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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K [X]
    
    Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 FOR THE FISCAL YEAR ENDED AUGUST 31, 2004 or [  ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 Commission File Number 1-12227 THE SHAW GROUP INC.  LOUISIANA
(State or other jurisdiction of incorporation or organization)
    
    72-1106167
(I.R.S. Employer
Identification Number)4171 Essen Lane
    
    70809Baton Rouge, Louisiana
    
    (zip code)(Address of principal executive offices)
 (225) 932-2500
(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, no par value, registered on the New York Stock Exchange. Preferred Stock Purchase Rights with respect to Common Stock, no par value,
registered on the New York Stock Exchange. Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark 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 [X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ] The aggregate market value of the common stock held by non-affiliates
(affiliates being directors, officers and holders of more than 5% of the
Companys common stock) of the Registrant at February 29, 2004 was
approximately $483 million. The number of shares of the Registrants common stock
outstanding at October
29, 2004 was 64,056,088. 1




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DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive proxy statement to be prepared for use
in connection with the Registrants 2004 Annual Meeting of Shareholders to be
held in January 2005 will be incorporated by reference into Part III of this
Form 10-K. 2




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TABLE OF CONTENTS PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    24Item 3.
    
    Legal Proceedings
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters
    
    
    31Item 6.
    
    Selected Consolidated Financial Data
    
    
    31Item 7.
    
    Managements Discussion and Analysis of Financial Condition and
Results
of Operations
    
    
    32Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    73Item 8.
    
    Financial Statements and Supplementary Data
    
    
    75Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    140Item 9A.
    
    Controls and Procedures
    
    
    140PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    140Item 11.
    
    Executive Compensation
    
    
    140Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder
Matters
    
    
    140Item 13.
    
    Certain Relationships and Related Transactions
    
    
    140Item 14.
    
    Principal Accountant Fees and Services
    
    
    140PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    141-145Signatures
    
    
    
    
    146Code of Corporate Conduct and Insider Trading and Disclosure PolicySubsidiariesConsent of Ernst & Young LLPPowers of AttorneyCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 1350Certification Pursuant to Section 1350
 
 PART I 
 Item 1. Business General We are a leading global provider of comprehensive services to the environmental
and infrastructure, power and process industries. We provide services to the
environmental, infrastructure and homeland security markets, including
consulting, engineering, construction, remediation and facilities management
services to governmental and commercial customers. We are also a
vertically-integrated provider of comprehensive engineering, procurement, pipe
fabrication, construction and maintenance services to the power and process
industries. Founded in 1987, we have expanded rapidly through internal growth and the
completion and integration of a series of strategic acquisitions since fiscal
2000. Our fiscal 2004 revenues were approximately $3.1 billion and our backlog
at August 31, 2004 was approximately $5.8 billion. We are headquartered in
Baton Rouge, Louisiana with offices and operations worldwide, and we employ
approximately 17,200 people. In July 2000, we acquired substantially all of the operating assets and assumed
certain liabilities of Stone & Webster, Incorporated (Stone & Webster). Stone
& Webster, a leading global provider of engineering, procurement, construction
and consulting services to the power, process and environmental and
infrastructure markets, was founded in 1889. In May 2002, we acquired substantially all of the operating assets and assumed
certain liabilities of The IT Group, Inc. (IT Group) and its subsidiaries. IT
Group was a leading provider of diversified environmental consulting,
engineering, construction, remediation and facilities management services. We
have combined the operations of the acquired IT Group and our existing
environmental and infrastructure operations into a newly formed wholly-owned
subsidiary, Shaw Environmental & Infrastructure, Inc. (Shaw E&I). 3




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We segregate our business activities into three operating segments:
Environmental and Infrastructure (E&I) segment, Engineering, Construction &
Maintenance (ECM) segment, and Fabrication, Manufacturing and Distribution
segment. Environmental & Infrastructure The E&I segment provides services which include the identification of
contaminants in soil, air and water and the subsequent design and execution of
remedial solutions. This segment also provides project and facilities
management and other related services to non-environmental construction,
watershed restoration and outsourcing of privatization markets. Engineering, Construction & Maintenance The ECM segment provides a range of project-related services, including design,
engineering, construction, procurement, maintenance, technology and consulting
services, primarily to the power generation and process industries. Fabrication, Manufacturing and Distribution The Fabrication, Manufacturing and Distribution segment provides integrated
piping systems and services for new construction, site expansion and retrofit
projects for industrial plants. On August 31, 2004, we sold our hanger
engineering and pipe support businesses which manufactured and distributed
specialty stainless, alloy and carbon steel pipe fittings for approximately
$1.3 million. The results of operations for the hanger engineering and pipe
support businesses are classified as discontinued operations for the three year
period ended August 31, 2004. Forward-Looking Statements And Associated Risks The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for certain forward-looking statements. The statements contained in this Annual
Report on Form 10-K that are not historical facts (including without limitation
statements to the effect that we believe, expect, anticipate, plan,
intend, foresee, or other similar expressions) are forward-looking
statements. These forward-looking statements are based on our current
expectations and beliefs concerning future developments and their potential
effects on us. There can be no assurance that future developments affecting us
will be those anticipated by us. All comments concerning our expectations for
future revenue and operating results are based on our forecasts for our
existing operations and do not include the potential impact of any future
acquisitions. These forward-looking statements involve significant risks and
uncertainties (some of which are beyond our control) and assumptions. They are
subject to change based upon various factors, including but not limited to the
risks and uncertainties mentioned in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations  Risk Factors and
those factors summarized below:  
    
    cyclical changes in demand for our products and services;  
    
    cyclical nature of the individual markets in which our customers operate;  
    
    the dollar amount of our backlog, as stated at any given time, is not indicative of our future earnings;  
    
    delays or difficulties related to our significant Engineering,
Procurement and Construction projects including additional costs,
reductions in revenues or the payment of liquidated damages;  
    
    the effect of our percentage-of-completion accounting policies;  
    
    changes in the estimates and assumptions we use to prepare our financial statements;  
    
    any non-compliance with the covenants in our Credit Facility,
indenture relating to our Senior Notes and indemnity agreements with our
sureties and our ability to obtain waivers and/or amendments; 4




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
    
    our ability to obtain surety bonds or other means of credit support for projects;  
    
    our ability to collateralize letters of credit upon non-compliance with covenants in our Credit Facility;  
    
    covenants in our Credit Facility and indenture relating to our Senior
Notes and bond indemnity agreements that restrict our ability to pursue
our business strategies;  
    
    our indebtedness could adversely affect our financial condition and
impair our ability to fulfill our obligations under our Senior Notes and
Credit Facility;  
    
    the outcome of a pending informal inquiry by the SEC;  
    
    various legal, regulatory and litigation risks including but not limited to, class action lawsuits;  
    
    the possibility of a downgrade of our debt securities by rating agencies;  
    
    the nature of our contracts, particularly fixed-price contracts;  
    
    risks associated with being a government contractor;  
    
    the failure to meet schedule or performance requirements of our contracts;  
    
    our dependence on subcontractors and equipment manufacturers;  
    
    possible cost escalations associated with our fixed-price contracts;  
    
    our ability to obtain new contracts for large-scale domestic and
international projects and the timing of the performance of these
contracts;  
    
    potential contractual and operational costs related to our environmental and infrastructure operations;  
    
    risks associated with our integrated environmental solutions businesses;  
    
    limitation or expiration of the Price-Anderson Acts nuclear contractor indemnification authority;  
    
