8,206 | 8,206 | | | ||||||||||||
U.S. government agency and corporation securities |
24,048 | | 24,048 | | ||||||||||||
Foreign government and foreign government
guaranteed securities |
118,083 | | 118,083 | | ||||||||||||
Corporate notes and bonds |
388,593 | | 388,593 | | ||||||||||||
Total |
$ | 1,117,601 | $ | 8,206 | $ | 1,109,395 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swap contract |
$ | 27,801 | $ | | $ | 27,801 | $ | | ||||||||
Derivatives Not Designated as Hedging Instruments: |
||||||||||||||||
Other Current Assets |
||||||||||||||||
Foreign currency forward assets |
$ | 510 | $ | | $ | 510 | $ | | ||||||||
Other Accrued Liabilities |
||||||||||||||||
Foreign currency forward liabilities |
$ | 1,086 | $ | | $ | 1,086 | $ | |
We value the interest rate swap liability utilizing a discounted cash flow model that takes
into consideration forward interest rates observable in the market
and the counterpartys credit
risk. Our counterparty to this instrument is a major U.S. bank. As discussed in Note 7 Debt and
Revolving Lines of Credit, we designated the swap as a hedge against changes in cash flows
attributable to changes in the benchmark interest rate related to our Westinghouse Bonds.
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We manage our transaction exchange exposures with foreign currency derivative instruments
denominated in our major currencies, which are generally the currencies of the countries in which
we conduct the majority of our international business. We utilize derivative instruments such as
forward contracts to manage forecasted cash flows denominated in foreign currencies generally
related to engineering and construction projects. Our counterparties to these instruments are major
U.S. banks. These currency derivative instruments are carried on the consolidated balance sheet at
fair value and are based upon market observable forward exchange rates and forward interest rates.
We value derivative assets by discounting future cash flows based on currency forward rates.
The discount rate used for valuing derivative assets incorporates counterparty credit risk, as well
as our cost of capital. Derivative liabilities are valued using a discount rate that incorporates
our credit risk.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Effective September 1, 2009, we adopted ASC 820, the fair value measurement guidance for all
nonfinancial assets and liabilities recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. These assets and liabilities include items such as goodwill and
long lived assets that are measured at fair value resulting from impairment, if deemed necessary.
During the third quarter of fiscal year 2010, we did not record any fair market value adjustments
to those nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
Effects of Derivative Instruments on Income and Other Comprehensive Income
Amount of Gain (Loss) Recognized | ||||||||||||||||||||
Location of Gain (Loss) | Three Months Ended | Nine Months Ended | ||||||||||||||||||
Recognized in Income on | May 31, | May 31, | May 31, | May 31, | ||||||||||||||||
(in millions) | Derivatives | 2010 | 2009 | 2010 | 2009 | |||||||||||||||
Derivatives Designated as Hedging
Instruments: |
||||||||||||||||||||
Interest rate swap contract |
Other Comprehensive Income (Loss) | $ | 3.4 | $ | 0.9 | $ | 2.2 | $ | (10.6 | ) | ||||||||||
Derivatives Not Designated as
Hedging Instruments: |
||||||||||||||||||||
Foreign currency forward contracts |
Other foreign currency transactions gains (losses), net | $ | (0.5 | ) | $ | 3.2 | $ | (0.3 | ) | $ | (2.9 | ) |
The gain (loss) recognized on derivatives not designated as hedging instruments for the three
and nine months ended May 31, 2010 includes unrealized losses of $(1.3) million and $(2.1) million,
respectively and realized gains of $0.8 million and $1.8 million, respectively. The gain (loss)
recognized on derivatives not designated as hedging instruments for the three and nine months ended
May 31, 2009 includes unrealized gains of $4.3 million and $2.8 million, respectively and realized
losses of $(1.1) million and $(5.7) million, respectively.
Note 18 Supplemental Cash Flow Information
Nine Months Ended | ||||||||
May 31, | May 31, | |||||||
2010 | 2009 | |||||||
Non-cash investing and financing activities (in thousands): |
||||||||
Additions to property, plant and equipment |
$ | 10,239 | $ | 10,670 | ||||
Interest rate swap contract on JPY-denominated bonds,
net of deferred tax of $1,377 and $6,822, respectively |
$ | 2,191 | $ | (10,625 | ) | |||
Equity in Westinghouses accumulated other
comprehensive income, net of deferred tax of $(8,425)
and $(73,071), respectively |
$ | (13,402 | ) | $ | (113,811 | ) | ||
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Form 10-Q may constitute forward-looking
statements within the meaning of the Private Securities Litigation Act of 1995. The words
believe, expect, anticipate, plan, intend, foresee, should, would, could or other
similar expressions are intended to identify forward-looking statements, which are generally not
historical in nature. However, the absence of these words does not mean that the statements are not
forward-looking. These forward-looking statements are based on our current expectations and beliefs
concerning future developments and their potential effect on us. While management believes that
these forward-looking statements are reasonable as and when made, there can be no assurance that
future developments affecting us will be those that we anticipate. All comments concerning our
expectations for future revenues and operating results are based on our forecasts for our existing
operations and do not include the potential impact of any future acquisitions. Our forward-looking
statements involve significant risks and uncertainties (some of which are beyond our control) and
assumptions that could cause actual results to differ materially from our historical experience and
from present expectations or projections. Important factors that could cause actual results to
differ materially from those in the forward-looking statements include, but are not limited to:
| continued depressed global economic conditions; | ||
| changes in demand for our products and services; | ||
| our ability to obtain new contracts for large-scale domestic and international projects and the timing of the performance of these contracts; | ||
| changes in the nature of the individual markets in which our clients operate; | ||
| project management risks, including additional costs, reductions in revenues, claims, disputes and the payment of liquidated damages; | ||
| the nature of our contracts, particularly fixed-price contracts, and the impact of possible misestimates and/or cost escalations associated with our contracts; | ||
| ability of our clients to unilaterally terminate our contracts; | ||
| our ability to collect funds on work performed for domestic and foreign government agencies and private sector clients that are facing financial challenges; | ||
| delays and/or defaults in client payments; | ||
| unexpected adjustments and cancellations to our backlog as a result of current economic conditions or otherwise; | ||
| the failure to meet schedule or performance requirements of our contracts; | ||
| our dependence on one or a few significant clients, partners, subcontractors and equipment manufacturers; | ||
| potential contractual and operational costs related to our environmental and infrastructure operations; | ||
| risks associated with our integrated environmental solutions businesses; | ||
| reputation and financial exposure due to the failure of our partners to perform their contractual obligations; | ||
| the presence of competitors with greater financial resources and the impact of competitive technology, products, services and pricing; | ||
| weakness in our stock price might indicate a decline in our fair value requiring us to further evaluate whether our goodwill has been impaired; | ||
| the inability to attract and retain qualified personnel, including key members of our management; |
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| work stoppages and other labor problems including union contracts up for collective bargaining; | ||
| potential professional liability, product liability, warranty and other potential claims, which may not be covered by insurance; | ||
| unavoidable delays in our project execution due to weather conditions, including hurricanes and other natural disasters; | ||
| changes in environmental factors and laws and regulations that could increase our costs and liabilities and affect the demand for our services; | ||
| the limitation or modification of the Price-Anderson Acts indemnification authority; | ||
| our dependence on technology in our operations and the possible impact of system and information technology interruptions; | ||
| compliance with laws and regulations relating to our global operations and our technologies; | ||
| protection and validity of patents and other intellectual property rights; | ||
| risks related to our Investment in Westinghouse; | ||
| changes in the estimates and assumptions we use to prepare our financial statements; | ||
| our use of the percentage-of-completion accounting method; | ||
| changes in our liquidity position and/or our ability to maintain or increase our letters of credit and surety bonds or other means of credit support of projects; | ||
| our ability to obtain waivers or amendments with our lenders or sureties or to collateralize letters of credit or surety bonds upon non-compliance with covenants in our credit facility or surety indemnity agreements; | ||
| covenants in our Restated Credit Agreement that restrict our ability to pursue our business strategies; | ||
| our indebtedness, which could adversely affect our financial condition and impair our ability to fulfill our obligations under our credit facility; | ||
| outcomes of pending and future litigation; | ||
| impact of recently passed legislation or outcomes of pending and future regulatory actions; | ||
| downgrades of our debt securities by rating agencies; | ||
| foreign currency fluctuations; | ||
| our ability to successfully identify, integrate and complete acquisitions; | ||
| liabilities arising from multi-employer plans entered into by any of our subsidiaries; | ||
| a determination to write-off a significant amount of intangible assets or long-lived assets; | ||
| changes in the political and economic conditions of the foreign countries where we operate; | ||
| significant changes in the market price of our equity securities; | ||
| provisions in our articles of incorporation, by-laws and shareholder rights agreement that could make it more difficult to acquire us and may reduce the market price of our common stock; |
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| the ability of our clients to obtain financing to fund their projects; | ||
| the ability of our clients to receive or the possibility of our clients being delayed in receiving the applicable regulatory and environmental approvals, particularly with projects in our Fossil, Renewables & Nuclear segment; and | ||
| the U.S. administrations support of the nuclear power option and loan guarantee program. |
Other factors that could cause our actual results to differ from our projected results are
described in (1) Part II, Item 1A and elsewhere in this Form 10-Q, (2) our 2009 Form 10-K, (3) our
reports and registration statements filed and furnished from time to time with the SEC and (4)
other announcements we make from time to time.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak
only as of the date hereof. We undertake no obligation to publicly update or revise any
forward-looking statements after the date they are made, whether as a result of new information,
future events or otherwise.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section discusses our financial position at May 31, 2010, and the results of our
operations for the three and nine months ended May 31, 2010 and May 31, 2009, and should be read in
conjunction with: (1) the unaudited consolidated financial statements and notes contained herein,
and (2) the consolidated financial statements and accompanying notes to our 2009 Form 10-K.
We report our financial results using August 31st as our fiscal year end.
Accordingly, our fiscal quarter end dates are as follows:
| First Quarter | November 30th | ||||
| Second Quarter | February 28th | ||||
| Third Quarter | May 31st | ||||
| Fourth Quarter | August 31st |
General Overview
We are a leading global provider of technology, engineering, procurement, construction,
maintenance, fabrication, manufacturing, consulting, remediation and facilities management
services. We provide our services to government and private sector clients in the energy,
chemicals, environmental, infrastructure and emergency response markets. Our clients include
regulated electric utilities, independent and merchant power producers, multi-national oil
companies and industrial corporations, government agencies and equipment manufacturers. Through
organic growth and a series of strategic acquisitions, we have significantly expanded and
diversified our expertise and service portfolio.
We are organized under the following reportable segments:
| Fossil, Renewables & Nuclear | ||
| Maintenance | ||
| Environmental & Infrastructure (E&I) | ||
| Energy & Chemicals (E&C) | ||
| Fabrication & Manufacturing (F&M) | ||
| Investment in Westinghouse | ||
| Corporate |
Fossil, Renewables & Nuclear Segment
Our Fossil, Renewables & Nuclear segment provides a range of services, including design,
engineering, construction, procurement, technology and consulting services, primarily to the
fossil, renewables and nuclear power generation industries.
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Nuclear Power Generation. Approximately 20% of the electric power generated in the U.S. is
from nuclear power plants. We provide a wide range of technical services to meet the demands of
this growing sector, including engineering, design, procurement,
construction and project management that support the domestic and international nuclear power
markets. We have been awarded a technical services contract for four AP1000 nuclear power units in
the Peoples Republic of China (China) and three EPC contracts to build six domestic AP1000 units
two each for Georgia Power, South Carolina Electric & Gas and Progress Energy. Progress on the
China AP1000 nuclear projects continued with the completion of significant construction milestones
including the setting of the containment vessel bottom head at three of the four units and the
setting of the second containment ring at the first unit. Completion of the first nuclear concrete
placement at the fourth unit is forecast for this summer, which will put all four China AP1000
units into the Construction Phase.
Nuclear Services. In addition to the contracts we have been awarded in the area of new plant
construction, we are recognized in the power industry for improving the efficiency, capacity output
and reliability of existing nuclear plants through uprate projects. These uprate projects are
carbon neutral and represent a competitive cost alternative to new plant construction and will
continue to be an important component in the expansion of domestic power generation and our Fossil,
Renewables & Nuclear segment. In May 2010, we announced the award of an extended power uprate (EPU)
contract for Entergys Grand Gulf Nuclear Station.
Clean Coal-Fired Generation. Approximately 48% of electric power generated in the U.S. is
from coal-fired power plants, and the U.S. has significant coal reserves. Electric power companies
in the U.S. have historically pursued construction of new coal-fired power plants, because,
although coal-fired capacity is capital intensive to build, it generally has relatively lower
operating costs as compared to other fossil fuels. Recently, however, uncertainty surrounding
potential regulations targeting carbon emissions, as well as the global economic downturn and low
natural gas prices, have caused the development of coal and other solid fuel-fired power plants to
slow significantly. Nevertheless, we believe that coal will continue to be a significant component
of future domestic energy generation, and we intend to continue positioning our resources to
capture a significant market share of any new build, retrofit or expansion projects.
Air Quality Control (AQC). Our AQC business includes domestic and international markets for
flue gas desulfurization (FGD) retrofits, installation of mercury emission controls, fine-particle
pollution control, carbon capture and selective catalytic reduction (SCR) processes used at
existing coal-fired electric power plants. Volume in our AQC business is heavily dependent on
pollution-control regulation and many of our current AQC clients have completed, or will soon
complete, projects that will enable them to meet current air quality standards. Our AQC business
has declined in the near term, as we understand utilities are waiting for regulatory clarity before
finalizing additional AQC work, as described in more detail below.
Existing U.S. government and state environmental AQC regulations have driven the need to
retrofit existing coal-fired power plants with modern pollution-control equipment. In July 2008,
the D.C. Circuit Court of Appeals issued an opinion in North Carolina v. Environmental Protection
Agency (EPA), vacating and remanding the Clean Air Interstate Rule (CAIR), a pollution reduction
program designed to reduce power plant emissions through various air quality standards. As a result
of the Courts decision, the current CAIR standards remain in place until the EPA makes
modifications. These rulings provide some temporary stability to the emission standards. Although
the EPA is required to revise the current CAIR rule and the status of any new emissions legislation
remains undecided, we anticipate that the revised CAIR rule and any future CAIR-related legislation
will continue to impose stringent requirements on air emissions, which is expected to have a
positive effect on future demand for AQC services. Based on our experience with FGD projects, we
believe we are well positioned to take advantage of opportunities as they arise.
Mercury emission controls and the SCR process for nitrogen oxide emission controls and AQC
services are in continued demand. We believe the domestic market for both these services could
increase if the current federal and state government trends toward increased regulation continue,
and we believe there will be select international markets for pursuing the SCR and fine particle
control work.
Gas-Fired Generation. Approximately 20% of the electric power generated in the U.S. is
generated from natural gas-fired power plants. We continue to observe renewed interest in gas-fired
electric generation as electric utilities and independent power producers look to diversify their
options. In many states, recent initiatives to reduce carbon dioxide and other greenhouse gas
emissions and immediate demand for additional electric power generation capacity have stimulated
renewed demand for gas-fired power plants. Gas-fired plants generally are less expensive to
construct than coal-fired and nuclear power plants but tend to have comparatively higher and
potentially more volatile operating costs. In addition, gas-fired generation has the potential to
complement wind, solar and other alternative generation facilities because gas-fired facilities can
be brought on-line quickly to smooth the inherently variable generation of these alternative energy
sources. We expect power producers to increase capital spending on gas-fired power plants to take
advantage of recent lower natural gas prices and the prospect that these prices may remain low for
some time because of gas field development projects in the U.S. as well as potential liquefied
natural gas (LNG) imports. Although the effect of current economic
conditions on the timing or financing of such projects is unclear, we expect that gas-fired
power plants will continue to be an important component in the development of long-term power
generation in the U.S. and internationally. We believe our capabilities and expertise position us
well to capitalize on opportunities in this market.
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Renewable Energy Generation. Approximately 4% of the electric power generated in the U.S is
from renewable sources such as biomass, geothermal, solar, wind. We are actively pursuing
international and domestic projects using a variety of renewable energy technologies, including
geothermal, biomass and solar. Although the current economic climate and uncertainty of
climate-control legislation have slowed development of many of these projects, we believe renewable
energy projects will likely be a significant part of the energy market in the future.
Maintenance Segment
Our Maintenance segment is a market leader, providing a full range of integrated asset life
cycle capabilities that complement our power and process industrial EPC services. We provide
clients with reliability engineering, plant engineering, turnaround maintenance, refueling outage
maintenance, routine maintenance, modifications, capital construction, off-site modularization,
offshore fabrication, support and specialty services. We perform services to restore, rebuild,
repair, renovate and modify industrial facilities, as well as offer predictive and preventative
maintenance. We offer comprehensive services to clients in combinations that increase capacity,
reduce expenditures and optimize cost to enable the highest return on critical production assets
within their facilities. Maintenance segment services are provided at client work sites located
primarily in North America.
Nuclear Plant Maintenance and Modifications. There are currently 104 operating nuclear
reactors in the U.S. requiring engineering, maintenance, and modification services to support
operations, plant refueling outages, extend life/licenses, upgrade materials, increase capacity
uprates and improve performance. We provide system-wide maintenance and modification services to 36
of the 104 operating domestic nuclear reactors. We concentrate on complicated, non-commodity
projects in which our historical expertise and project management skills add value.
In addition to supporting operations and improving performance at existing commercial nuclear
power plants, we believe we can further expand in broader areas of plant maintenance, potentially
bringing value to international clients who operate nuclear plants as well as support our nuclear
services business on uprate-related modifications.
Fossil Plant Maintenance and Modifications. We offer fossil plant maintenance services for
energy generation facilities in North America. Our nuclear refueling outage expertise, paired with
our construction planning and execution skills, give us the ability to expand in to this market as
energy demand increases.
Chemical Plant/Refinery Maintenance and Capital Construction. We have a continuous presence
in various U.S. field locations serving alternative energy, petrochemicals, specialty chemicals,
oil and gas, manufacturing and refining markets. Our Maintenance segment also includes a capital
construction component serving a variety of clients in various industries, including existing
chemicals and petrochemicals clients as well as power clients. Our construction scope includes
constructability reviews, civil and concrete work, structural steel erection, electrical and
instrumentation, mechanical and piping system erection.
In addition to our varied spectrum of maintenance and construction work, we have a strong
resume of substantial rebuild projects. We successfully mobilize resources under demanding client
deadlines to rebuild and restore facilities damaged by natural disasters or catastrophes. Our
successful project completions include major petrochemicals, nuclear power, natural gas processing
and refining facilities in the Gulf Coast region.
E&I Segment
Our E&I segment provides engineering, design and construction, construction management,
regulatory, scientific, logistics support, operations and maintenance and program management
services to both commercial clients and U.S. federal, state and local government clients. Our staff
is strategically positioned throughout the U.S. and abroad to provide full-service solutions to
clients facing complex environmental and infrastructure challenges.
Program Management. We oversee large federal, state and local government programs including
capital improvement, emergency response and disaster recovery projects and programs, as well as
private sector commercial programs. In doing so, we implement the necessary planning, management
and organizational activities and technical services, with quality and safety in mind. We typically
staff projects with a full complement of experienced professionals, provide our clients with a
single point of contact and manage all
administrative duties required for each job. Our integrated business teams work together to
provide expertise across all business lines and consistency throughout each program.
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Design-Build. We execute all design-build phases using our proficiencies in engineering,
design, operations, construction and construction management for large infrastructure projects. Our
current hurricane protection project in New Orleans, Louisiana, is the largest design-build
domestic civil works project ever undertaken by the U.S. Army Corps of Engineers (USACE). Also, the
U.S. DOE contracted us, through our joint venture Shaw Areva Mox Services, LLC, to design, license
and construct the Mixed Oxide (MOX) Fuel Fabrication Facility in Aiken, South Carolina, a
first-of-its-kind facility in the U.S. to process weapons-grade plutonium into nuclear fuel. As
part of our sustainability efforts, we help our clients achieve Leadership in Energy and
Environmental Design certification for facilities by using green building practices. We continue to
develop engineering, design and construction strategies to promote the use of sustainable
development techniques. Some of those strategies include retrofitting buildings for energy
efficiency and weatherizing structures, with the goal of providing a return on investment for our
clients.
Environmental Remediation. We have extensive experience in environmental remediation for both
government and private-sector clients, including those in the chemical, energy, real estate,
manufacturing and transportation fields. We have executed complex remediation and restoration
projects for the U.S. government, including remediating military bases with unexploded ordnance
exposure and residual fuel and chemical contamination, as well as former nuclear weapons production
and atomic testing sites. Our technological capabilities such as laboratory assessments,
field-testing and analysis support a wide range of client needs, including but not limited to
groundwater modeling, contaminant transport and soil washing. E&I has the largest production
capacity of microbial cultures in the industry, enabling application of this technology on project
sites to remediate contaminated groundwater and the sale of cultures to licensees. We also
spearhead the use of ozone, a common element in the earths atmosphere, to eliminate organic
contaminants.
Coastal, Maritime and Natural Resource Design and Restoration. We provide engineering and
design services, including port and waterway navigation feasibility and development, sediment
management, coastal engineering, environmental services, levee development and construction,
shoreline protection and restoration and marine security. We perform wetland construction,
mitigation, restoration and related work for clients nationwide. We are involved in projects
generated by the Coastal Wetlands Planning Protection and Restoration Act, which provides federal
funds to restore and conserve coastal wetlands and barrier islands.
Transportation and General Infrastructure. We offer program management for infrastructure
projects related to transportation, water and wastewater systems. We offer a full range of
technical and management services to design, plan, engineer, construct, renovate, operate and
maintain highways, railways, transit systems, waterways and airports. We provide airport-related
services for runways, taxiways, aprons, terminals and concourses. Bridge and roadwork, transit and
highway tunnels, parking structures and vehicle maintenance facilities are also included in our
broad scope of services. Large U.S. municipal agencies such as the New York City Department of
Environmental Protection and the San Francisco Public Utilities Commission have engaged us for
major water infrastructure needs, which include water system improvements and wastewater services
such as planning, collection and treatment, as well as plant construction services. Additionally,
we execute urban planning projects and provide clients with a long-term vision that supports viable
growth opportunities for their region.
Other Federal Services. We offer program management, operations, engineering, design,
construction, consulting and technology-based solutions to help various U.S. government clients
including DOE, USACE, the Department of Defense (DoD), the EPA, Federal Transit Administration
(FTA) and Federal Emergency Management Agency (FEMA) meet goals and manage challenges associated
with the operation of large federal facilities and programs. Our core services include
environmental remediation and restoration, regulatory compliance, facilities management and
operations and emergency response services. Environmental restoration activities support client
compliance with government requirements such as the Comprehensive Environmental Response
Compensation and Liability Act, also known as the Superfund law, and the Resource Conservation and
Recovery Act. Additionally, we support our clients efforts to comply with Clean Water Act, Clean
Air Act and Toxic Substances Control Act requirements. We are a significant service provider for
U.S. government operations at the EPA Test and Evaluation facility and other National Risk
Management Research Laboratory facilities, where we provide operational support and research
services.
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E&C Segment
Our E&C segment provides a full range of project-related services including proprietary
technology, project management, engineering, procurement, construction, commissioning/start-up and
consulting to the oil and gas, refining, and petrochemical industries globally. We believe our
ability to develop, design, commercialize and integrate a wide range of process technologies and
perform projects that range from small consulting studies to large EPC projects differentiate us
from many of our competitors. From our main offices in Houston, Texas; Baton Rouge, Louisiana;
Cambridge, Massachusetts; Toronto, Canada; Mumbai, India and Milton Keynes, England, we deliver
services through five major business lines: ethylene, petrochemicals, refining, upstream and
consulting.
While the current global economic climate has impacted E&C segments prospects in the
short-term, as the economy recovers, we anticipate increased expenditures by our major oil and
petrochemical clients in this area.
Ethylene. One of Shaws core proprietary technologies is ethylene process technology.
Ethylene is an olefin that serves as a base chemical of the petrochemical industry. Since our first
ethylene plant was built in 1941, we have designed and/or built more than 120 grassroots units,
which provide a significant portion of the worlds ethylene supply. Produced by the steam cracking
of hydrocarbon feedstocks, ethylene and its co-product, propylene, are key building blocks for
other petrochemicals and polymers. The economic slowdown and the large amount of ethylene currently
entering the market from recently completed projects have contributed to reduced demand and the
delay of many planned projects. Exceptions are in the Middle East, where projects are more likely
to proceed because of the availability of low-cost feedstock, and in China, which seems to be
affected less by the economic slowdown than other regions.
We believe the delay in new, grassroots ethylene project activity will be somewhat offset by
opportunities to revamp existing facilities as owners seek to maximize productivity. We anticipate
that debottleneck and revamp projects and technology upgrades may result in additional
opportunities over the next several years.
Petrochemicals. The economic downturn has resulted in a decrease in global demand for durable
goods made from petrochemicals and a corresponding decline in production and new construction.
However, we expect that Middle Eastern and Chinese clients may continue to focus on strategic plans
and investments. In the rest of Asia, we anticipate that investments may ramp up as the economy
recovers. We also expect that the Middle Easts demand for polymers may increase, especially for
specialty commodities and engineering plastics. With our portfolio of technologies in polystyrene,
acrylonitrile butadiene styrene (ABS), intermediate polycarbonates and others, Shaw is well
positioned to participate in any economic upturn.
Additional opportunities may arise as major oil and petrochemical companies look for ways to
integrate their refining and petrochemical facilities to improve profitability. We have extensive
expertise in the design and construction of ethylene and downstream derivative plants, which
provide the source of many higher value chemical products used to produce packaging, pipe,
polyester, antifreeze, electronics and tires.
Refining. Demand for technology and services in the petroleum refining industry has been
driven primarily by our clients requirements to process heavier, poorer quality feedstocks into a
variety of lighter, cleaner products. Adaptability and increased flexibility are key as refiners
around the world consider expanding beyond their traditional fuels market by integrating their
facilities with petrochemical operations.
In the last year, the refining sector slowed with the economic downturn, and shrinking margins
led to reduced investments. The Middle East appears to be the strongest region for future growth,
where oil producers are striving to own more of the supply chain by also exporting finished oil
products and even petrochemicals. In the U.S., refinery utilization appears to be decreasing, but
reconfiguration of refineries to produce cleaner fuels and meet environmental legislation may
create new opportunities for our services. In Europe, we expect strong diesel demand to drive
investment decisions.
Shaws fluid catalytic cracking (FCC) technology, jointly licensed with an international
partner, remains a key technology in new refineries being built around the world, primarily due to
the FCCs ability to boost production of gasoline and polymer-grade propylene. This same technology
is being used to enhance the performance of existing assets through its ability to process poorer
quality feedstocks, increase capacity and improve product yields, quality and energy efficiency.
Modifications, or revamps, of existing FCCs to increase refinery profit margins may result in
opportunities in the U.S. and Europe, where most of the worlds catalytic crackers are located.
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In addition to FCC, Shaw offers related technologies including deep catalytic cracking and
catalytic pyrolysis process, which boost production of ethylene and propylene. The recent
popularity of these technologies is driven by the growing global trend toward integrating
refineries and petrochemical facilities.
Upstream. Our upstream division business has been successful in winning project management
consultancy work in the offshore sector and is currently pursuing additional onshore opportunities
in the Middle East. In response to the rising global demand for liquefied petroleum gas (LPG),
production is forecast to increase by 2012, primarily in the Middle East and North Africa. We are
active in this market, with recent awards for front-end engineering design (FEED) and detailed
engineering services for an LPG project in Algeria.
Synthesis gas (Syngas), a clean gas that can be used for power generation or converted to
substitute natural gas or high value clean fuels, has characteristics that make it an attractive
future fuel source. Syngas can be produced through a number of processes including coal
gasification and steam reforming of natural gas or liquid hydrocarbons. Syngas production may grow
with rising demand for electricity and the push for reductions in greenhouse gas emissions,
especially carbon dioxide, and we believe we are well positioned to participate in this growth.
F&M Segment
We believe our F&M segment is among the largest worldwide suppliers of fabricated piping
systems. Demand for our F&M segments products is typically driven by capital projects in the
electric power, chemical and refinery industries.