    changes in environmental laws and regulations;  
    
    risks associated with our military housing privatizations;  
    
    reputation and financial exposure due to the failure of our partners
to perform their contractual obligations;  
    
    our dependence on one or a few significant customers;  
    
    delays and/or defaults in customer payments;  
    
    potential professional liability, product liability, warranty and other potential claims;  
    
    the presence of competitors with greater financial resources and the
impact of competitive products, services and pricing;  
    
    changes in the political and economic conditions of the countries in which we operate;  
    
    work stoppages and other labor problems; 5




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
    
    our liquidity position;  
    
    currency fluctuations;  
    
    liabilities associated with various acquisitions, including the Stone
& Webster and IT Group acquisitions;  
    
    a determination to write-off a significant amount of intangible
assets acquired through acquisitions or long-lived assets;  
    
    our ability to successfully identify, integrate and complete acquisitions;  
    
    our failure to attract and retain qualified personnel;  
    
    our ability to retain key members of our management;  
    
    our competitors ability to develop or otherwise acquire equivalent or superior technology;  
    
    general economic conditions;  
    
    future changes in accounting standards or interpretations;  
    
    provisions in articles of incorporation and by-laws and rights
agreement could make it more difficult to acquire us and may reduce the
market price of our common stock.  
    
    changes in the U.S. economy and global markets as a result of
terrorists actions; Should one or more of these risks or uncertainties materialize, or should any
of our assumptions prove incorrect, actual results may vary in material
respects from those projected in the forward-looking statements. We undertake
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. For a more
detail discussion of some of the foregoing risk and uncertainties, see Item 7
 Managements Discussion and Analysis of Financial Condition and Results of
Operations  Risk Factors and our reports and registration statements at
www.shawgrp.comfiled by us with the Securities and Exchange Commission (the
SEC) and under Forward Looking Statements on our website. These documents
are available from the SEC or from our Investor Relations department. All of
our annual, quarterly, and current reports, and amendments thereto, filed with
the SEC are available on our website under Investor Relations. For more
information about us and the announcements we make from time to time, visit our
website at www.shawgrp.com. Corporate Information We are a Louisiana corporation. Our executive offices are located at 4171 Essen
Lane, Baton Rouge, Louisiana 70809. Our telephone number is 1-225-932-2500. All
of our periodic report filings with the SEC pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, are made available, free of
charge, through our website located at http://www.shawgrp.com, including our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports
on Form 8-K, and any amendments to these reports. These reports are available
through our website as soon as reasonably practicable after we electronically
file with or furnish such material to the SEC. In addition, the public may read
and copy any materials we file with the SEC at the SECs Public Reference Room
at 450 Fifth Street, NW, Washington, D.C. 20549 or on their Internet website
located at http://www.sec.gov. The public may obtain information on the
operation of the Public Reference Room and the SECs Internet website by
calling the SEC at 1-800-SEC-0330. Business Strategy Our core business strategy is to utilize our unique skills and capabilities as
a vertically integrated firm to capitalize on significant business
opportunities in diverse market segments and geographic regions, including all
facets of the 6




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power, process, environmental and infrastructure industries. We intend to
execute this strategy by aggressively pursuing the following opportunities: Pursue Growth Opportunities for Our Environmental Business  
    
    Environmental Liability Solutions- Traditionally, owners of
contaminated property have been liable for the clean up of the
properties and other damages under environmental and tort law.
Recently, innovative contracting practices and environmental
insurance products have allowed property owners to outsource
environmental management and transfer certain liabilities to
contractors and insurers. These clients can reduce administrative
expense and time through such outsourcing, and can obtain cost
certainty through guaranteed fixed-price (GFP) contracts. Growing
trends exist for these kinds of contracts in both our commercial and
federal markets. During fiscal 2004, we were awarded several
indefinite delivery/indefinite quantity (IDIQ) contracts by the U.S.
Department of Defense (DOD) that were primarily Fixed-price
Remediation with Insurance (FPRI) type contracts. We have been
awarded three projects totaling approximately $16.6 million, and we
continue to see new projects from these FPRI contracts. In addition,
we have approximately $114 million in backlog related to two
IDIQ projects as of August 31, 2004. We also had four other
contracts where FPRI scopes were included in the contract award. We
are seeing more of the DOD agencies moving in this direction for
project delivery, and this may represent a significant opportunity
for us and we believe we can minimize our exposure for loss through
appropriate contract negotiation and insurance coverage. We have created the Shaw Insured Environmental
Liability
Distribution or SHIELD(SM) program, a proprietary structured
transaction tool that insures and distributes environmental
liabilities for parties desiring to substantially reduce contingent
environmental liabilities. We believe our experience in managing
environmental liabilities and environmental-related insurance
products will enhance margins and improve our win-rates in our core
environmental contracting business for both the federal and
commercial sectors.  
    
    Department of Energy (DOE) The opportunity in the DOE market
remains large with a budget increasing from approximately $23 billion
in fiscal 2004 to approximately $24 billion in fiscal 2005. However,
we have experienced changes in the DOE acquisition strategies to
address environmental cleanup of the nuclear weapons complex and
changes in their approach for addressing future energy needs. At the
same time the existing prime DOE contractors have changed their
subcontracting strategies and their view of us as a serious
competitor. We are seeing fewer opportunities and those we do see
often have higher business risk and more restrictive terms and
conditions. In general, project revenues from our historical sources,
the DOE prime contractors, have declined over the last two years. We
anticipate this trend to continue into the future. Revenue in this
market increased from $86.4 million in fiscal 2003 to $94.6 million
in fiscal 2004. We made significant changes in fiscal 2004 to our
strategic approach for capturing an increased DOE prime contract
market share over the next three to five years. Our general approach
to bidding future work to the DOE prime contractors is to selectively
target those sites that offer us a more favorable bidding
environment. For the DOE Environmental work, we have experienced a
push to significantly increase small business subcontracting direct
to DOE; a focus on incentive-based site closure and accelerated
clean-up; and the carving out of the cleanup scope at sites across
the complex. Our approach to this DOE environmental market is to
participate in the Small Business initiatives with our SBA approved
8(a) Joint Venture company created with Portage Environmental, and to
bid on other full and open site closure projects as a prime
contractor or significant member of a business team. The business
risk on these DOE cost plus incentive fee contracts remains low with
the biggest risk to us resulting from investment of relatively large
bid and proposal efforts, typically costing more than $1 million for
a major procurement. In fiscal 2004, we focused on five major DOE
procurements, three of which were large contract value small business
set asides, one major closure contract, and one DOE national
laboratory management contract. The potential value of these five
contracts to us is $2.5 billion over the next five years, but
competition is significant. We will continue to pursue projects
within the DOE Environmental Management segment, as well as build off
of our nuclear engineering, construction and maintenance capabilities
to support the evolving nuclear energy and non-proliferation missions
of the DOE.  
    
    Unexploded Ordnance and Explosives, or UXO- The DODs fiscal
requirements for Conventional Ordnance and Explosives clean-up on
closed ranges will exceed current government funding, which we
estimate to be $250 million annually. Several congressional advocates
continue to push for increased 7




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funding for UXO removal projects along with developing an enhanced
Military Munitions Response Program. We have encountered opportunities
through our existing contracts for projects involving UXO as well as
indications that there will be new contracts for UXO in the near
future. We intend to pursue opportunities related to the UXO removal
projects. In addition, we had revenue of $25.4 million and $18.0
million from these removal projects, respectively. During fiscal 2004,
we were awarded $140 million in UXO type IDIQ contracts. We expect
this growth trend to continue as the DOD addresses operational and
non-operational ranges under the Military Munitions Response Program.  
    