We provide support and work for both external clients and other Shaw business segments. F&M
provides pipe and structural steel fabrication for projects such as the E&I segments DOE work and
several of the Fossil, Renewables & Nuclear segments power projects, as well as the E&C segments
largest current projects. Our F&M segment is nearing completion on a new facility that will
assemble modules for the construction of nuclear power plants and, potentially, offshore oil and
gas type modules.
Pipe Fabrication. We fabricate fully integrated piping systems for heavy industrial clients
around the world. We believe our expertise and proven capabilities in furnishing complete piping
systems to a global market have positioned us among the largest suppliers of fabricated piping
systems for power generation facilities in the U.S. and worldwide. Piping systems are normally on
the critical path schedule for heavy industrial plants that process large quantities of fluids or
gases. Large piping systems account for significant components within power generation, chemical
and other processing facilities.
We fabricate complex piping systems using carbon steel, stainless, nickel, titanium and
aluminum pipe. We fabricate the pipe by cutting it to specified lengths, welding fittings, flanges
or other components on the pipe and/or bending the pipe to precise client specifications using our
unique pipe-bending technology. We believe our Shaw Cojafex induction pipe-bending technology is
the most advanced, sophisticated and efficient pipe bending technology of its kind. We utilize the
Cojafex technology and related equipment to bend carbon steel and alloy pipe for industrial,
commercial and architectural applications. Delivering pipe bent to client specifications can
provide significant savings in labor, time and material costs compared to field fabrication and
bent pipe provides greater strength than pipes and fittings welded together.
Additionally, we implemented a robotics welding program that we believe results in increased
productivity and quality levels. By utilizing robotics, as well as automated and semi-automated
welding processes and production technology, we are able to provide our clients a complete range of
pipe fabrication services.
We operate pipe fabrication facilities in Louisiana, Arkansas, South Carolina, Utah, Mexico
and Venezuela and through a joint venture in Bahrain. Additionally, we are constructing a new
fabrication facility in the Middle East. Our South Carolina facility is certified to fabricate
piping for nuclear energy plants and maintains a nuclear piping American Society of Mechanical
Engineers certification.
Through structural steel fabrication, we produce custom fabricated steel components and
structures used in the architectural and industrial markets. These steel fabrications are used for
supporting piping and equipment in buildings, chemical plants, refineries and power generation
facilities. Our fabrication lines utilize standard mill-produced steel shapes that are cut,
drilled, punched and welded into the specifications requested by our clients. We have structural
steel fabrication facilities in Louisiana and Mexico, which is our newest facility offering the
latest in advanced technology and efficiency for structural steel fabrication.
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Manufacturing and Distribution. We operate pipe fitting manufacturing facilities in Louisiana
and New Jersey. Products from these facilities ultimately are sold to third-party operating plants,
engineering and construction firms, as well as to our other business segments within the company.
We maintain an inventory of pipe and pipe fittings enabling us to realize greater efficiencies in
the purchase of raw materials, reduces overall lead times and lowers total costs.
We operate distribution centers in Louisiana, Texas, Georgia and New Jersey that distribute
our products and products manufactured by third parties.
Modular Facility. We began operations of a modular facility in Lake Charles, Louisiana in May
2010. The Shaw Modular Solutions facility is believed to be the first of its kind in the U.S. and
will build modules for the construction of domestic AP1000 nuclear power plants. The new facility
will utilize our industry-leading technologies and our proprietary operations management systems.
We have received orders for the first six nuclear reactors to be built domestically in more than 30
years, all of which are designed to use AP1000 technology and will include modules fabricated in
our Lake Charles facility.
Investment in Westinghouse Segment
Our Investment in Westinghouse segment includes a 20% equity interest in Westinghouse. We
financed our Westinghouse Equity purchase from Toshiba partially through our subsidiary NEH issuing
limited recourse to us (except NEH) JPY-denominated bonds. Westinghouse serves the domestic and
international nuclear electric power industry by supplying advanced nuclear plant designs,
licensing, engineering services, equipment, fuel and a wide range of other products and services to
owners and operators of nuclear power. We believe that Westinghouse products and services are being
used in approximately half of the worlds operating nuclear plants, including 60% of those in the
U.S. Internationally, Westinghouse technology is being used for six reactors under construction in
South Korea, and four reactors under construction in China and is under consideration for numerous
new nuclear reactors in multiple countries.
In connection with our Investment in Westinghouse, we entered into JPY-denominated Put Option
Agreements with Toshiba (Put Option), providing us the option to sell all or part of our
Westinghouse Equity to Toshiba during a defined Exercise Period. The Exercise Period commences
upon the earlier of March 31, 2010, or the occurrence of a Toshiba Event which is caused by,
among other things, Toshiba failing to maintain certain financial metrics. Toshiba notified us on
May 11, 2009, that it experienced a Toshiba Event as of May 8, 2009, because it failed to maintain
a minimum consolidated net worth as defined in the Put Option of JPY 800 billion. Because of the
Toshiba Event, the Westinghouse Bond holders who funded our Investment in Westinghouse currently
have the opportunity, under certain circumstances, to direct us to exercise the Put Option.
As of the date of this report, the bondholders have not directed us to exercise the Put
Option, and we have no knowledge of any intent to do so in the future. The bondholders direction
to exercise the Put Option would not affect Toshibas or our obligations under the CRA, which
provides us with certain exclusive opportunities to bid on projects where the company would provide
EPC services on future Westinghouse AP1000 nuclear power plants and other commercial opportunities
such as supplying piping for those units. In June 2009, Toshiba reported that it raised
approximately $3.0 billion in equity, which increased Toshibas net worth to an amount exceeding
the minimum threshold.
Westinghouse maintains its accounting records for reporting to its majority owner, Toshiba, on
a calendar quarter basis with a March 31 fiscal year end. Financial information about
Westinghouses operations is available to us for Westinghouses calendar quarter periods.
The Westinghouse segment financial results continue to experience significant volatility
resulting from the effect of foreign currency exchange rate fluctuations on the value of the
Westinghouse Bonds. The Westinghouse Bonds are JPY-denominated, limited recourse to us (except NEH)
and, under GAAP, are revalued for financial reporting purposes to USD at the exchange rate in
effect on the last day of the quarter. The Put Option is designed to provide us with a natural
hedge against fluctuations in the exchange rate associated with the Westinghouse Bonds. However,
unlike the Westinghouse Bonds, the Put Option is not revalued to current exchange rates under
GAAP. Consequently, for financial reporting purposes, at each quarters end we recognize a gain or
loss on the revaluation of the Westinghouse Bonds based upon the JPY/USD exchange rate then in
effect but do not recognize an offsetting gain or loss on the revaluation of the Put Option. As a
result, our statement of operations frequently contains significant earnings volatility.
For additional information, see Note 5 Equity Method Investments and Note 7 Debt and
Revolving Lines of Credit included in Part I, Item 1. Financial Statements and in Liquidity
below.
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Corporate Segment
Our Corporate segment includes our corporate management and expenses associated with managing
our company as a whole. These expenses include compensation and benefits of corporate management
and staff, legal and professional fees and administrative and general expenses that are not
allocated to other segments. Our Corporate segments assets primarily include cash and cash
equivalents held by the corporate entities, property and equipment related to our corporate
headquarters and certain information technology costs.
Overview of Results and Outlook
We had solid earnings in the third quarter of fiscal year 2010 primarily driven by the
operating performance of our E&I, Maintenance and Fossil, Renewables & Nuclear segments. Our E&I
segment continued its execution of major U.S. government contracts, while our Fossil, Renewables &
Nuclear segment experienced increased volume of earnings on its domestic AP1000 nuclear power
projects. Earnings in our Maintenance segment improved significantly compared to the third quarter
of fiscal year 2009 resulting from nuclear power plant outage work performed for new and existing
clients. As expected, we had reduced revenues and earnings in our E&C and F&M segments due to lower
levels of new bookings in fiscal year 2009 and into fiscal year 2010. Our third quarter earnings
benefited from the strengthening of the USD compared to the JPY, and our results include a $34.1
million non-operating, non-cash, foreign exchange translation gain in our Investment in
Westinghouse segment resulting from translating the Westinghouse Bonds from JPY to USD for
financial reporting purposes. The JPY/ USD exchange rate was 91.0 at May 31, 2010 versus 88.9 at
February 28, 2010.
New bookings of non-U.S. government related work continued at reduced levels into the third
quarter of 2010. We believe the global economic slowdown delayed or altered client investment
decisions for new refinery, petrochemical and chemical projects during fiscal year 2009, and this
trend continues in fiscal year 2010. As a result, our business segments have experienced declines
from year-end backlog levels.
During the third quarter of fiscal year 2010, cash flow from operations was positive but
decreased from the comparable period in 2009 when we generated $435.1 million in operating cash
flow. The decrease from 2009 was largely due to the scheduled reversal of favorable changes in
working capital on our major Fossil, Renewable & Nuclear EPC projects.
Our Fossil, Renewables & Nuclear segments financial results reflect the completion of several
domestic AQC projects and continued execution of five EPC projects for new coal and gas-fired power
plants. Our results also reflect continued work under a services contract for four new AP1000
nuclear reactors in China as well as increasing activity on four EPC domestic AP1000 nuclear
reactors.
Our Maintenance segments improved results in the third quarter fiscal year 2010 were driven
by projects for nuclear power plant refueling outages for new and existing clients. Typically, the
first and third quarters of our fiscal year generate the highest volumes of power maintenance work,
as many power generation facilities are shut down for scheduled maintenance during these periods.
Our E&I segment generated strong revenue and earnings, primarily driven by increased business
volumes and solid execution in our U.S. government business activities. Construction activity on a
hurricane protection project for the USACE in southeast Louisiana and our MOX project for the DOE
in South Carolina continue to drive E&Is earnings. U.S. government spending remains strong and the
E&I segment is well positioned to compete for many large U.S. government opportunities. E&I is also
well positioned to compete for opportunities resulting from the Deepwater Horizon oil spill as
reflected by the recent contract awarded by the Office of Coastal Protection and Restoration of
Louisiana for overall project management and construction of sand berms off the coast of Louisiana.
Our E&C segments results reflected the impact of lower bookings during the past 18 months.
While E&C continues to successfully execute projects in its backlog, a majority of the high-margin
engineering services contracts that drove record earnings in fiscal 2009 have now been completed.
We have a significant number of proposals outstanding, but it is extremely difficult to predict the
timing and quantity of clients investment decisions that drive bookings for this segment.
Our F&M segment continued its solid operating performance during the third quarter of fiscal
year 2010 but earnings declined from the record levels experienced in fiscal year 2009. F&M
continues experiencing margin pricing pressure and has experienced a reduction in new bookings
throughout 2009 and well into fiscal 2010 (excluding nuclear modular and fabrication scope
transferred from our Fossil, Renewables & Nuclear segment). We have completed the construction of
our new state-of-the-art modular facility in Lake Charles, Louisiana and began fabrication of
modules for the domestic AP1000 nuclear power projects in May 2010.
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Consolidated Results of Operations
Consolidated Revenues:
(dollars in millions) | May 31, 2010 | May 31, 2009 | $ Change | % Change | ||||||||||||
Three months ended |
$ | 1,789.3 | $ | 1,848.4 | $ | (59.1 | ) | (3.2 | )% | |||||||
Nine months ended |
$ | 5,272.0 | $ | 5,416.4 | $ | (144.4 | ) | (2.7 | )% |
Consolidated revenues decreased slightly during the three and nine months ended May 31, 2010,
as compared to the prior fiscal year. Revenues in our E&I and Maintenance segments increased in the
three months ended May 31, 2010, as compared to the same period in the prior fiscal year. E&I
benefited from increased U.S. government spending while Maintenance benefited from an increased
number of nuclear power plant outages. However, revenues in our E&C, F&M and Fossil, Renewables &
Nuclear operating segments declined as compared to the same period in the prior year resulting from
reduced bookings of new contract awards during fiscal years 2009 and 2010. For the nine months
ended May 31, 2010, revenues increased in our E&I segment while decreasing in our other segments
compared to the same period in the prior fiscal year. For additional segment details, see the
business segment analysis section.
Consolidated Gross Profit:
(dollars in millions) | May 31, 2010 | May 31, 2009 | $ Change | % Change | ||||||||||||
Three months ended |
$ | 151.7 | $ | 163.0 | $ | (11.3 | ) | (6.9 | )% | |||||||
Nine months ended |
$ | 451.6 | $ | 453.4 | $ | (1.8 | ) | (0.4 | )% |
Consolidated gross profit decreased for the three and nine months ended May 31, 2010, as
compared to the prior fiscal year due primarily to decreased activity in our E&C and F&M segments.
This decrease was slightly offset by our E&I and Maintenance segments, which experienced increased
margins compared to the prior fiscal year.
Consolidated Selling, General & Administrative Expenses (SG&A):
(dollars in millions) | May 31, 2010 | May 31, 2009 | $ Change | % Change | ||||||||||||
Three months ended |
$ | 74.7 | $ | 78.6 | $ | (3.9 | ) | (5.0 | )% | |||||||
Nine months ended |
$ | 222.8 | $ | 222.1 | $ | 0.7 | 0.3 | % |
Consolidated selling, general and administrative expenses decreased for the three months ended
May 31, 2010, as compared to the prior fiscal year mainly from reduced overhead in our Corporate
segment and cost saving initiatives in our Fossil, Renewables & Nuclear operating segment.
Consolidated selling, general and administrative expenses were essentially flat for the nine months
ended May 31, 2010, as compared to the same period in the prior fiscal year.
Consolidated Interest Expense:
(dollars in millions) | May 31, 2010 | May 31, 2009 | $ Change | % Change | ||||||||||||
Three months ended |
$ | 10.7 | $ | 40.4 | $ | (29.7 | ) | (73.5 | )% | |||||||
Nine months ended |
$ | 32.2 | $ | 64.0 | $ | (31.8 | ) | (49.7 | )% |
Consolidated interest expense decreased for the three and nine months ended May 31, 2010, as
compared to the prior fiscal year due primarily to lower interest expense on our JPY-denominated
bonds. During the third quarter of fiscal year 2009, we expensed
$29.4 million of the deferred
financing costs ($6.6 million) and the original issuance discount
($22.8 million)
associated with the Westinghouse Bonds because of the Toshiba Event (See Note 5 for additional
details).
39
Table of Contents
Consolidated Provision for Income Taxes:
(dollars in millions) | May 31, 2010 | May 31, 2009 | $ Change | % Change | ||||||||||||
Three months ended |
$ | 40.8 | $ | 6.8 | $ | 34.0 | 500.0 | % | ||||||||
Nine months ended |
$ | 67.5 | $ | 6.8 | $ | 60.7 | 892.6 | % |
The increase in the provision for income taxes for the three and nine months ended May 31,
2009 as compared to the prior fiscal year was predominately due to the increase in income before
income taxes and earnings (losses) from unconsolidated entities.
Our consolidated tax rate on income before income taxes and earnings (losses) from
unconsolidated entities for the three and nine months ended May 31, 2010, was 37% and 36%,
respectively, as compared to 48% and 59% for the comparable periods in the prior fiscal year. We
expect our fiscal 2010 annual effective tax rate, excluding discrete items, to be approximately
36%.
The higher tax rates in the prior year were due to the relatively small amount of income
before income taxes and earnings (losses) from unconsolidated entities as compared to the net
effect of the amounts that influence the rate such as the location and amount of our taxable
earnings, unrealized foreign currency gains or losses, the mix and amount of earnings in various
tax jurisdictions, changes in certain non-deductible expenses and the provision for uncertain tax
positions. We treat unrealized foreign currency translation gains and losses on the JPY-denominated
Westinghouse Bonds as discrete in each reporting period due to their volatility and the difficulty
in reliably estimating such gains and losses.
We recorded other discrete items of $0.7 million for the three months ended May 31, 2010. For
the three months ended May 31, 2009, we recorded a provision for other discrete items totaling $5.2
million relating to provisions for uncertain tax positions and other identified adjustments.
The nine months ended May 31, 2010 includes other discrete items of $0.7 million. The nine
months ended May 31, 2009 includes net other discrete items of $10.8 million relating to provisions
for uncertain tax positions as well as a benefit for the retroactive effect of the renewal of the
Work Opportunity Tax Credit.
Consolidated Earnings from Unconsolidated Entities, net of income taxes:
(dollars in millions) | May 31, 2010 | May 31, 2009 | $ Change | % Change | ||||||||||||
Three months ended |
$ | 3.8 | $ | 4.9 | $ | (1.1 | ) | (22.4 | )% | |||||||
Nine months ended |
$ | 6.9 | $ | 12.2 | $ | (5.3 | ) | (43.4 | )% |
The decrease in earnings from unconsolidated entities for the three and nine months ended May
31, 2010, as compared to the same period in the prior fiscal year, was primarily due to lower
earnings, net of income taxes, from our Investment in Westinghouse segment.
Consolidated Net Income:
(dollars in millions) | May 31, 2010 | May 31, 2009 | $ Change | % Change | ||||||||||||
Three months ended |
$ | 72.4 | $ | 12.3 | $ | 60.1 | 488.6 | % | ||||||||
Nine months ended |
$ | 126.4 | $ | 16.9 | $ | 109.5 | 647.9 | % |
The increase in consolidated net income for the three and nine months ended May 31, 2010 was
predominantly due to changes in the non-cash foreign currency translation gain or loss associated
with our Westinghouse Bonds as well as improved execution in our Fossil, Renewables & Nuclear,
Maintenance and E&I segments. For the three months ended May 31, 2010, we recorded a translation
gain on the Westinghouse Bonds of $34.1 million compared to a loss of $33.2 million during the same
period in fiscal 2009. For the nine months ended May 31, 2010 and 2009, we recorded translation
losses on the Westinghouse Bonds of $28.9 million and $163.5 million, respectively.
40
Table of Contents
Segment Results of Operations
The following comments and tables compare selected summary financial information related to
our segments for the three and nine months ended May 31, 2010 and May 31, 2009 (dollars in
millions).
Three Months Ended | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Revenues: |
||||||||||||||||
Fossil, Renewables & Nuclear |
$ | 574.1 | $ | 644.5 | $ | (70.4 | ) | (10.9 | )% | |||||||
Maintenance |
252.9 | 232.5 | 20.4 | 8.8 | ||||||||||||
E&I |
568.0 | 451.8 | 116.2 | 25.7 | ||||||||||||
E&C |
266.7 | 339.0 | (72.3 | ) | (21.3 | ) | ||||||||||
F&M |
127.6 | 179.4 | (51.8 | ) | (28.9 | ) | ||||||||||
Corporate |
| 1.2 | (1.2 | ) | NM | |||||||||||
Total revenues |
$ | 1,789.3 | $ | 1,848.4 | $ | (59.1 | ) | (3.2 | )% | |||||||
Gross profit: |
||||||||||||||||
Fossil, Renewables & Nuclear |
$ | 42.0 | $ | 34.1 | $ | 7.9 | 23.2 | % | ||||||||
Maintenance |
13.4 | 5.9 | 7.5 | 127.1 | ||||||||||||
E&I |
55.7 | 36.5 | 19.2 | 52.6 | ||||||||||||
E&C |
21.6 | 40.9 | (19.3 | ) | (47.2 | ) | ||||||||||
F&M |
18.4 | 44.3 | (25.9 | ) | (58.5 | ) | ||||||||||
Corporate |
0.6 | 1.3 | (0.7 | ) | NM | |||||||||||
Total gross profit |
$ | 151.7 | $ | 163.0 | $ | (11.3 | ) | (6.9 | )% | |||||||
Gross profit percentage: |
||||||||||||||||
Fossil, Renewables & Nuclear |
7.3 | % | 5.3 | % | ||||||||||||
Maintenance |
5.3 | 2.5 | ||||||||||||||
E&I |
9.8 | 8.1 | ||||||||||||||
E&C |
8.1 | 12.1 | ||||||||||||||
F&M |
14.4 | 24.7 | ||||||||||||||
Corporate |
NM | NM | ||||||||||||||
Total gross profit percentage |
8.5 | % | 8.8 | % | ||||||||||||
Income (loss) before income
taxes and earnings from
unconsolidated entities: |
||||||||||||||||
Fossil, Renewables & Nuclear |
$ | 29.1 | $ | 22.0 | $ | 7.1 | 32.3 | % | ||||||||
Maintenance |
11.2 | 3.2 | 8.0 | 250.0 | ||||||||||||
E&I |
41.4 | 18.7 | 22.7 | 121.4 | ||||||||||||
E&C |
8.9 | 29.2 | (20.3 | ) | (69.5 | ) | ||||||||||
F&M |
10.7 | 35.5 | (24.8 | ) | (69.9 | ) | ||||||||||
Investment in Westinghouse |
24.7 | (72.7 | ) | 97.4 | 134.0 | |||||||||||
Corporate |
(16.7 | ) | (21.6 | ) | 4.9 | NM | ||||||||||
Total income (loss) before
income taxes and earnings
from unconsolidated entities |
$ | 109.3 | $ | 14.3 | $ | 95.0 | 664.3 | % | ||||||||
NM | Not Meaningful. |
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Nine Months Ended | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Revenues: |
||||||||||||||||
Fossil, Renewables & Nuclear |
$ | 1,705.3 | $ | 1,873.1 | $ | (167.8 | ) | (9.0 | )% | |||||||
Maintenance |
723.5 | 739.3 | (15.8 | ) | (2.1 | ) | ||||||||||
E&I |
1,584.5 | 1,303.1 | 281.4 | 21.6 | ||||||||||||
E&C |
893.2 | 992.0 | (98.8 | ) | (10.0 | ) | ||||||||||
F&M |
365.4 | 505.3 | (139.9 | ) | (27.7 | ) | ||||||||||
Corporate |
0.1 | 3.6 | (3.5 | ) | NM | |||||||||||
Total revenues |
$ | 5,272.0 | $ | 5,416.4 | $ | (144.4 | ) | (2.7 | )% | |||||||
Gross profit: |
||||||||||||||||
Fossil, Renewables & Nuclear |
$ | 93.7 | $ | 54.7 | $ | 39.0 | 71.3 | % | ||||||||
Maintenance |
42.0 | 16.1 | 25.9 | 160.9 | ||||||||||||
E&I |
148.5 | 111.3 | 37.2 | 33.4 | ||||||||||||
E&C |
102.8 | 154.0 | (51.2 | ) | (33.2 | ) | ||||||||||
F&M |
63.1 | 113.7 | (50.6 | ) | (44.5 | ) | ||||||||||
Corporate |
1.5 | 3.6 | (2.1 | ) | NM | |||||||||||
Total gross profit |
$ | 451.6 | $ | 453.4 | $ | (1.8 | ) | (0.4 | )% | |||||||
Gross profit percentage: |
||||||||||||||||
Fossil, Renewables & Nuclear |
5.5 | % | 2.9 | % | ||||||||||||
Maintenance |
5.8 | 2.2 | ||||||||||||||
E&I |
9.4 | 8.5 | ||||||||||||||
E&C |
11.5 | 15.5 | ||||||||||||||
F&M |
17.3 | 22.5 | ||||||||||||||
Corporate |
NM | NM | ||||||||||||||
Total gross profit percentage |
8.6 | % | 8.4 | % | ||||||||||||
Income (loss) before income
taxes and earnings from
unconsolidated entities: |
||||||||||||||||
Fossil, Renewables & Nuclear |
$ | 52.2 | $ | 12.2 | $ | 40.0 | 327.9 | % | ||||||||
Maintenance |
35.0 | 7.4 | 27.6 | 373.0 | ||||||||||||
E&I |
99.8 | 62.4 | 37.4 | 59.9 | ||||||||||||
E&C |
66.7 | 124.2 | (57.5 | ) | (46.3 | ) | ||||||||||
F&M |
39.8 | 91.9 | (52.1 | ) | (56.7 | ) | ||||||||||
Investment in Westinghouse |
(57.0 | ) | (223.9 | ) | 166.9 | 74.5 | ||||||||||
Corporate |
(49.5 | ) | (62.7 | ) | 13.2 | NM | ||||||||||
Total income (loss) before
income taxes and earnings
from unconsolidated entities |
$ | 187.0 | $ | 11.5 | $ | 175.5 | 1,526.1 | % | ||||||||
NM | Not Meaningful |
The following table presents our revenues by geographic region generally based on the site
location of the project for the three and nine months ended May 31, 2010 and May 31, 2009.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
(In Millions) | % | (In Millions) | % | (In Millions) | % | (In Millions) | % | |||||||||||||||||||||||||
United States |
$ | 1,460.1 | 82 | % | $ | 1,429.0 | 77 | % | $ | 4,178.9 | 79 | % | $ | 4,244.5 | 78 | % | ||||||||||||||||
Asia/Pacific Rim |
220.1 | 12 | 276.2 | 15 | 740.5 | 14 | 674.7 | 12 | ||||||||||||||||||||||||
Middle East |
79.9 | 4 | 74.0 | 4 | 242.9 | 5 | 303.5 | 6 | ||||||||||||||||||||||||
Canada |
2.5 | | 15.6 | 1 | 9.7 | | 27.9 | 1 | ||||||||||||||||||||||||
Europe |
15.7 | 1 | 35.5 | 2 | 52.6 | 1 | 102.5 | 2 | ||||||||||||||||||||||||
South America and
Mexico |
5.1 | | 11.9 | 1 | 11.7 | | 43.5 | 1 | ||||||||||||||||||||||||
Other |
5.9 | 1 | 6.2 | | 35.7 | 1 | 19.8 | | ||||||||||||||||||||||||
Total revenues |
$ | 1,789.3 | 100 | % | $ | 1,848.4 | 100 | % | $ | 5,272.0 | 100 | % | $ | 5,416.4 | 100 | % | ||||||||||||||||
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Table of Contents
Business Segment Analysis
Fossil, Renewables & Nuclear Segment
Our Fossil, Renewables & Nuclear segment continued executing major electric power generation
projects across the globe. The segments activity increased on two contracts for four domestic
AP1000 nuclear reactors and two domestic new build gas-fired plants. In addition, work continues on
our services contract for four new AP1000 nuclear power reactors in China. However, reduced demand
for electricity in the U.S. and uncertainty regarding air emission regulations in the U.S. have
contributed to a decline in new awards throughout 2009 and 2010.
Revenues (3rd Quarter)
Revenues decreased $70.4 million, or 10.9%, to $574.1 million for the three months ended May
31, 2010 from $644.5 million for the same period in the prior fiscal year. This decrease in
revenues was primarily attributable to the completion of several domestic emissions control
projects and substantially less activity on a large coal-fired EPC contract in the current period
as compared to the same period in the prior fiscal year. When aggregated, the reduced activity on
those projects resulted in a decrease in revenue of approximately $155.0 million. This decrease was
partially offset by an increase in activity on two domestic EPC contracts for four AP1000 nuclear
reactors and two new build gas-fired power plants.
Gross profit and gross profit percentage (3rd Quarter)
Gross profit increased $7.9 million, or 23.2%, to $42.0 million for the three months ended May
31, 2010 from $34.1 million for the same period in the prior fiscal year. Our gross profit
percentage increased to 7.3% for the three months ended May 31, 2010 from 5.3% for the same period
in the prior fiscal year. Our gross profit and gross profit percentage increases were primarily due
to additional volume of work performed on higher margin nuclear services contracts in our nuclear
sector, additional progress on our domestic new build power plants and our services contract for
the four new AP1000 nuclear power reactors in China. Additionally, we have made progress in
achieving price certainty in a number of key commodities, which resulted in revisions to our
estimated cost at completion on a number of contracts. While our older coal EPC projects continue
to negatively impact margins, we continue working off this element of our backlog. We expect the
margins for this segment to increase as the work progresses on our current portfolio of nuclear
power projects and the more recently awarded new build coal plants.
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (3rd
Quarter)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities increased
$7.1 million, or 32.3%, to $29.1 million for the three months ended May 31, 2010, from $22.0
million for the same period in the prior fiscal year, primarily attributable to the increase in
gross profit and gross profit percentage described above along with reduced selling, general and
administrative expenses.
Revenues (Year to Date)
Revenues decreased $167.8 million, or 9.0%, to $1,705.3 million for the nine months ended May
31, 2010 from $1,873.1 million for the same period in the prior fiscal year. The decrease in
revenues was primarily attributable to the completion of the domestic emissions control projects
and reduced activity level at a large coal-fired EPC contract referenced above. During the nine
months ended May 31, 2010, these projects generated approximately $497.7 million less revenue than
during the same period of the prior year. The decrease in revenues was partially
offset by increased activity related to progress on our domestic EPC contracts for four new
AP1000 nuclear power reactors and two new build gas-fired power plants.