    Coastal and Natural Resource Restoration- We have performed
wetland-related work in the Everglades, Chesapeake Bay area, and
other areas throughout the United States, and we maintain the
expertise and resources to continue to benefit from this expanding
segment. New opportunities are present in both the federal and
commercial markets for these types of projects. For example, the
Coastal Wetlands Planning Protection and Restoration Act provides
federal funds to conserve, restore and create coastal wetlands and
barrier islands. We believe our E&I segment is well positioned to
capitalize on upcoming wetlands and coastal restoration work in
Louisiana and other locations throughout the United States. Pursue Growth Opportunities for Our Infrastructure Business  
    
    Privatization For the past couple of years, the Department of
Defense (DOD) has moved to privatization of military housing and
utility systems consisting of more than 270,000 family housing units
owned by the DOD, of which approximately 60% need to be renovated or
replaced. Since fiscal 2003, we have been awarded two contracts by
the DOD to privatize military family housing for approximately 2,500
military family housing units with our joint venture partner, C.E.I.
Investment Corp. (CEI). The total estimated development cost for
these two contracts is approximately $284 million. We have also been
notified that we have been awarded five additional contracts to
privatize military family housing; however, these contracts had not
yet closed as of August 31, 2004. These contracts have estimated development costs of
approximately $1 billion for the privatization of approximately 7,800
military family housing units. We believe that several factors,
including (i) our federal government business platform, (ii) prior
DOD facilities management and Job Order Contracting and other
governmental contracting experience, and (iii) expertise in
construction at military installations, contributed to these
contracts being awarded to us.  
    
    Homeland Security- Federal, state and local homeland security
needs continue to provide initial and value-added opportunities for
our E&I segment to capitalize on growing experience in
disaster-related preparedness, incident response,mitigation design
and installation and chemical and biological weapons
demilitarization. We provide our customers valuable security related
products and services in assessments of threat, vulnerability and
risk; electronic security design and installation; force protection
design and construction; security program development and
integration; and technology assessment. Our expanding capability to
assess security and reliability of critical energy infrastructure and
develop mitigation designs makes us a leader in the industry. The full-spectrum of
homeland security services includes continuity of operations, risk
assessment, and consequence management planning and training to the
federal, state and local governments and private industry customers
nationwide. Our Homeland Security Team provides total security

solutions and integrated services for consulting, engineering/design,
procurement and construction services.  
    
    Transportation and Water Infrastructure State and local
critical infrastructure upgrade requirements, provides growth
opportunities for our E&I Segment. We have targeted specific regions
to expand our participation in this segment in order to most
effectively deploy our technical and project management resources. Pursue Growth in the Federal Market Place Through Diversification of Service
Offering  
    
    The Federal Government ranks as one of the largest buyers of
technical service in the the world. Shaws breadth of technical
expertise and experience, along with Shaw E&Is years of government
contracting experience, offers the platform to expand our
participation within this vast market. 8




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Pursue Growth Opportunities for the Power Market Shaw provides a broad portfolio of services to all segments of the power market
and we are currently taking advantage of domestic and international
opportunities. Our experience and diversity of capabilities allows us to
participate in all power segments and reduces the impact on our operations from
the cyclical nature of certain sectors of the power industry. Opportunities
for our services in the power market include Engineering, Procurement and
Construction (EPC), Maintenance, and Fabrication & Manufacturing opportunities. Engineering, Procurement & Construction  
    
    Nuclear The United States has approximately 100 operating nuclear plants that
continue to require engineering and maintenance services to support
operations and improve performance. In addition to supporting
operations and improving performance, plant restarts and new plant
construction provide opportunities for further expansion. Plant
restarts are currently taking place in the U.S. and Canada while new
plant construction is ongoing in certain foreign countries and should
occur in the U.S. in the future. This market is estimated at $250
million per year. During fiscal 2004, we were awarded contracts
totaling more than $50 million. Our subsidiary, Stone & Webster is
well known for its strengths in the design of new nuclear facilities
and the related technical services.  
    
    Flue Gas Desulphurization (FGD) Environmental regulations and the
rising price of natural gas have fueled the need to retrofit existing
coal-fired power plants. During fiscal 2004, we were awarded
engineering contracts on projects totaling more than $200 million. We
believe we are well positioned and qualified to perform the EPC on
these and other FGD projects. The FGD retrofit market is roughly a $10
to $12 billion market that will continue to grow through 2011, assuming
the EPA will pass clean air regulation. We will continue to seek new
opportunities in this area and believe our unique and recent experience
in engineering and managing these projects will make us an early
industry leader in this market.  
    
    Coal The sharp rise in oil prices has prompted regulated power
companies in the United States to focus on coal-fired plants. While the
number of new plants in the future is an uncertainty, the general
consensus is that some awards of coal plants will be made in fiscal
2005. Our Stone & Webster subsidiaries have the experience and
expertise related to these coal plants which should position us for a
share of this market.  
    
    Gas-Fired Generating Capacity Expansion of new gas generation
capacity will be limited in the United States market, but the
international market, including Canada, is expected to become
increasingly active. Some growth in the United States is expected to
be driven by distribution rather than capacity as evidenced by two
generating plants awarded to us during fiscal 2004 totaling more than
$700 million in contract value which are currently under construction.
Select opportunities to potentially complete construction on existing
and partially-completed combined-cycle plants throughout the United
States exist in the market. Additionally, general proposals are in
preparation for international projects in fiscal 2005. Our integrated
capabilities and recent experience bodes well for success in what will
be a competitive market. Maintenance  
    
    Shaw Maintenance Shaw Maintenance is well positioned to assist
the power industry by providing capabilities that compliment our EPC
services. We are a diverse, worldwide business group able to provide
our clients with Reliability services, Turnarounds & Outages, Small
Project Capital Construction Services, Tank Design Construction &
Maintenance, Insulation, Painting, Scaffolding, and Water and
Wastewater Operation and Maintenance (O&M). Our Plant and Reliability Engineering, as well as our
Maintenance expertise, combine to assist our clients in the improvement
of power production and compliance with federal environmental
requirements. Nuclear, FGD, Coal and Gas-fired generation
opportunities in the market will provide the best power growth
opportunities for our maintenance services in fiscal year 2005.  
    