Gross profit and gross profit percentage (Year to Date)
Gross profit increased $39.0 million, or 71.3%, to $93.7 million for the nine months ended May
31, 2010 from $54.7 million for the same period in the prior fiscal year, and our gross profit
percentage increased to 5.5% for the nine months ended May 31, 2010 from 2.9% for the same period
in the prior fiscal year. The increase in our gross profit and gross profit percentage was
primarily due to increased estimated costs at completion in 2009 on two new coal plant construction
projects and a back-end modification project, and from increased revenues in 2010 on two domestic
EPC contracts for four new AP1000 nuclear power reactors in the U.S. and two new gas-fired power
plants. In addition, we made progress in achieving price certainty on
a number of contracts by securing commitments from vendors and
subcontractors. The increases in gross profit and gross profit percentage were
partially offset by the reduced volume of revenues resulting from completion of several emissions
control projects.
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Table of Contents
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (Year to
Date)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities increased
$40.0 million, or 327.9%, to $52.2 million for the nine months ended May 31, 2010, from $12.2
million for the same period in the prior fiscal year, primarily attributable to the increase in
gross profit described above.
Maintenance Segment
Our Maintenance segments performance significantly improved during the third quarter of
fiscal 2010 as compared to the same period of fiscal 2009 driven primarily by execution of new and
existing nuclear power plant maintenance contracts.
Revenues (3rd Quarter)
Revenues increased $20.4 million, or 8.8%, to $252.9 million for the three months ended May
31, 2010, from $232.5 million for the same period in the prior fiscal year. A leading contributor
to this increase was the completion of more nuclear power plant outages during the period as
compared to same period in the prior year. Partially offsetting this increase was a decline in the
volume of smaller projects resulting from a decline in overall construction spending and
significant competition.
Gross profit and gross profit percentage (3rd Quarter)
Gross profit increased $7.5 million, or 127.1%, to $13.4 million for the three months ended
May 31, 2010, from $5.9 million for the same period in the prior fiscal year. Gross profit
percentage increased to 5.3% for the three months ended May 31, 2010, from 2.5% for the same period
in the prior fiscal year. The increase in our gross profit and gross profit percentage was
primarily due to improved execution resulting in higher margins and increased incentive fees earned
as compared to the same period in the prior year as well as the positive impact of cost saving
measures implemented during fiscal year 2010. These increases were partially offset by the negative
impact of an adverse arbitration ruling of $2.3 million in the current fiscal year.
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (3rd
Quarter)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities increased
$8.0 million, or 250.0%, to $11.2 million for the three months ended May 31, 2010, from $3.2
million for the same period in the prior fiscal year, primarily attributable to the increase in
gross profit and gross profit percentage described above.
Revenues (Year to Date)
Revenues decreased $15.8 million, or 2.1%, to $723.5 million for the nine months ended May 31,
2010, from $739.3 million for the same period in the prior fiscal year. This decrease in revenues
was primarily due to a decrease in the volume of smaller industrial related construction projects
compared to the prior year. The decline in revenues was partially offset by increases in the number
of power maintenance outages and from turnarounds at process related industries at new and existing
client locations.
Gross profit and gross profit percentage (Year to Date)
Gross profit increased $25.9 million, or 160.9%, to $42.0 million for the nine months ended
May 31, 2010, from $16.1 million for the same period in the prior fiscal year. Our gross profit
percentage increased to 5.8% for the nine months ended May 31, 2010, from 2.2% for the same period
in the prior fiscal year. The increase in our gross profit and gross profit percentage was
primarily due to improved execution resulting in higher margins and the achievement of higher
incentive awards as compared to the same period in the prior year as well as the positive impact of
cost saving initiatives implemented during fiscal 2010.
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (Year to
Date)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities increased
$27.6 million, or 373.0%, to $35.0 million for the nine months ended May 31, 2010, from $7.4
million for the same period in the prior fiscal year, primarily attributable to the increase in
gross profit and gross profit percentage described above as well as reductions in selling, general
and administrative expenses.
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Table of Contents
E&I Segment
The financial results of our E&I segment continue to reflect strong project execution with
revenues and earnings being driven primarily by execution of its two largest projects: the
hurricane protection project for the USACE in southeast Louisiana and our MOX project for the DOE
in South Carolina. The USACE project should continue through fiscal year 2011 and the MOX project
should continue for several years, depending on client options for additional work.
Revenues (3rd Quarter)
E&Is revenues increased $116.2 million, or 25.7%, to $568.0 million for the three months
ended May 31, 2010 from $451.8 million for the same period in the prior fiscal year. This increase
was primarily attributable to increased activity on our hurricane protection project with the USACE
in southeast Louisiana and our MOX and Paducah consolidated joint ventures for the DOE.
Gross profit and gross profit percentage (3rd Quarter)
E&Is gross profit increased $19.2 million, or 52.6%, to $55.7 million for the three months
ended May 31, 2010, from $36.5 million for the same period in the prior fiscal year. Gross profit
percentage increased to 9.8% for the three months ended May 31, 2010, from 8.1% for the same period
in the prior fiscal year. The increase in gross profit was primarily attributable to an increase in
estimated project revenues on our hurricane protection project as well as the other revenue increases discussed
previously. The increase in gross profit percentage was primarily attributable to profit earned
from the increase in estimated project revenues on our hurricane protection project in southeast Louisiana.
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (3rd
Quarter)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities increased
$22.7 million, or 121.4%, to $41.4 million for the three months ended May 31, 2010, from $18.7
million for the same period in the prior fiscal year. The increase was primarily attributable to
the increase in gross profit described above as well as increased other income primarily related to
the favorable resolutions of a note receivable and certain disputed obligations and a
gain on sale of a facility. The increase was partially offset by an increase in selling, general
and administrative expenses related primarily to increased sales proposal activities.
Revenues (Year to Date)
E&Is revenues increased $281.4 million, or 21.6%, to $1,584.5 million for the nine months
ended May 31, 2010 from $1,303.1 million for the same period in the prior fiscal year. This
increase was primarily attributable to our work on a hurricane protection project with the USACE in
southeast Louisiana and increased activity on our MOX and Paducah consolidated joint ventures for
the DOE.
Gross profit and gross profit percentage (Year to Date)
E&Is gross profit increased $37.2 million, or 33.4%, to $148.5 million for the nine months
ended May 31, 2010, from $111.3 million for the same period in the prior fiscal year. Gross profit
percentage increased to 9.4% for the nine months ended May 31, 2010, from 8.5% for the same period
in the prior fiscal year. The increase in gross profit was primarily attributable to increased
activity on U.S. government contracts including the activity discussed above as well as a change in
estimated project revenues on our hurricane protection project. The increase in gross profit percentage was
primarily attributable to profit earned from the change in estimated project revenues on our hurricane protection
project in southeast Louisiana, lower overhead costs as a percentage of revenue as compared to the
prior year, as well as a change in estimate on a fixed price project in the Middle East completed
in 2008 for which the costs were incurred and expensed in prior periods.
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (Year to
Date)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities increased
$37.4 million, or 59.9%, to $99.8 million for the nine months ended May 31, 2010, from $62.4
million for the same period in the prior fiscal year, primarily attributable to the increase in
gross profit described above.
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E&C Segment
As anticipated, E&C continued to experience the effects of the global economic downturn
resulting in lower revenues and earnings for the three months ending May 31, 2010, as compared to
the record levels in the prior fiscal year. Revenues for E&C decreased from 2009 primarily due to
reduced volumes of client furnished materials and reimbursable costs which are invoiced to clients
without profit, as well as from reduced activity on a major international project and reduced
bookings of new work. We continue to see signs of renewed client interest in the early phases of
major capital investments such as studies and front-end engineering and design contracts, which
precede the engineering, procurement and construction phase of major projects, but the timing and
award of these projects remains uncertain. As a result, we expect E&Cs volume of business and
earnings to continue to decline through the end of fiscal year 2010.
Revenues (3rd Quarter)
E&Cs revenues decreased $72.3 million, or 21.3%, to $266.7 million for the three months ended
May 31, 2010, from $339.0 million for the same period in the prior fiscal year. Included in these
revenues were client furnished material and pass through revenues of $75.9 million and $115.1
million for the three months ended May 31, 2010 and May 31, 2009, respectively, for which we
recognize no gross profit or loss. Excluding pass through revenues, E&Cs revenue decreased from
the reduced volume of engineering services and less activity on a major international project when
compared to the prior fiscal year.
Gross profit and gross profit percentage (3rd Quarter)
Gross profit decreased $19.3 million, or 47.2%, to $21.6 million for the three months ended
May 31, 2010, from $40.9 million for the same period in the prior fiscal year. Gross profit
percentage decreased to 8.1% for the three months ended May 31, 2010 from 12.1% for the same period
in the prior fiscal year. The decrease in gross profit and gross profit percentage was primarily
due to the work-off of several high-margin engineering services contracts that contributed to
record performance in the prior fiscal year and the reduction in new contract awards in 2009 and
2010.
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (3rd
Quarter)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities decreased
$20.3 million, or 69.5%, to $8.9 million for the three months ended May 31, 2010, from $29.2
million for the same period in the prior fiscal year, primarily as a result of the decrease in
gross profit and gross profit percentage described above along with an increase in selling, general
and administrative expenses related to increased business development and sales proposal
activities.
Revenues (Year to Date)
E&Cs revenues decreased $98.8 million, or 10.0%, to $893.2 million for the nine months ended
May 31, 2010, from $992.0 million for the same period in the prior fiscal year. Included in these
revenues were client furnished material and pass through revenues of $233.1 million and $317.9
million for the nine months ended May 31, 2010 and May 31, 2009, respectively, for which we
recognize no gross profit or loss. Excluding pass through revenues, E&Cs revenue decreased $14.0
million, or 2.0%, to $660.1 million for the nine months ended May 31, 2010, from $674.1 million for
the same period in the prior fiscal year. The decrease in revenues was due to lower volume of
engineering services contracts partially offset by increased construction related activity on a
major international EPC ethylene project in the current year as compared to the same period in the
prior fiscal year.
Gross profit and gross profit percentage (Year to Date)
Gross profit decreased $51.2 million, or 33.2%, to $102.8 million for the nine months ended
May 31, 2010, from $154.0 million for the same period in the prior fiscal year. Gross profit
percentage decreased to 11.5% for the nine months ended May 31, 2010 from 15.5% for the same period
in the prior fiscal year. The decrease in gross profit and gross profit percentage was due to the
lower volume of engineering services and procurement contracts in the current year compared to the
same period in the prior fiscal year.
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (Year to
Date)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities decreased
$57.5 million, or 46.3%, to $66.7 million for the nine months ended May 31, 2010, from $124.2
million for the same period in the prior fiscal year, primarily as a result
of the decrease in gross profit and gross profit percentage described above along with an
increase in selling, general and administrative expenses related to increased business development
and sales proposal activities.
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F&M Segment
Our F&M segment performed well but experienced a decline in business volume and profits for
the third quarter of fiscal year 2010 due to reduced bookings of process industry and non-nuclear
power related work in fiscal years 2009 and 2010. The reduced market volume of business results in
lower plant utilization and increases pricing pressure in the marketplace. We expect this downturn
in volume and profits to improve to the extent that the modular assembly and pipe fabrication
associated with the AP1000 work increases in the fourth quarter of 2010 and into 2011.
Revenues (3rd Quarter)
Revenues decreased $51.8 million, or 28.9%, to $127.6 million for the three months ended May
31, 2010, from $179.4 million for the same period in the prior fiscal year. This decrease was due
to lower volumes resulting from lower bookings across the majority of our U.S. operations as a
result of global economic conditions partially offset by higher revenues in our Mexican operations.
Gross profit and gross profit percentage (3rd Quarter)
Gross profit decreased $25.9 million, or 58.5%, to $18.4 million for the three months ended
May 31, 2010, from $44.3 million for the same period in the prior fiscal year. Gross profit
percentage decreased to 14.4% for the three months ended May 31, 2010, from 24.7 % for the same
period in the prior fiscal year. The decrease in gross profit and gross profit percentage was
primarily due to reduced client demand for pipe fabrication services, a more competitive pricing
environment and the completion of higher margin contracts during the same period in the prior
fiscal year.
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (3rd
Quarter)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities decreased
$24.8 million, or 69.9%, to $10.7 million for the three months ended May 31, 2010, from $35.5
million for the same period in the prior fiscal year, primarily attributable to the decrease in
gross profit and gross profit percentage described above offset by the reduction in selling,
general and administrative expenses.
Revenues (Year to Date)
Revenues decreased $139.9 million, or 27.7%, to $365.4 million for the nine months ended May
31, 2010, from $505.3 million for the same period in the prior fiscal year for the reasons
described above.
Gross Profit and Gross Profit Percentage (Year to Date)
Gross profit decreased $50.6 million, or 44.5%, to $63.1 million for the nine months ended May
31, 2010, from $113.7 million for the same period in the prior fiscal year. Gross profit percentage
decreased to 17.3% for the nine months ended May 31, 2010, from 22.5% in the same period in the
prior fiscal year, for the reasons described above.
Income (loss) before income taxes and earnings (losses) from unconsolidated entities (Year to
Date)
Income (loss) before income taxes and earnings (losses) from unconsolidated entities decreased
$52.1 million, or 56.7%, to $39.8 million for the nine months ended May 31, 2010, from $91.9
million for the same period in the prior fiscal year, primarily attributable to the decrease in
gross profit and gross profit percentage described above.
Investment in Westinghouse Segment
Westinghouse maintains its accounting records for reporting to its majority owners on a
calendar quarter basis. Financial information reported by Westinghouse is available to us based
upon Westinghouses calendar quarter periods. As a result, we record our earnings (loss) and other
comprehensive income (loss) on our Investment in Westinghouse based upon Westinghouses calendar
quarterly reporting periods, or two months in arrears of our current periods. Under this
policy, Westinghouses operations for the three and nine months ended March 31, 2010, are reflected
in our results of operations for the three and nine months ended May 31, 2010.
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The impact of the Investment in Westinghouse segment on our income (loss) before income taxes,
for the three and nine months ended May 31, 2010, was $24.7 million and $(57.0) million,
respectively, compared to $(72.7) million and $(223.9) million, respectively, in the three and nine
months ended May 31, 2009. Results for the three and nine months ended May 31, 2010 and May 31,
2009 included the following:
Three Months Ended | Nine Months Ended | |||||||||||||||
(dollars in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Interest expense on JPY-denominated bonds including accretion and
amortization |
$ | (9.4 | ) | $ | (39.4 | ) | $ | (28.0 | ) | $ | (60.2 | ) | ||||
Foreign currency translation gains (losses) on JPY-denominated bonds, net |
34.1 | (33.2 | ) | (28.9 | ) | (163.5 | ) | |||||||||
General and administrative expenses |
| (0.1 | ) | (0.1 | ) | (0.2 | ) | |||||||||
Income (loss) before income taxes |
$ | 24.7 | $ | (72.7 | ) | $ | (57.0 | ) | $ | (223.9 | ) | |||||
Additionally, our net income (loss) for the three and nine months ended May 31, 2010 includes
our share of Westinghouses net income of $3.9 million and $6.4 million, respectively, compared to
$4.3 million and $11.3 million for the three and nine months ended May 31, 2009.
We enter into foreign currency forward contracts from time-to-time to hedge the impact of
exchange rate changes on our JPY interest payments on the Westinghouse Bonds. Please see our
disclosure under Liquidity below, as well as in Notes 5 and 7 in the accompanying financial
statements, with respect to the circumstances in which we may be required to exercise the Put
Option and to repay the Westinghouse Bonds.
Corporate Segment
Selling, general and administrative expenses (SG&A)
SG&A for the three months ended May 31, 2010 decreased $3.2 million, or 13.8%, to $20.0
million, from $23.2 million for the same period in the prior fiscal year. The decrease was due to
lower professional fees and a non-income related tax expense for the same period in the prior
fiscal year. The decrease was partially offset by insurance expenses in the current period. For the
nine months ended May 31, 2010, SG&A decreased $4.8 million, or 7.3%, to $61.4 million from $66.2
million in the prior year. The decrease was primarily due to lower professional fees and $5.6
million of non-income related tax expense included in the results of the prior year partially
offset by expenses related to insurance.
Related Party Transactions
From time to time, we perform work for related parties. See Part I, Item 1- Financial
Statements, Note 14 for additional details relating to these activities.
Liquidity and Capital Resources
Liquidity
At May 31, 2010, our restricted and unrestricted cash and cash equivalents, escrowed cash and
restricted and unrestricted short-term investments totaled $1,632.1 million, an increase of $98.8
million, or 6.4%, from $1,533.3 million at August 31, 2009. Included in our restricted and
unrestricted cash and cash equivalents, escrowed cash and restricted and unrestricted short-term
investments amount was $250.1 million of cash we voluntarily used to secure letters of credit,
increasing the availability under our revolving Credit Facility to $737.6 million at May 31, 2010.
We generated positive operating cash flow during the third quarter of fiscal year 2010 from
all of our operating segments except for our Energy & Chemicals, Corporate and Investment in
Westinghouse segments. The cash flow was generated primarily by earnings in each segment, offset by
an increase in working capital. Our primary source of operating cash inflows is from collections of
our accounts receivable, which are generally invoiced based upon achieving performance milestone
prescribed in our contracts. Our outstanding accounts receivable and costs and estimated earnings
in excess of billings are reviewed monthly and are primarily due
from high quality credit clients such as regulated utilities, independent and merchant power
producers, multinational oil companies and industrial corporations, government agencies and other
equipment manufacturers.
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We continue to invest a portion of our excess cash to support the growth of our business
lines. In the third quarter of fiscal year 2010, we invested approximately $46.0 million for
property and equipment, primarily for our new modular facility in Louisiana and for the purchase of
heavy cranes used at large industrial construction sites. Subsequent to the close of the third
quarter of fiscal year 2010, we made an investment of approximately $10.0 million to a joint
venture that will construct a pipe fabrication facility in an international location.
Over the past three years, we have generated significant operating cash flow and currently
have in excess of $1.6 billion of cash and short-term marketable securities. Our excess cash is
generally invested in (1) money market funds governed under rule 2a-7 of the U.S. Investment
Company Act of 1940 and rated AAA/Aaa by S& P and/or Moodys, respectively, (2) interest bearing
deposit accounts with commercial banks rated at least A/A2 or better by S&P and/or Moodys,
respectively (3) publicly traded debt rated at least A/A2 or better by S&P and/or Moodys,
respectively, at the time of purchase with maturities up to two years or (4) publicly traded debt
funds holding securities rated at least A/A2 or better by S&P and/or Moodys, respectively.
At May 31, 2010, the amounts shown as restricted cash and restricted short-term investments in
the accompanying balance sheet included approximately $265.5 million used to voluntarily secure
letters of credit and approximately $25.5 million to secure insurance related contingent
obligations in lieu of a letter of credit. We expect to continue to voluntarily cash collateralize
certain letters of credit in fiscal 2010 and fiscal 2011 if the bank fees avoided on those letters
of credit exceed the return on other investment opportunities.
In March 2010 and November 2009, we made voluntary cash contributions to an underfunded
pension plan in the United Kingdom totaling £8.0 million (approximately $11.4 million) and £5.0
million (approximately $8.3 million), respectively.
Approximately $170.0 million, or 10%, of our cash and cash equivalents, short-term investments
and restricted cash and short-term investments at May 31, 2010 was held by our international
operations. We have the ability to return certain amounts of our overseas funds to the U.S. but may
incur incremental taxes under certain circumstances.
We expect to fund our operations for the next twelve months with cash generated from
operations and existing cash balances. However, there can be no assurance that we will achieve our
forecasted cash flow, which could result in new borrowings under existing or future credit
facilities. We expect to continue to reinvest a portion of our excess cash to support the growth of
our business lines, including, but not limited to, the purchase of equipment that we have
historically leased.
Our strong cash position, combined with the global economic slowdown, has created
opportunities for us to obtain market discounts and provide protection from potential future price
escalation for our EPC projects by undertaking an early procurement program. Accordingly, we have
begun to procure certain commodities, subcontracts and construction equipment early in the life
cycle of major projects. If successful, this strategy will provide price and schedule certainty but
requires that we expend our cash earlier than originally required under the contracts. At May 31,
2010, we have expended approximately $27.8 million under the early procurement program for fiscal
2010 and are currently evaluating early procurement opportunities up to $105.0 million for fiscal
year 2011. It is our intent to balance any potential cancellation exposure associated with early
procurements with our termination rights and obligations under the respective prime contracts with
our clients and to help protect ourselves from suppliers failing to perform by requiring financial
security instruments to support their performance. However, we can provide no assurance that our
intent to manage our cancellation exposure will be successful. In addition, while we currently
intend to pursue procurements of this magnitude over the remainder of fiscal 2010 and into fiscal
2011, our ability to complete such purchases is subject to our ability to execute definitive
purchase contracts as well as our ability to terminate this strategy should we identify other
opportunities or needs that we determine are in our best interests to pursue.
Credit Facility
Many of our clients require that we issue letters of credit or surety bonds for work we
perform. Our growth may be dependent on our ability to increase our letter of credit and surety
bonding capacity, our ability to achieve timely release of existing letters of credit and surety
bonds and/or our ability to obtain more favorable terms from our clients reducing letter of credit
and surety requirements on new work. Our need for letter of credit capacity may increase as we seek
additional nuclear construction projects. Increases in outstanding performance letters of credit
issued under our Facility reduce the available borrowing capacity under our Facility.
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On September 24, 2009, we entered into the Restated Agreement with a group of lenders that
provides new and extended lender commitments of up to $1,214.0 million, all of which is available
for the issuance of performance and financial letters of credit and/or borrowings for working
capital needs and general corporate purposes. The Restated Agreement included new lenders to the
Facility as well as certain existing lenders who will exit the Facility in 2010 or 2011, following
the expiration of their existing commitments. Accordingly, the Restated Agreement contemplates
three groups of lenders, the 2010 Lenders, the 2011 Lenders and the 2012 Lenders, with the
Facility terminating with respect to such lenders on April 25, 2010, April 25, 2011 and October 25,
2012, respectively. On April 25, 2010, the commitments of the 2010 Lenders expired, reducing total
lender commitments to $1,095.0 million. Current commitments available under The Restated Agreement
expire as follows:
Commitment Expiration | (dollars in millions) | |||
Total Commitments as of May 31, 2010 |
$ | 1,095.0 | ||
Commitments expiring April 25, 2011 |
(95.0 | ) | ||
Commitments April 25, 2011 through October 25, 2012 |
$ | 1,000.0 | ||
The Restated Agreement allows us to seek new or increased lender commitments under this
Facility subject to the consent of the Administrative Agent and, in some instances, those lenders
who issue letters of credit under the Facility on our behalf and/or seek other supplemental credit
facilities on a pari passu basis with the Facility, of up to an aggregate of $400.0 million.
Additionally, we may pledge up to $300.0 million of our unrestricted cash on hand to secure
additional letters of credit incremental to amounts available under the Facility, provided that we
have unrestricted cash and cash equivalents of at least $500.0 million available immediately
following the pledge. The borrowing base restrictions that were set forth in the original credit
agreement are not included in the Restated Agreement. The Restated Agreement contains a revised
pricing schedule with respect to letter of credit fees and interest rates payable by us.
The Restated Agreement contains customary financial covenants and other restrictions. The
covenants set forth in the Restated Credit Agreement generally conform to the covenants set forth
in the original credit agreement, except that the Restated Credit Agreement, among other things
(1) replaces the consolidated fixed charge coverage ratio covenant of the original credit agreement
with a debt service coverage ratio covenant, and (2) increases certain maximum allowable amounts
and certain threshold triggers and adds certain additional exceptions with respect to the dividend,
investment, indebtedness, lien, asset sale, letter of credit, acquisition, lease and additional
collateral covenants, thus providing the company with greater financial flexibility in business
decisions and strategies. The Restated Credit Agreement contains defaulting lender provisions.
The Restated Agreement limits our ability to declare or pay dividends or make any
distributions of capital stock (other than stock splits or dividends payable in our own capital
stock) or redeem, repurchase or otherwise acquire or retire any of our capital stock. If
unrestricted cash and cash equivalents, after giving effect to any dividend or stock repurchase, is
at least $500.0 million, we are limited to aggregate dividend payments and/or stock repurchases
during the life of the Restated Credit Agreement to $250.0 million. In situations where our
unrestricted cash and cash equivalents is less than $500.0 million, our ability to pay dividends or
repurchase our shares is limited to $25.0 million per fiscal year.
The Restated Agreement is secured by, among other things: (1) a first priority security
interest in all of the Companys tangible and intangible assets (including, without limitation,
equipment, real estate and intellectual property) and a pledge of all of the capital stock of the
Companys material domestic subsidiaries; (2) guarantees by the Companys material domestic
subsidiaries; and (3) a pledge of 66% of the capital stock of certain of the Companys foreign
subsidiaries. The Restated Agreement permits the release of such liens if (a) the Company obtains a
corporate credit rating of at least BBB- from S&P and Baa3 from Moodys, (b) all liens securing any
supplemental credit facilities are released, and (c) other conditions specified in the Restated
Agreement are satisfied.
During the third quarter of fiscal 2010, no borrowings were made under the credit facility;
however, we had outstanding letters of credit of approximately $357.4 million as of May 31, 2010,
and those letters of credit reduce what is otherwise available for borrowing under our Facility.
At May 31, 2010, we were in compliance with the covenants contained in our Restated Agreement.
See Note 7 Debt and Revolving Lines of Credit included in our consolidated financial
statements for a description of: (1) the terms and interest rates related to our Facility and
revolving lines of credit; (2) amounts available and outstanding for performance letters of credit,
financial letters of credit and revolving loans under our Facility; and (3) a description of our
Facilitys financial covenants and matters related to our compliance with those covenants during
the third quarter of fiscal 2010.
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Other Debt
As more fully described in Note 7 Debt and Revolving Lines of Credit included in our
consolidated financial statements, our Investment in Westinghouse was financed primarily through
the issuance of JPY-denominated Westinghouse Bonds of approximately $1.0 billion. If we decide to
repay or refinance the Westinghouse Bonds, we may use some of our existing cash and/or seek to
raise capital from the debt and/or equity markets. There can be no assurance that should we wish to
repay or refinance the Westinghouse Bonds we will be able to raise sufficient capital, or if
sufficient capital will be available to us, on terms acceptable to us.
In addition, we have various short-term (committed and uncommitted) revolving credit
facilities from several financial institutions that are available for letters of credit and, to a
lesser extent, working capital loans.
Off Balance Sheet Arrangements
On a limited basis, performance assurances are extended to clients in the form of letters of
credit, surety bonds and/or parent company guarantees that guarantee certain performance obligation
of a project. If performance assurances are extended to clients, generally our maximum potential
exposure is limited in the contract with our clients. We frequently obtain similar performance
assurances from third party vendors and subcontractors for work performed in the ordinary course of
contract execution. As a result, the total costs of the project could exceed our original cost
estimates and we could experience reduced gross profit or possibly a loss for that project. In some
cases, where we fail to meet certain performance standards, we may be subject to contractual
liquidated damages.
Commercial Commitments
Our lenders issue letters of credit on our behalf to clients and sureties and to secure other
financial obligations in connection with our contract performance and, in limited circumstances, on
certain other obligations of third parties. If drawn, we are required to reimburse our lenders for
payments on these letters of credit.
We also have performance letters of credit that are cash collateralized. For additional
information on our cash collateralized letters of credit, see Part I, Item 1. Financial
Statements, Note 3.