    Nuclear Plant Maintenance and Modifications- We are currently
providing nuclear maintenance services in 33 of the 103 operating
nuclear plants in the United States and decommissioning services at two
plants. Potential opportunities include expansion to other U.S. plants
and the expansion of our services within the existing plants. This
market is estimated at $500 million per year. During fiscal 2004, we
were awarded 9




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contracts totaling more than $250 million. Our subsidiary, Stone &
Webster has performed nuclear plant maintenance modification services for
over 25 years and has the largest market share in the United States. Fabrication & Manufacturing  
    
    Piping Nuclear maintenance, FGD projects, new coal plants and
retrofits, new gas plants, and general plant maintenance all require
pipe fabrication which our group can provide. A typical new power
plant will result in multiple subcontracts which all include pipe
fabrication. The Fabrication and Manufacturing Group generally
participates in some way on each new plant being built in the U. S.
market and many being built internationally. The participation is
not limited to Shaw business units. We expect the most growth
opportunities in the power market for piping to occur domestically in
the coal market, both new coal plants and retrofits. Pursue Growth Opportunities for the Process Market Shaw provides a variety of services to process industries and we are focusing
on efforts in both domestic and international opportunities. Opportunities for
our services in the processes industries market include Engineering,
Procurement and Construction (EPC), Maintenance, and Fabrication &
Manufacturing opportunities. Engineering, Procurement & Construction  
    
    Proprietary Technologies within the Process Industries.We offer
world-class proprietary technologies to the refining and petrochemical
industries. Our fiscal 2003 acquisition of Badger Technologies
demonstrates our commitment to expand our technology portfolio and
maintain a leadership position in process technologies. The
acquisition of Badger complements our core competency in conversion
technologies (steam cracking and fluid catalytic cracking) by enabling
us to offer several key olefin derivative technologies. In particular,
we are now able to license world leading technologies to produce ethyl
benzene and cumene through Badger Licensing LLC, a joint venture of
Stone & Webster and ExxonMobil Chemical. We are also able to offer
Badger styrene monomer technology in cooperation with Atofina. By
providing world-class proprietary technologies, we are able to
capitalize on the combined strengths of Shaw and our partners to offer
our clients an optimum business solution. We expect to continue to
expand our technology portfolio through key alliance partners and
research and development efforts.  
    
    Clean Fuels We were awarded approximately $200 million of clean
fuel emissions work in fiscal 2004 and approximately $50 million in
early fiscal 2005. We currently have five active clean fuels projects.
We believe this market will continue to expand for us into fiscal 2006
as we have demonstrated the ability to win and execute work in this
area.  
    
    Ethylene The demand for ethylene is growing at a rate of 4 to 5%
per year (1.4 times GDP growth). Approximately 70% of ethylene is
produced from petroleum derived naphtha but this is changing due to the
availability of low cost ethane feedstock in the Middle East region.
This feedstock cost advantage has seriously impacted the economic
viability of gas feed steam crackers in North America where feedstock
price is controlled by natural gas pricing. New facilities will mainly
be gas feed crackers based on ethane extracted from nature gas. The
expansion in ethylene demand is being driven by the increased demand
for polyethylene, polyesters, polystyrene and PVC, mainly from China.
We anticipate this increase to continue into fiscal 2006. We are
currently bidding on ten major ethylene projects in the Middle East and
China with additional projects in the planning stage. With our
estimated 35% of the all ready existing market share and only four
ethylene technology licensor competitors, our Stone & Webster
subsidiaries are well positioned to seize these opportunities.  
    
    Petrochemical Refinery The refining industry is searching for new
value-added projects that can be produced from petroleum, and are
investigating integration into petrochemical facilities. We have an
exclusive agreement with RIPP/Sinopec to license a key technology that
encourages the refiners entry into the petrochemical arena. This
technology is a high olefin yield, fluid catalytic cracker derived
process called Deep Catalytic Cracking (DCC). This technology is of
increasing interest because of its ability to produce propylene, a base
chemical that is in short supply and whose demand is growing faster
than that of ethylene. The petrochemical industry is concerned about
the future supply of propylene. This is due to the predominant
increase in ethane crackers which produce ethylene and minimal amounts
of propylene which 10




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leads to the increased interest in DCC. We have just licensed a large
DCC unit to a confidential client and are in discussions with several
other potential clients. We believe growth opportunities in the process
market for petrochemical refineries exist in retrofit projects
domestically and new construction and expansion projects internationally. Maintenance  
    
    Process Maintenance Shaw Maintenance began as primarily a process
focused business and has diversified into all phases of the industrial
market. We strive to be safety-driven with proactive programs and
world-class results. Shaw Maintenance holds diverse capabilities to
service our clients needs. We perform design, repair, renovation,
and preventative services to customer facilities worldwide. Shaw
Maintenance is positioned to assist the Process industry by providing
capabilities in conjunction with our EPC services. Petrochemical,
Ethylene and Clean Fuels markets will provide the best Process growth
opportunities for our Maintenance services in fiscal year 2005. Fabrication & Manufacturing  
    
    Piping Shaw Fabrication and Manufacturing has completed a
substantial portion of the pipe fabrication for the clean fuels
initiatives taking place in the U.S. market. Alliances with major
refinery owners as well as alliances with many of the EPC companies
involved in clean fuels projects have resulted in extensive work
experience and backlog for our group. Shaws inventory levels,
fabrication expertise and capacity, and innovative material supply
programs have led to the bulk of these bookings. The material market
is the most challenging it has been in recent history due to the
explosive expansion of the Asian market. Not only has the fabrication
portion of our business benefited, but our manufacturing arm has seen
tremendous benefits from this market. In addition to clean fuels, new
plants utilizing proprietary technologies provide tremendous
fabrication opportunities. We expect our growth opportunities for the
process market in piping to occur internationally as ethylene and
petrochemical refinery opportunities occur. Maintain A Diversified Revenue Base. We intend to continue to maintain our
diversity in markets served, services offered, contracting arrangements and
customer base. This diversity has helped us to minimize our dependence on any
particular market segment or individual customer, minimize the impact of
short-term market volatility and has enabled us to more accurately anticipate
future revenues. Our presence across numerous markets allows us to focus our
resources on those areas experiencing growth. In addition, our presence allows
us to allocate our resources efficiently within and across our segments. With
the IT Group acquisition in fiscal 2002, we further diversified our business
mix which provided a recurring revenue base. Many of our environmental and
infrastructure businesses, along with our existing ECM maintenance services,
tend to provide recurring revenues due to established customer-contracts.
However, a significant portion of our revenue is generated from services
provided to various U.S. Government agencies under separate contracts. For the
years ended August 31, 2004, 2003 and 2002, revenues from these U.S. Government
agencies were $1,170.0 million, $948.9 million and $363.0 million, respectively. Maintain Focus On
Cost-Reimbursable and Negotiated Fixed-Price Contract Structures. Our strategy is to
perform most of our engineering, procurement and construction projects pursuant
to cost-reimbursable contracts in which our contractual loss exposure is
limited to our gross profit. These contracts often contain
incentive/sharing/penalty provisions for performance, cost control, and
delivery of products and services. We intend to continue our contracting
practices to minimize our risk of contractual losses while providing incentives
for us and our customers to work cooperatively. As of August 31, 2004,
approximately 78% of our contracts included in our backlog are
cost-reimbursable contracts, 20% are fixed-price contracts and 2% are
unit-price contracts. In the current domestic power market and our expanded environmental
and infrastructure services to various U.S. Government agencies, our customers
are increasingly requesting fixed-price contracts. We prefer to selectively pursue
such fixed-price contracts whenever possible on a negotiated basis in situations where we believe
we can control our cost and minimize our risks. For example, in September
2003, we signed and announced an EPC contract to build a combined-cycle power
plant in Queens, New York, which is a $565 million fixed-price contract.
Generally, fixed-priced contracts are priced with a higher margin than
cost-reimbursable contracts in order to compensate for cost overrun risk. Continue To Form Strategic Alliances. We intend to continue to capitalize upon
and enter into strategic partnerships and alliances with our customers. Our
alliance and partnership agreements enhance our ability to obtain 11