At May 31, 2010, we had both letter of credit commitments and surety bonding obligations,
which were generally issued to secure performance and financial obligations on certain of our
construction contracts, which expire as follows (in millions):
Less Than | ||||||||||||||||||||
Commercial Commitments (1) | Total | 1 Year | 1-3 Years | 3-5 Years | After 5 Years | |||||||||||||||
Letters of Credit Domestic and Foreign |
$ | 659.8 | $ | 594.3 | $ | 65.5 | $ | | $ | | ||||||||||
Surety bonds |
658.5 | 618.3 | 24.2 | 16.0 | | |||||||||||||||
Total Commercial Commitments |
$ | 1,318.3 | $ | 1,212.6 | $ | 89.7 | $ | 16.0 | $ | | ||||||||||
(1) | Commercial Commitments above exclude any letters of credit or surety bonding obligations associated with outstanding bids or proposals or other work not awarded prior to June 1, 2010. |
Of the amount of outstanding letters of credit at May 31, 2010, $475.8 million were issued to
clients in connection with contracts (performance letters of credit). Of the $475.8 million, five
clients held $308.5 million, or 64.8%, of the outstanding letters of credit. The largest amount of
letters of credit issued to a single client on a single project was $117.5 million.
At May 31, 2010 and August 31, 2009, we had total surety bonds of $658.5 million and $729.7
million, respectively. However, based on our percentage-of-completion on contracts covered by these
surety bonds, our estimated potential liability at May 31, 2010 and August 31, 2009 was $154.4
million and $282.1 million, respectively.
Fees related to these commercial commitments were $3.6 million and $11.8 million, for the
three and nine months ended May 31, 2010, respectively, compared to $3.8 million and $11.2 million
for the three and nine months ended May 31, 2009, respectively.
See Note 7 Debt and Revolving Lines of Credit to our consolidated financial statements in
Part I, Item 1 of this Form 10-Q for a discussion of long-term debt and Note 11 Contingencies
and Commitments to our consolidated financial statements in Part I, Item 1 of this report for a
discussion of contingencies and commitments.
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Critical Accounting Policies
Item 7 of Part II of our 2009 Form 10-K addresses the accounting policies and related
estimates that we believe are the most critical to understanding our consolidated financial
statements, financial condition and results of operations and those that require management
judgment and assumptions, or involve uncertainties.
Backlog of Unfilled Orders
General. Our backlog represents managements estimate of the amount of awards that we expect
to result in future revenues. Backlog is based on legally binding agreements for projects that
management believes are probable to proceed. Awards are evaluated by our management on a
project-by-project basis and are reported for each period shown based upon the underlying contract
or commitment plus managements assessment of the likelihood of the project proceeding.
New bookings and ultimately the amount of backlog of unfilled orders is largely a reflection
of broad global economic trends. The volume and timing of executing the work in our backlog is
important to us in anticipating our operational needs. Backlog is not a measure defined in GAAP,
and our methodology for determining backlog may not be comparable to the methodology used by other
companies in determining their backlog. We cannot assure you that revenues projected in our backlog
will be realized, or if realized, will result in profits.
All contracts contain client termination for convenience clauses and many of the contracts in
backlog provide for cancellation fees in the event clients cancel projects. These cancellation fees
usually provide for reimbursement of our out-of-pocket costs, revenues associated with work
performed prior to cancellation and, to varying degrees, a percentage of the profits we would have
realized had the contract been completed.
The process to add new awards to backlog is generally consistent among our segments and is
based on us receiving a legally binding agreement with clients plus managements assessment that
the project will likely proceed. Additional details relating to each segments booking process
follows:
Fossil, Renewables & Nuclear and E&C Segments. We define our backlog in our Fossil, Renewables
& Nuclear and E&C segments to include projects for which we have received legally binding
commitments from our clients and our pro rata share of projects for which our consolidated joint
venture entities have received legally binding commitments. These commitments typically take the
form of a written contract for a specific project or a purchase order and sometimes require that we
estimate anticipated future revenues, often based on engineering and design specifications that
have not been finalized and may be revised over time. The value of work subcontracted to our F&M
segment is removed from the backlog of the Fossil, Renewables & Nuclear and E&C segments and is
shown in the backlog of our F&M segment.
E&I Segment. Our E&I segments backlog includes the value of awarded contracts including the
estimated value of funded and unfunded work and anticipated revenue of consolidated joint venture
entities. The unfunded backlog generally represents U.S. government project awards for which the
project funding has been partially authorized or awarded by the relevant government authorities
(e.g., authorization of an award has been provided for only the initial year of a multi-year
project or an indefinite delivery, indefinite quantity contract is awarded with terms defining
possible future task order awards within the scope of the contract). Because of appropriation
limitations in the U.S. government budget processes, firm funding is usually made for only one year
at a time and, in some cases, for periods less than one year. Some contracts may contain a number
of one-year options. Amounts included in backlog are based on the contracts total awarded value
and our estimates regarding the amount of the award that will ultimately result in the recognition
of revenues. These estimates may be based on indications of future values provided by our clients,
our estimates of the work required to complete the contract, our experience with similar awards and
similar clients and our knowledge and expectations relating to the given award. Generally, the
unfunded component of new contract awards is added to backlog at 75% of our contract value. The
programs are monitored, estimates are reviewed periodically and adjustments are made to the amounts
included in backlog and in unexercised contract options to properly reflect our estimate of total
contract revenue in the E&I segment backlog. Our E&I segment backlog does not generally include any
awards (funded or unfunded) for work expected to be performed more than five years after the date
of our financial statements. The executed amendment to the MOX contract signed in the third quarter
of fiscal 2008 extends beyond five years but has defined contract values, which differs from many
other contracts with government agencies. Accordingly, we included the entire value of the MOX
contract not yet executed in our backlog of unfilled orders. The value of work subcontracted to our
F&M segment is removed from the backlog of our E&I segment and is shown in the backlog of our F&M
segment.
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Maintenance Segment. We define our backlog in the Maintenance segment to include projects that
are based on legally binding contracts from our clients and our pro rata share of consolidated
joint venture entities. These commitments typically take the form of a written contract or a
specific project purchase order and can cover periods ranging from three to five years. Many of
these contracts cover reimbursable work to be designated and executed over the term of the
agreement. Accordingly, certain of the backlog amounts are based on the underlying
contracts/purchase orders, our clients historic maintenance requirements or our future cost
estimates based on the clients indications of future plant outages. Our Maintenance segment
backlog does not include any awards for work expected to be performed more than five years after
the date of our financial statements.
F&M Segment. We define our backlog in the F&M segment to include projects for which we have
received a legally binding commitment from our clients. These commitments typically take the form
of a written contract for a specific project, a purchase order or a specific indication of the
amount of time or material we need to make available for clients anticipated projects under
alliance type agreements. A significant amount of our F&M segments backlog results from
inter-company awards received from our Fossil, Renewables & Nuclear, E&I and E&C segments. In such
cases, we include the value of the subcontracted work in our F&M segments backlog and exclude it
from the corresponding affiliate segment.
At May 31, 2010 and August 31, 2009, our backlog was as follows:
May 31, 2010 | August 31, 2009 | |||||||||||||||
By Segment | (In Millions) | % | (In Millions) | % | ||||||||||||
Fossil, Renewables & Nuclear |
$ | 11,742.3 | 58 | $ | 12,795.1 | 56 | ||||||||||
Maintenance |
1,546.6 | 7 | 1,808.1 | 8 | ||||||||||||
E&I |
4,976.9 | 25 | 5,439.0 | 24 | ||||||||||||
E&C |
771.9 | 4 | 1,298.6 | 6 | ||||||||||||
F&M |
1,269.3 | 6 | 1,374.8 | 6 | ||||||||||||
Total backlog |
$ | 20,307.0 | 100 | % | $ | 22,715.6 | 100 | % | ||||||||
May 31, 2010 | August 31, 2009 | |||||||||||||||
By Industry | (In Millions) | % | (In Millions) | % | ||||||||||||
E&I |
$ | 4,976.9 | 25 | $ | 5,439.0 | 24 | ||||||||||
Power Generation |
14,187.2 | 70 | 15,478.1 | 68 | ||||||||||||
Chemical |
1,044.9 | 5 | 1,761.1 | 7 | ||||||||||||
Other |
98.0 | | 37.4 | 1 | ||||||||||||
Total backlog |
$ | 20,307.0 | 100 | % | $ | 22,715.6 | 100 | % | ||||||||
May 31, 2010 | August 31, 2009 | |||||||||||||||
By Geographic Region | (In Millions) | % | (In Millions) | % | ||||||||||||
Domestic |
$ | 19,158.9 | 94 | $ | 20,978.2 | 92 | ||||||||||
International |
1,148.1 | 6 | 1,737.4 | 8 | ||||||||||||
Total backlog |
$ | 20,307.0 | 100 | % | $ | 22,715.6 | 100 | % | ||||||||
The decrease in backlog as compared to August 31, 2009 was driven primarily by reduced
bookings during the first three quarters of fiscal year 2010. Bookings during the first three
quarters of fiscal year 2010 were led by E&I, which continues to benefit from awards from U.S.
government entities.
Included in backlog is our share of the full EPC contracts for two new AP1000 nuclear reactors
to be located in Georgia and two new AP1000 nuclear reactors to be located in Florida. Not included
in our backlog is the majority of the work to be performed on an EPC contract for two new AP1000
nuclear reactors to be located in South Carolina for which the contract has been awarded and work
is progressing but for which certain client authorizations had not been received at May 31, 2010.
During the fiscal quarter ended May 31, 2009, we received notice from our client of a
significant delay in the construction schedule for the aforementioned two new AP1000 nuclear
reactors to be located in Florida relating to early construction activities. Our client advised us
that these activities would not be performed for these units until the COL is issued by the Nuclear
Regulatory Commission for the plant, which we understand is expected to occur in late 2012. As a
result, the first reactor is now expected to enter service in 2021, with the second 18 months
later. In the interim, we continue to perform limited engineering and support services and have not
removed or altered the corresponding contract value from our backlog as our contract with this
client remains in effect. The amount of revenues and contract profit expected to be generated from
this project during fiscal years 2010 and 2011 are likely to be immaterial when considered in
relation to our consolidated operations. We expect to recover any future adverse cost impacts
associated with the current schedule delay. If our client were to cancel the project, we would
be entitled to retain all proceeds collected to date, collect any receivables that may be
outstanding at that time and be entitled to invoice additional amounts as prescribed under our
contract.
53
Table of Contents
Recently
Adopted Accounting Standards
For
a discussion of recently adopted accounting standards, refer to Note 1 General
Information of our consolidated financial statements in Part I, Item 1. Financial Statements.
Recent
Accounting Standards
For a discussion of recent accounting standards and the effect they could have on our
financial statements, refer to Note 1 General Information of our consolidated financial statements in Part I, Item 1.
Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into derivative financial instruments for trading, speculation or other
purposes that would expose us to market risk. In the normal course of business, we have exposure to
both interest rate risk and foreign currency exchange rate risk. For quantitative and qualitative
disclosures about our market risk, see Item 7A Quantitative and Qualitative Disclosures about
Market Risk of our 2009 Form 10-K. Our exposures to market risk have not changed materially since
August 31, 2009.
ITEM 4. CONTROLS AND PROCEDURES
Managements Quarterly Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) are designed to ensure that information required to be disclosed in our reports filed
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. This information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. Our management, under the supervision and
with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and procedures at May 31,
2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at May 31, 2010.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months
ended May 31, 2010 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have been and may from time to time be named as a defendant in legal actions claiming
damages in connection with engineering and construction projects, technology licenses and other
matters. These are typically claims that arise in the ordinary course of business, including
employment-related claims and contractual disputes or claims for personal injury or property damage
that occur in connection with services performed relating to project or construction sites.
Contractual disputes normally involve claims relating to the timely completion of projects,
performance of equipment or technologies, design or other engineering services or project
construction services provided by our subsidiaries. See Note 11 Contingencies and Commitments of
our consolidated financial statements in Part I, Item 1. Financial Statements for information
about our material pending legal proceedings.
54
Table of Contents
ITEM 1A. RISK FACTORS
There have been no material changes to the Risk Factors disclosures included in our Annual
Report on Form 10-K for the year ended August 31, 2009, as updated in our Quarterly Report on Form
10-Q for the period ended February 28, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
Effective as of July 7, 2010, we amended J.M. Bernhard, Jr.s employment agreement, removing the
cost restriction on the time Mr. Bernhard will be permitted to use our aircraft following his
termination (as defined in his Amended and Restated Employment Agreement dated December 31, 2008).
Mr. Bernhard is our Chairman, Chief Executive Officer and President. His employment agreement
allows him to use Company aircraft up to 150 hours annually for ten years following his
termination. The amendment did not increase the annual hours permitted.
ITEM 6. EXHIBITS
The exhibits marked with the cross symbol () are filed or furnished (in the case of Exhibits
32.1 and 32.2) with this Form 10-Q. The exhibits marked with the asterisk symbol (*) are management
contracts or compensatory plans or arrangements filed pursuant to Item 601(b)(10)(iii) of
Regulation S-K.
SEC File or | Exhibit | |||||||||||
Exhibit | Report or Registration | Registration | or Other | |||||||||
Number | Document Description | Statement | Number | Reference | ||||||||
2.1 | Investment Agreement, dated as
of October 4, 2006, by and among
Toshiba, Toshiba Nuclear Energy
Holdings Corporation (US) Inc.,
a Delaware corporation (the US
Company), The Shaw Group Inc.
(the Company) and Nuclear
Energy Holdings, L.L.C. (NEH)
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 2.01 | ||||||||
2.2 | Investment Agreement, dated as
of October 4, 2006, by and among
Toshiba, Toshiba Nuclear Energy
Holdings (UK) Limited, a company
registered in England with
registered number 5929672 (the
UK Company), the Company and
NEH
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 2.02 | ||||||||
3.1 | Amendment to and Restatement of
the Articles of Incorporation of
the Company dated February 23,
2007
|
The Shaw Group Inc. Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended August 31, 2006 | 1-12227 | 3.1 | ||||||||
3.2 | Amended and Restated By-Laws of the Company dated as of
January 30, 2007
|
The Shaw Group Inc. Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended August 31, 2006 | 1-12227 | 3.2 |
55
Table of Contents
SEC File or | Exhibit | |||||||||||
Exhibit | Report or Registration | Registration | or Other | |||||||||
Number | Document Description | Statement | Number | Reference | ||||||||
4.1 | Specimen Common Stock Certificate
|
The Shaw Group Inc. Annual Report on Form 10-K for the fiscal year ended August 31, 2007 | 1-12227 | 4.1 | ||||||||
4.2 | Rights Agreement, dated as of
July 9, 2001, between the
Company and First Union National
Bank, as Rights Agent, including
the Form of Articles of
Amendment to the Restatement of
the Articles of Incorporation of
the Company as Exhibit A, the
form of Rights Certificate as
Exhibit B and the form of the
Summary of Rights to Purchase
Preferred Shares as Exhibit C
(Exhibit A-1 and A-2)
|
The Shaw Group Inc. Registration Statement on Form 8-A filed on July 30, 2001 | 1-12227 | 99.1 | ||||||||
4.3 | The Shaw Group Inc. hereby
agrees to furnish copies of
instruments defining the rights
of holders of long-term debt of
The Shaw Group Inc. and its
consolidated subsidiaries to the
Commission upon request. |
|||||||||||
*10.1 | The Shaw Group Inc. 2008 Omnibus
Incentive Plan
|
The Shaw Group Inc. on Quarterly Report on Form 10-Q for the period February 28, 2009 | 1-12227 | 10.8 | ||||||||
*10.2 | Form of Section 16 Officer
Restricted Stock Unit Award
Agreement under The Shaw Group
Inc. 2008 Omnibus Incentive Plan
|
The Shaw Group Inc. on Quarterly Report on Form 10-Q for the period November 30, 2009 | 1-12227 | 10.66 | ||||||||
*10.3 | Form of Employee Incentive Stock
Option Award under The Shaw
Group Inc. 2008 Omnibus
Incentive Plan
|
The Shaw Group Inc. on Quarterly Report on Form 10-Q for the period November 30, 2009 | 1-12227 | 10.67 | ||||||||
*10.4 | Form of Employee Nonqualified
Stock Option Award Agreement
under The Shaw Group Inc. 2008
Omnibus Incentive Plan
|
The Shaw Group Inc. on Quarterly Report on Form 10-Q for the period November 30, 2009 | 1-12227 | 10.68 | ||||||||
*10.5 | Form of Employee Restricted
Stock Unit Award Agreement under
The Shaw Group Inc. 2008 Omnibus
Incentive Plan
|
The Shaw Group Inc. on Quarterly Report on Form 10-Q for the period November 30, 2009 | 1-12227 | 10.69 | ||||||||
*10.6 | Form of Canadian Employee
Incentive Stock Option Agreement
under The Shaw Group Inc. 2008
Omnibus Incentive Plan
|
The Shaw Group Inc. on Quarterly Report on Form 10-Q for the period November 30, 2009 | 1-12227 | 10.70 | ||||||||
*10.7 | The Shaw Group Inc. Stone &
Webster Acquisition Stock Option
Plan
|
The Shaw Group Inc. Registration Statement on Form S-8 filed on June 12, 2001 | 333-62856 | 4.6 | ||||||||
*10.8 | The Shaw Group Inc. 1993
Employee Stock Option Plan,
amended and restated through
October 8, 2001
|
The Shaw Group Inc. Annual Report on Form 10-K for the fiscal year ended August 31, 2001 | 1-12227 | 10.1 |
56
Table of Contents
SEC File or | Exhibit | |||||||||||
Exhibit | Report or Registration | Registration | or Other | |||||||||
Number | Document Description | Statement | Number | Reference | ||||||||
*10.9 | The Shaw Group Inc. 2005
Non-Employee Director Stock
Incentive Plan, amended and
restated through November 2,
2007
|
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended November 30, 2007 | 1-12227 | 10.5 | ||||||||
*10.10 | Written description of the
Companys compensation policies
and programs for non-employee
directors
|
The Shaw Group Inc. Proxy Statement for the 2009 Annual Meeting of Shareholders contained in The Shaw Group Inc.s Schedule 14A filed on December 24, 2008 | 1-12227 | (Contained at pages 12 to 15 in the 2009 Proxy Statement) | ||||||||
*10.11 | Flexible Perquisites Program for certain executive officers |
The Shaw Group Inc. Current Report on Form 8-K filed on November 1, 2004 | 1-12227 | (Description contained under Item 1.01 of the referenced Form 8-K) | ||||||||
*10.12 | Written description of the
Companys incentive compensation
policies programs for executive
officers, including performance
targets for fiscal year end 2009
|
The Shaw Group Inc. Proxy Statement for the 2009 Annual Meeting of Shareholders contained in The Shaw Group Inc.s Schedule 14A filed on December 17, 2009 | 1-12227 | (Contained at pages 23 to 64 in the 2010 Proxy Statement) | ||||||||
*10.13 | Amended and Restated Employment
Agreement dated as of December
31, 2008, by and between the
Company and J.M. Bernhard, Jr.
|
The Shaw Group Inc. Current Report on Form 8-K filed on January 7, 2009 | 1-12227 | 10.1 | ||||||||
*10.14 | Amended and Restated Employment
Agreement dated as of December
22, 2008 by and between the
Company and Gary P. Graphia
|
The Shaw Group Inc. Current Report on Form 8-K filed on December 24, 2008 | 1-12227 | 10.1 | ||||||||
*10.15 | Employee Indemnity Agreement
dated as of July 12, 2007
between the Company and Brian K.
Ferraioli
|
The Shaw Group Inc. Annual Report on Form 10-K for the fiscal year ended August 31, 2007 | 1-12227 | 10.34 | ||||||||
*10.16 | Amended and Restated Employment
Agreement dated as of December
31, 2008 between the Company and
Brian K. Ferraioli
|
The Shaw Group Inc. Current Report on Form 8-K filed on January 7, 2009 | 1-12227 | 10.2 | ||||||||
*10.17 | Amended and Restated Employment
Agreement dated as of December
31, 2008 by and between the
Company and George P. Bevan
|
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended February 28, 2009 | 1-12227 | 10.13 | ||||||||
*10.18 | Amended and Restated Employment
Agreement dated as of March 23,
2009 by and between the Company
and Frederick W. Buckman
|
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended May 31, 2009 | 1-12227 | 10.20 |
57
Table of Contents
SEC File or | Exhibit | |||||||||||
Exhibit | Report or Registration | Registration | or Other | |||||||||
Number | Document Description | Statement | Number | Reference | ||||||||
*10.19 | Employment Agreement of David L.
Chapman, Sr. dated April 6, 2002
|
The Shaw Group Inc. Current Report on Form 8-K filed December 24, 2003 | 1-12227 | 99.1 | ||||||||
*10.20 | Amendment to Employment
Agreement of David L. Chapman,
Sr., dated November 29, 2004
(with an effective date of
April 1, 2005)
|
The Shaw Group Inc. Current Report on Form 8-K filed on January 12, 2005 | 1-12227 | 10.1 | ||||||||
*10.21 | Letter Agreement between the
Company and David L. Chapman,
Sr. dated as of March 12, 2008
|
The Shaw Group Inc. Current Report on Form 8-K filed on March 17, 2008 | 1-12227 | 10.1 | ||||||||
*10.22 | Offer Letter dated as of August
31, 2007, by and between the
Company and Michael J. Kershaw
|
The Shaw Group Inc. Current Report on Form 8-K filed on December 21, 2007 | 1-12227 | 10.1 | ||||||||
*10.23 | Amended and Restated Employment
Agreement dated as of December
31, 2008 by and between the
Company and Lou Pucher
|
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended February 28, 2009 | 1-12227 | 10.16 | ||||||||
*10.24 | Amended and Restated Employment
Agreement dated as of December
17, 2009 by and between the
Company and John Donofrio
|
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended November 30, 2009 | 1-12227 | 10.65 | ||||||||
*10.25 | The Shaw Group Inc. 401(k) Plan
|
The Shaw Group Inc. Registration Statement on Form S-8 filed on May 4, 2004 | 333-115155 | 4.6 | ||||||||
*10.26 | The Shaw Group Inc. 401(k) Plan
for Certain Hourly Employees
|
The Shaw Group Inc. Registration Statement on Form S-8 filed on May 4, 2004 | 333-115155 | 4.6 | ||||||||
*10.27 | The Shaw Group Deferred Compensation Plan |
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended February 28, 2009 | 1-12227 | 10.10 | ||||||||
*10.28 | The Shaw Group Deferred
Compensation Plan Form of
Adoption
|
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended February 28, 2009 | 1-12227 | 10.11 | ||||||||
*10.29 | Trust Agreement, dated as of
January 2, 2007 by and between
the Company and Fidelity
Management Trust Company for The
Shaw Group Deferred Compensation
Plan Trust
|
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended February 28, 2007 | 1-12227 | 10.6 | ||||||||
10.30 | Asset Purchase Agreement, dated
as of July 14, 2000, among
Stone & Webster, Incorporated,
certain subsidiaries of Stone &
Webster, Incorporated and the
Company
|
The Shaw Group Inc. Current Report on Form 8-K filed on July 28, 2000 | 1-12227 | 2.1 |
58
Table of Contents
SEC File or | Exhibit | |||||||||||
Exhibit | Report or Registration | Registration | or Other | |||||||||
Number | Document Description | Statement | Number | Reference | ||||||||
10.31 | Composite Asset Purchase
Agreement, dated as of
January 23, 2002, by and among
the Company, The IT Group, Inc.
and certain subsidiaries of The
IT Group, Inc., including the
following
amendments:(i) Amendment No. 1,
dated January 24, 2002, to Asset
Purchase Agreement,
(ii) Amendment No. 2, dated
January 29, 2002, to Asset
Purchase Agreement, and (iii) a
letter agreement amending
Section 8.04(a)(ii) of the Asset
Purchase Agreement, dated as of
April 30, 2002, between The IT
Group, Inc. and the Company
|
The Shaw Group Inc. Current Report on Form 8-K filed on May 16, 2002 | 1-12227 | 2.1 | ||||||||
10.32 | Amendment No. 3, dated May 2,
2002, to Asset Purchase
Agreement by and among the
Company, The IT Group, Inc. and
certain subsidiaries of The IT
Group, Inc.
|
The Shaw Group Inc. Current Report on Form 8-K filed on May 16, 2002 | 1-12227 | 2.2 | ||||||||
10.33 | Amendment No. 4, dated May 3,
2002, to Asset Purchase
Agreement by and among the
Company, The IT Group, Inc. and
certain subsidiaries of the IT
Group, Inc.
|
The Shaw Group Inc. Current Report on Form 8-K filed on May 16, 2002 | 1-12227 | 2.3 | ||||||||
10.34 | Put Option Agreement, dated as
of October 13, 2006, between NEH
and Toshiba related to shares in
the US acquisition company
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.2 | ||||||||
10.35 | Put Option Agreement, dated as
of October 13, 2006, between NEH
and Toshiba related to shares in
the UK acquisition company
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.3 | ||||||||
10.36 | Shareholders Agreement, dated as
of October 4, 2006, by and among
Toshiba, Toshiba Nuclear Energy
Holdings (US) Inc. the US
Company, NEH, TSB Nuclear Energy
Investment US Inc., a Delaware
corporation and a wholly owned
subsidiary of Toshiba and
Ishikawajima-Harima Heavy
Industries Co., Ltd., a
corporation organized under the
laws of Japan (IHI)
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.4 | ||||||||
10.37 | Shareholders Agreement, dated as
of October 4, 2006, by and among
Toshiba, Toshiba Nuclear Energy
Holdings (UK) Inc., the UK
Company, NEH, IHI and TSB
Nuclear Energy Investment UK
Limited, a company registered in
England with registered number
5929658
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.5 |
59
Table of Contents
SEC File or | Exhibit | |||||||||||
Exhibit | Report or Registration | Registration | or Other | |||||||||
Number | Document Description | Statement | Number | Reference | ||||||||
10.38 | Bond Trust Deed, dated
October 13, 2006, between NEH
and The Bank of New York, as
trustee
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.6 | ||||||||
10.39 | Parent Pledge Agreement, dated
October 13, 2006, between the
Company and The Bank of New York
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.7 | ||||||||
10.40 | Issuer Pledge Agreement, dated
October 13, 2006, between NEH
and The Bank of New York
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.8 | ||||||||
10.41 | Deed of Charge, dated
October 13, 2006, among NEH, The
Bank of New York, as trustee,
and Morgan Stanley Capital
Services Inc., as swap
counterparty
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.9 | ||||||||
10.42 | Transferable Irrevocable Direct
Pay Letter of Credit (Principal
Letter of Credit) effective
October 13, 2006 of Bank of
America in favor of NEH
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.10 | ||||||||
10.43 | Transferable Irrevocable Direct
Pay Letter of Credit (Interest
Letter of Credit) effective
October 13, 2006 of Bank of
America in favor of NEH
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.11 | ||||||||
10.44 | Reimbursement Agreement dated as
of October 13, 2006, between the
Company and Toshiba
|
The Shaw Group Inc. Current Report on Form 8-K filed on October 18, 2006 | 1-12227 | 10.12 | ||||||||
10.45 | Amended and Restated Credit
Agreement, dated as of September
24, 2009, among the Company, as
borrower; the Companys
subsidiaries signatories
thereto, as guarantors; BNP
Paribas, as administrative
agent; and the other agents
lenders signatory thereto.
|
The Shaw Group Inc. Current Report on Form 8-K filed on September 25, 2009 | 1-12227 | 10.1 | ||||||||
*10.46 | Form of Nonemployee Director
Nonqualified Stock Option Award
Agreement under The Shaw Group
Inc. 2008 Omnibus Incentive Plan
|
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended February 28, 2010 | 1-12227 | 10.46 | ||||||||
*10.47 | Form of Nonemployee Director
Restricted Stock Unit Award
Agreement under The Shaw Group
Inc. 2008 Omnibus Incentive Plan
|
The Shaw Group Inc. Quarterly Report on Form 10-Q for the quarter ended February 28, 2010 | 1-12227 | 10.47 | ||||||||
*10.48 | Amendment to the Amended and
Restated Employment Agreement
dated December 31, 2008, by and
between the Company and J.M.
Bernhard, Jr.
|
1-12227 | ||||||||||
31.1 | Certification pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002 |
60
Table of Contents
SEC File or | Exhibit | |||||||||||
Exhibit | Report or Registration | Registration | or Other | |||||||||
Number | Document Description | Statement | Number | Reference | ||||||||
31.2 | Certification pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002 |
|||||||||||
32.1 | Certification pursuant to
18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of
2002 |
|||||||||||
32.2 | Certification pursuant to
18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of
2002 |
61
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE SHAW GROUP INC. |
||||
Dated: July 12, 2010 | /s/ Brian K. Ferraioli | |||
Brian K. Ferraioli | ||||
Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
62