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contracts for individual projects by eliminating or reducing formal bid
preparation. We continue to pursue these strategic partnerships and alliances
in an attempt to increase our market share within our existing markets and
assist us in entering into new markets. We will also continue to look to expand
our operations where we see the potential for attractive and profitable
business opportunities and can leverage the local knowledge of an alliance or
joint venture partner. For example, Shaw E&I has a partnership with CEI
related to seven military housing privatization projects. CEIs experience in
property management along with our engineering and construction management
experience has allowed us to obtain a portion of this market share.
Additionally, within our facilities management activities, we continue to
pursue strategic alliances like our partnership with Computer Sciences
Corporation to provide facilities management services to NASAs Stennis Space
Center. Capitalize On Opportunities For Cross-Selling. We have several complementary
areas of expertise we will leverage to deliver increased value to our
customers. Our engineering, design and construction expertise allows us to
provide retrofitting and construction services to our facilities maintenance
customers such as the Tennessee Valley Authority, or TVA. In addition, we
expect the capabilities of our E&I segment to allow us to offer specialized
environmental remediation, facilities management and maintenance services to
our clients in the power and process industries. As a result, our combined
business now enables us to offer complete service offerings, from design
through construction to ongoing maintenance and management, across a variety of
industries. Pursue Selective Acquisitions. We intend to continue to pursue selective
acquisitions of businesses or assets that will expand, complement or further
diversify our current portfolio of products and services. Upon execution of our
effective and thorough due diligence procedures led by our senior executives
who became involved early in the acquisition process, we believe we have
efficiently enhanced our existing services through our successful strategic
acquisitions. For example, effective December 31, 2003, we acquired all of the
common stock of Energy Delivery Services, Inc. (Shaw EDS) from Duke Energy
Global Markets, Inc. which provides a full line of vertical services to utility
companies seeking to upgrade, install and maintain their power grids and is
vertically integrated in our ECM segment. From time to time, we may also
consider dispositions of non-strategic assets. Utilize Technology And Intellectual Property. We intend to continue to employ
our technology and intellectual property to reduce costs and to better serve
our customers. Our technologies include:  
    
    Induction Pipe Bending Technology. We believe our induction
pipe bending technology is one of the most advanced, sophisticated,
and efficient technologies available. Induction bending utilizes
simultaneous super-heating and compression of pipe to produce
tight-radius bends to a customers specifications. When compared to
the traditional cut and weld method, our induction bending technology
provides a lower cost and more uniform product, generally considered
stronger and less prone to structural fatigue.  
    
    Proprietary Ethylene and Downstream Petrochemical Technologies.
We believe we have a leading position in technologies associated with
the process design of plants that produce ethylene. We estimate we
have supplied process technology for approximately 35% of the worlds
ethylene capacity constructed since 1990.  
    
    Technology Partnerships. We have been awarded 24 of the last 36
residual feed fluid catalytic cracking projects and have combined the
best elements of fluid catalytic cracking technology from different
developers into a single source that is among the best in the
industry. Our partners include Total, Axens, Spraying Systems, BP and
RIPP. We also offer the only commercially demonstrated high olefin
production catalytic cracking technology through our exclusive
licensing agreement with RIPP/Sinopec.  
    
    Proprietary Customer-focused Computer Software. We have
developed proprietary computer software to aid in project and process
management. This software includes:  
    
    SHAW-MAN and other software programs which enhance
a customers ability to plan, schedule and track projects and
reduce installation costs and cycle times.  
    
    SHAWTRAC which is a web-based, proprietary earned
value application that enables us to 12




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continually enhance the way we manage and integrate the many
phases of a capital project, from estimating to engineering
through construction and start-up. Users from around the world
consistently access SHAWTRAC through the public networks in
order to update and understand the real-time financial position
of respective projects.  
    
    Technology Solutions for the Electric Power Industry. Power
Technologies, Inc., or PTI, one of our subsidiaries, provides software
for the electric power industry. PTIs licensed software includes,
programs for analyzing and optimizing electric power system performance
and evaluating transfer capability, transaction impacts and contingency
analysis for transmission systems. In addition, we have programs for
transmission reliability studies and for planning, designing and
analyzing distributions systems.  
    
    Line Rating Monitor. PTIs patented real-time
monitoring system enables electric transmission and
distribution lines to transfer more power while maintaining
high reliability and safety. This new technology has recently
completed beta testing and is ready for commercial application.  
    
    Proprietary Biological Treatment Technologies  We
believe we have a leading position in the application of
biotechnology for the destruction of recalcitrant contaminants
in the environment. Our distinctions include:  
    
    Identifying and optimizing the
degradative activity of naturally-occurring
microorganisms with distinctive capabilities for
degrading targeted contaminants. Such contaminants
include MTBE, TBA, ammonium perchlorate, PCBs, TCE, PAHs,
HCFCs, nitroaromatics and chlorinated solvents. We
possess microorganisms with exceptional capabilities for
each of these, and patent positions related to the
degradation of several of these contaminants; and
    
    Developing and applying
high-performance, biologically based process systems for
the destruction of contaminants in air, water and soils.
These include both in situ technologies for in-ground
remediation of soils and groundwater, and above-ground
systems for groundwater, wastewater and drinking water
treatment. We hold a number of patents related to
enhancing the performance of bioreactor systems. These
systems, many using our proprietary microbes or microbial
activity enhancement approaches, are in use in such
diverse applications as high-concentration ammonium
perchlorate in groundwater, high-strength wastewater
treatment in the food-and-beverage industry, volatile
organic compound, and odors treatment from tobacco plant
air streams, and solvent destruction in pharmaceutical
wastewaters. Business Segments Environmental & Infrastructure Segment Our E&I segment provides services that include the identification of
contaminants in soil, air and water and the subsequent design and execution of
remedial solutions. The segment also provides project and facilities management
capabilities and other related services to non-environmental civil
construction, watershed restoration and the outsourcing privatization markets.
Federal, state and local governmental entities and commercial industrial
companies are the primary customers for our E&I segment. Federal Core Services: The core service of our federal business is the delivery of
environmental restoration and regulatory compliance services to U.S. government
agencies, such as the DOD, the Department of Energy (DOE), the Environmental
Protection Agency (EPA), and the Government Services Administration (GSA).
Environmental restoration activities are centered on engineering and
construction services to support customer compliance with the requirements of
the Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA), and the Resource Conservation and Recovery Act of 1976
(RCRA). Regulatory compliance activities are centered on providing
professional services to meet the requirements of the Clean Water 13




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Act, Clean Air Act, Toxic Substances Control Act, and RCRA. For the DOE,
we are presently working on several former nuclear-weapons production
facilities where we provide engineering, construction and construction
management for nuclear activities. For the DOD, we are involved in projects at
several Superfund sites and several Formerly Utilized Sites Remedial Action
program (FUSRAP) sites managed by the U.S. Army Corps of Engineers. For the
Department of the Army, we are working on the chemical demilitarization program
at several sites. The DOD is increasingly using performance based contract
vehicles, including guaranteed fixed-price contracts, wherein we assume
responsibility for cleanup and regulatory closure of contaminated sites for a
firm fixed-price. We purchase environmental insurance to provide protection
from unanticipated cost growth due to unknown site conditions, changes in
regulatory requirements and other project risks. Homeland Security: As a part of our homeland security programs, we have
provided emergency support services to numerous federal agencies (and
private-sector clients) in response to anthrax contamination at a number of
high profile sites. The services we provide for anthrax and other biological
agent contamination include sampling, analyzing samples, providing other
laboratory services, decontaminating and cleaning buildings and equipment, air
monitoring and modeling, and disposing of contaminated waste. Our services
also include providing risk assessment and engineering and logistical support,
as well as playing a leading role in investigating, developing and testing
innovative decontamination techniques to help minimize and eliminate such
contamination. Nuclear Services: A significant portion of future DOD and DOE
environmental expenditures will be directed to cleaning up hundreds of domestic
and international military bases and to restoring former nuclear weapons
facilities. The DOD has stated there is a need to ensure that the hazardous
wastes present at these sites, often located near population centers, do not
pose a threat to the surrounding population. Further, in connection with the
closure of many military bases, there are economic incentives and benefits
resulting from environmental restoration that enable these sites to be
developed commercially by the private sector. The DOE has long recognized the
need to stabilize and safely store nuclear weapons materials and to clean up
areas contaminated with hazardous and radioactive waste. We continue to
provide engineering and project leadership support to other DOE nuclear
programs such as Mixed Oxide Fuel and Yucca Mountain. Environmental Liability Solutions: The DOD has stated its intent to
increase the use of performance based contracts, including guaranteed
fixed-price with environmental insurance vehicles. During fiscal 2004, we were
awarded several IDIQ contracts by the DOD that were primarily FPRI type
contracts. We have been awarded three projects totaling approximately $16.6
million and we continue to see new projects from these FPRI contracts. In
addition, we have approximately $114 million in backlog related
to two IDIQ projects as of August 31, 2004. We have also created the Shaw
Insured Environmental Liability Distribution or SHIELD program, a
proprietary structured transaction tool that insures and distributes
environmental liabilities for parties desiring to substantially reduce
contingent environmental liabilities. Facilities Management  Mission Support Services: The Facilities
Management  Mission Support Services business line provides integrated
management services to federal customers. These services traditionally include
operating logistics facilities and equipment, providing public works
maintenance services, operating large utilities systems, managing engineering
organizations, supervising construction, operating and maintaining housing, and
maintaining public safety services including police, fire and emergency
services. Customers include the DOE, NASA, the Army, the Air Force, and the
Navy. Specifically,
our subsidiary, Shaw Beneco, provides construction management,
design/build and general contracting for military housing, commercial and
industrial facilities for the federal government and other clients. Shaw
Benecos operations are organized by project delivery and contract type:
Maintenance, Renovation and Repair (MRR) programs and Construction Projects.
MRR programs include Job Order Contracts and the U.S. Air Forces Simplified
Acquisition of Base Engineering Requirements contracting methods, along with
various forms of IDIQ contracts. Construction projects include stand-alone
construction projects, design/build and multiple award construction contracts. Commercial, State and Local Commercial, State and Local services provide environmental consulting,
engineering and construction services to 14




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private-sector and state and local government customers. Core services of the
Commercial Consulting and Engineering and Construction Groups include
engineering, consulting and turnkey management services. These services include
complete life cycle management, construction management, O&M services, and environmental services including emergency
response and high hazard and toxic waste cleanups and on-site remedial
activities. Commercial, state and local services provides full service
capability, including site selection, permitting, design, build, operation,
decontamination, demolition, remediation and redevelopment. Our services range
from initial studies to designing and constructing in-water remediation
projects, marine terminals and navigation improvements. Through our solid waste service line, we provide turnkey services, including
engineering, permitting, design/build construction, equipment fabrication,
landfill products, sampling, monitoring, and facility and system operation and
maintenance, principally to the owners and operators of municipal solid waste
landfills. Shaw E&I offers complete life cycle management of solid waste,
employing capabilities that range from site investigation through landfill
design and construction to post-closure operations and maintenance or
redevelopment. Additionally, our Science and Technology Group utilizes technology to solve
environmental problems and these efforts are supported by three Company-owned
laboratories. We also utilize bioreactor systems technology and have expertise
in the treatment of contaminated groundwater and wastewater. Specific
applications include contaminants such as perchlorate, MTBE, and high strength
waste streams from food, beverage, and pharmaceutical industries. Housing Privatization The Housing Privatization business line provides integrated services for the
DODs Military Housing Privatization Initiative, including property ownership;
project financing; development; design/construction; and daily property
management and maintenance services. This is a relatively new market that has
developed in recent years as a result of the DODs need to retain personnel by
providing quality housing to service members and their families. Traditionally, the DOD has maintained most of its own facilities and support
systems, but in recent years it has transferred many of these responsibilities
to private contractors and private owners. A privatization market has been
created by the governments sales of assets or revenue streams, such as
military housing, electric, water and wastewater utilities on a military base,
to private companies, which are then responsible for maintenance and operation
of site activities currently conducted by government personnel. Additionally,
the Office of Management and Budget has an initiative to force agencies to
follow the DODs lead and begin to streamline their operations. As a result, during fiscal 2004, we have been awarded two contracts to
privatize military family housing for approximately 2,500 military family
housing units with our joint venture partner, CEI. The total estimated
development costs for these two contracts is approximately $284 million.
Additionally, we have been notified that we have been awarded five additional
contracts to privatize military family housing; however, these
contracts had
not yet closed as of August 31, 2004. These contracts have estimated development costs of
approximately $1 billion for the privatization of approximately 7,800 military
family housing units. We believe several factors, including (i) our federal
government business platform, (ii) prior DOD facilities management and Job
Order Contracting and other governmental contracting experience, and (iii)
expertise in construction at military installations contributed to these
contracts being awarded to us. Engineering, Construction & Maintenance Segment The ECM segment provides a range of project-related services, including design,
engineering, construction, procurement, maintenance, technology and consulting
services, primarily to the power generation and process industries. Industry Overview Power Generation Industry We provide a full range of engineering, procurement and construction services
to power projects on a global basis. During fiscal 2001, our backlog increased
significantly as a result of demand for new power plants, primarily 15




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combined-cycle and combustion turbine technology fueled by natural gas or both
oil and gas. This new capacity demand was primarily created by orders from
independent power producers and merchant power plants to develop additional
generation capacity. Typically, new plants from independent and merchant power
producers compete directly with existing utilities in deregulated sectors.
Deregulation also created opportunities for us from existing utilities that
needed to upgrade or develop new power plants to remain competitive. Although
demand for new power plants decreased significantly in fiscal 2002 and fiscal
2003, we expect that in the coming years many existing plants will need to be
re-powered or substantially upgraded by replacing all or most of the existing
equipment with more efficient systems. During fiscal 2004, we were awarded two
contracts for new construction gas-fired power generation projects for a
combined contract price of approximately $735 million. We also provide system-wide maintenance and modification services to existing
power plants. These projects can include upgrading emission control systems and
redesigning facilities to allow for the use of alternative fuels. We
concentrate on more complicated, non-commodity type projects where our
technology, historical know-how and project management skills can add value to
the project. We believe we have a leading position in the decommissioning and
decontamination business for nuclear power plants. This business consists of
shutting down and safely removing a facility from service while reducing the
residual radioactivity to a level that permits release of the property for
unrestricted use and termination of the nuclear power plant license. Process Industry Our process work includes work for customers primarily in the chemical,
petrochemical and refining industries. Demand in processing industries has
declined in recent years as a result of decreased spending by chemical,
petrochemical and refining companies and, more recently, due to an overall
downturn in the worldwide economy. However, we are encouraged by an increase in
inquiry activity in the petrochemical and refining industries, especially in
the overseas markets. Key drivers include an increased demand for ethylene and
downstream petrochemical products as well as waste-to-energy opportunities. We
believe there will be increased capital expenditures by the major oil and
petrochemical companies in calendar 2005. Internationally, China continues to
significantly expand its petrochemical capabilities. Critical to this expansion
is additional ethylene capacity which is one of our core competencies. We also
expect new petrochemical opportunities in the oil producing regions due to the
higher than expected crude oil prices and the availability of lower priced
natural gas in the Middle East. This is particularly true in the Kingdom of
Saudi Arabia where the oil refining industry is beginning to expand into
petrochemicals. We expect that actions by the major oil and petrochemical companies to
integrate refining and petrochemical facilities in order to improve margins
will provide opportunities for us. In the petrochemical field, we have
particular expertise in the construction of ethylene plants which convert gas
and/or liquid hydrocarbon feed stocks into ethylene, the source of many
higher-value chemical products, including packaging, pipes, polyester,
antifreeze, electronics, tires and tubes. The demand for our services in the
refining industry has been driven by refiners needs to process a broader
spectrum of crude and to produce a greater number of products. In addition,
current refining activity is being driven by demand for clean fuels and clean
air legislation. While the refining process is largely a commodity activity,
the configuration of each refinery depends primarily on the grade of crude
feedstock available, desired mix of end-products and considerations of capital
and operating costs. We also undertake related work in the gas-processing
field, including propane dehydrogenation facilities, gas treatment facilities,
liquefied natural gas plants and cryogenic processes. Services Offered Engineering and Design We provide a broad range of engineering, design and design-related services to
our customers. Our engineering capabilities include civil, structural,
mechanical, and electrical. For each project, we identify the project
requirements and then integrate and coordinate the various design elements.
Other critical tasks in the design process may include value analysis and the
assessment of construction and maintenance requirements. Construction, Procurement and Maintenance 16




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We provide construction and construction management services. We often manage
the procurement of materials, subcontractors and craft labor. We believe we
have significant expertise in effectively and efficiently managing these
activities, vendors and labor. Depending on the project, we may function as the
primary contractor or as a subcontractor to another firm or as a construction
manager, engaged by the customer to oversee another contractors compliance
with design specifications and contracting terms. Under operation and
maintenance contracts, we perform repair, renovation, predictive and
preventative services to customers in their facilities worldwide. Consulting We provide technical and economic analysis and recommendations to owners,
investors, developers, operators and governments, primarily in the global power
generation industry. Our services include competitive market valuations, asset
valuations, assessment of stranded costs, plant technical descriptions and
energy demand modeling. We have particular expertise in the electronic
simulation and analysis of power transmission and distribution systems. Technology Our world-class proprietary olefin and refinery technologies, coupled with the
Badger alliances, allow us to offer clients an integrated refinery and
petrochemicals solution. The combined Stone & Webster/Badger team, in
conjunction with key alliance partners, offers leading technology in many
sectors of the refining and petrochemical industry. Fabrication, Manufacturing And Distribution Segment The Fabrication, Manufacturing and Distribution segment provides integrated
piping systems and services for new construction, site expansion and retrofit
projects for industrial plants and manufactures. We believe we are the largest
supplier of fabricated piping systems for power generation facilities in the
United States and a leading supplier worldwide. In process facilities, piping
systems are the critical path to convert raw or feedstock materials to
products. We fabricate fully integrated piping systems and provide a full range
of engineering, procurement and construction services for process customers
around the world. Piping system integration accounts for a significant portion of the total
man-hours associated with constructing a power generation or a materials
processing facility. We provide fabrication of complex piping systems from raw
materials including carbon steel, stainless steel and other alloys, such as
nickel, titanium and aluminum. We fabricate pipe by cutting it to length,
welding fittings on the pipe and bending the pipe, each to precise customer
specifications. We currently operate pipe fabrication facilities in Louisiana,
South Carolina, Utah, Oklahoma (where operations have been substantially
reduced as a result of decreased demand), the United Kingdom, Venezuela (our
pipe fabrication facility was closed due to political unrest during 2003), and
two joint ventures: Bahrain and China. Our fabrication facilities are capable
of fabricating pipe ranging in diameter from 1/2 inch to 72 inches, with
overall wall thicknesses from 1/8 inch to 7 inches. We can fabricate pipe
assemblies up to 100 feet in length and weighing up to 45 tons. We believe our induction pipe bending technology is one of the most advanced,
sophisticated, and efficient technologies available, and we utilize this
technology and related equipment to bend pipe and other carbon steel and alloy
items for industrial, commercial and architectural applications. Pipe bending
can provide significant savings in labor, time and material costs, as well as
product strengthening. In addition, we have commenced a robotics program which
we believe will result in productivity and quality levels not previously
attained in this industry. As of August 31, 2004, the robotics program is
currently being tested in production. We operate a manufacturing facility in Shreveport, Louisiana, which sells its
products to our ECM segments operations and to third parties. Manufacturing
our own pipe fittings enables Shaw to realize greater efficiencies in the
purchase of raw materials, reduces overall lead times and lowers total
installed costs. We also operate several distribution centers in the U.S., which distribute our
products and products manufactured by third parties. Demand for the segments
products is typically dependent upon capital projects in the Power Generation
and process industries. 17




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Segment Financial Data And Export Sale Information See Note 15 of the notes to our consolidated financial statements for detailed
financial information regarding each business segment and export sales
information. Revenues By Industry And Geographic Region Our revenues by industry in our three most recent fiscal years approximated the
following amounts: Year Ended August 31,2004
    
    2003
    
    2002Industry Sector
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %Environmental and
Infrastructure
    
    $
    1,329.4
    
    
    
    43
    %
    
    $
    1,203.8
    
    
    
    37
    %
    
    $
    489.8
    
    
    
    16
    %Power Generation
    
    
    1,115.5
    
    
    
    36
    
    
    
    1,536.2
    
    
    
    47
    
    
    
    2,217.8

    
    
    
    70Process Industries
    
    
    544.2
    
    
    
    18
    
    
    
    440.5
    
    
    
    13
    
    
    
    258.5
    
    
    
    8Other Industries
    
    
    87.8
    
    
    
    3
    
    
    
    112.3
    
    
    
    3
    
    
    
    183.0
    
    
    
    6$
    3,076.9
    
    
    
    100
    %
    
    $
    3,292.8
    
    
    
    100
    %
    
    $
    3,149.1
    
    
    
    100
    %
 Process industries include chemical and petrochemical processing and crude oil
refining sales. Other industries includes the oil and gas exploration and
production industry as well as various fabrication distribution customers. The major industries in which we operate are cyclical. Because our customers
typically participate in a broad portfolio of industries, our experience has
been that downturns in one industry sector may be mitigated, in part, by
opportunities in another sector. Our revenues by geographic region in our three most recent fiscal years
approximated the following amounts: Year Ended August 31,2004
    
    2003
    
    2002Geographic Region
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %United States
    
    $
    2,511.6
    
    
    
    82
    %
    
    $
    2,800.9
    
    
    
    85
    %
    
    $
    2,737.3
    
    
    
    87
    %Asia/Pacific Rim
    
    
    223.4
    
    
    
    7
    
    
    
    219.8
    
    
    
    7
    
    
    
    146.1
    
    
    
    5Middle East
    
    
    151.3
    
    
    
    5
    
    
    
    12.0
    
    
    
    
    
    
    
    10.8
    
    
    
    Europe
    
    
    96.3
    
    
    
    4
    
    
    
    101.9
    
    
    
    3
    
    
    
    103.7
    
    
    
    3Canada
    
    
    74.5
    
    
    
    2
    
    
    
    127.7
    
    
    
    4
    
    
    
    108.2
    
    
    
    4South America and
Mexico
    
    
    7.2
    
    
    
    
    
    
    
    14.7
    
    
    
    
    
    
    
    27.6
    
    
    
    1Other
    
    
    12.6
    
    
    
    
    
    
    
    15.8
    
    
    
    1
    
    
    
    15.4
    
    
    
    $
    3,076.9
    
    
    
    100
    %
    
    $
    3,292.8
    
    
    
    100
    %
    
    $
    3,149.1
    
    
    
    100
    %
 18




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Backlog The following table breaks out backlog in the following industry sectors,
geographic regions and business segments for the periods indicated. At August 31,2004
    
    2003
    
    2002In Millions
    
    %
    
    In Millions
    
    %
    
    In Millions
    
    %Industry SectorEnvironmental & Infrastructure
    
    $
    2,856.4
    
    
    
    50
    %
    
    $
    2,783.9
    
    
    
    59
    %
    
    $
    2,313.7
    
    
    
    41
    %Power Generation
    
    
    2,176.7
    
    
    
    38
    
    
    
    1,399.7
    
    
    
    29
    
    
    
    2,690.2
    
    
    
    48Process Industries
    
    
    723.2
    
    
    
    12
    
    
    
    529.1
    
    
    
    11
    
    
    
    497.8
    
    
    
    9Other Industries
    
    
    9.7
    
    
    
    
    
    
    
    38.6
    
    
    
    1
    
    
    
    103.0
    
    
    
    2$
    5,766.0
    
    
    
    100
    %
    
    $
    4,751.3
    
    
    
    100
    %
    
    $
    5,604.7
    
    
    
    100
    %Geographic RegionDomestic
    
    $
    4,906.6
    
    
    
    85
    %
    
    $
    4,310.7
    
    
    
    91
    %
    
    $
    5,080.9
    
    
    
    91
    %International
    
    
    859.4
    
    
    
    15
    
    
    
    440.6
    
    
    
    9
    
    
    
    523.8
    
    
    
    9$
    5,766.0
    
    
    
    100
    %
    
    $
    4,751.3
    
    
    
    100
    %
    
    $
    5,604.7
    
    
    
    100
    %Business SegmentsE&I
    
    $
    2,856.4
    
    
    
    50
    %
    
    $
    2,783.9
    
    
    
    59
    %
    
    $
    2,313.7
    
    
    
    41
    %ECM
    
    
    2,793.8
    
    
    
    48
    
    
    
    1,868.3
    
    
    
    39
    
    
    
    3,017.0
    
    
    
    54Fabrication, Manufacturing
and Distribution
    
    
    115.8
    
    
    
    2
    
    
    
    99.1
    
    
    
    2
    
    
    
    274.0
    
    
    
    5$
    5,766.0
    
    
    
    100
    %
    
    $
    4,751.3
    
    
    
    100
    %
    
    $
    5,604.7
    
    
    
    100
    %
 We estimate that approximately 43% of our backlog at August 31, 2004 will be
completed in fiscal 2005. Our backlog is largely a reflection of the broader economic trends being
experienced by our customers and is important to us in anticipating our
operational needs. Backlog is not a measure defined in generally accepted
accounting principles and our methodology for determining backlog may not be
comparable to the methodology used by other companies in determining their
backlog. We cannot assure you that revenues projected in our backlog will be
realized, or if realized, will result in profits. see Item 7. - Managements
Discussion and Analysis of Financial Condition and Results of
Operations - Risk
Factors. E&I Segment- Our E&I segments backlog includes the value of awarded contracts
and the estimated value of unfunded work of our consolidated subsidiaries and
our proportionately consolidated joint venture entities. The unfunded backlog
generally represents various government (federal, state and local) project
awards for which the project funding has been at least partially authorized or
awarded by the relevant government authorities (e.g., authorization or an award
has been provided for only the initial year or two of a multi-year project).
Because of appropriation limitations in the governmental budget processes, firm
funding is usually made for only one year at a time, and, in some cases, for
periods less than one year, with the remainder of the years under the contract
expressed as a series of one-year options. Amounts included in backlog are
based on the contracts total awarded value and our estimates regarding the
amount of the award that will ultimately result in the recognition of revenue.
These estimates are based on our experience with similar awards and similar
customers and average approximately 75% of the total unfunded awards. Estimates
are reviewed periodically and appropriate adjustments are made to the amounts
included in backlog and in unexercised contract options. Our backlog does not
include any awards (funded or unfunded) for work expected to be performed more
than five years after the date of our financial statements. The amount of
future actual awards may be more or less than our estimates. ECM Segment- We define our backlog in the ECM segment to include projects for
which we have received a commitment from our customers of our consolidated
subsidiaries and proportionately consolidated joint venture entities. This
commitment typically takes the form of a written contract for a specific
project, a purchase order, or a specific indication of the amount of time or
material we need to make available for a customers anticipated project.
Certain backlog engagements are for particular products or projects for which
we estimate anticipated revenue, often based on engineering and design
specifications that have not been finalized and may be revised over time. Our
backlog for maintenance work is derived from maintenance contracts and our
customers historic maintenance requirements. 19




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Fabrication, Manufacturing & Distribution -We define our backlog in this
segment to include projects for which we have received a commitment from our
customers. This commitment typically takes the form of a written contract for a
specific project, a purchase order, or a specific indication of the amount of
time or material we need to make available for a customers anticipated
project. Many of the contracts in backlog provide for cancellation fees in the event
customers cancel projects. These cancellation fees usually provide for
reimbursement of our out-of-pocket costs, revenue associated with work
performed prior to cancellation and a varying percentage of the profits we
would have realized had the contract been completed. Types Of Contracts  Our work is performed under fixed-price contracts, cost-reimbursable contracts,
and fixed-price and cost-reimbursable contracts modified by incentive and
penalty provisions. Each of our contracts may contain components of more than
one of the contract types discussed below. During the term of a project, the
contract or components of the contract may be renegotiated to a different
contract type. We focus our engineering, procurement and construction activities on
cost-reimbursable, as defined below, and negotiated fixed-price work. We
believe these types of contracts reduce our exposure to unanticipated and
unrecoverable cost overruns. Fixed-price contracts are generally obtained by
direct negotiation rather than by competitive bid. We have entered into
fixed-price or unit-price contracts on a significant number of our domestic
piping contracts and substantially all of our international piping projects. At
August 31, 2004, approximately 78% of our backlog was comprised of
cost-reimbursable contracts, 20% were fixed-price contracts and 2% were
unit-price contracts. Our fixed-price contracts include the following:  
    
    Firm fixed-price contract - A contract in which the price is
not subject to any adjustment by reason of our cost experience or our
performance under the contract. As a result, we benefit from costs
savings while generally being unable to recover any cost overruns on
these contracts. However, these contract prices may be adjusted for
changes in scope of work, new or changing laws and regulations and
other events negotiated. These fixed-price contracts usually require
that we use our best efforts to accomplish the scope of the work
within a specified time; otherwise, we could be assessed damages
which in some cases are limited to agreed-upon liquidated damages.  
    
    Maximum price contract - A contract which provides at the
outset for an initial target cost, an initial target profit, and a
price ceiling. The price is subject to adjustment by reason of our
cost experience, but the adjustment would generally not exceed the
price ceiling established in the contract. In addition, these
contracts usually include provisions whereby we share cost savings
with our clients. As a result, we partially benefit from cost savings
while we generally are unable to recover any cost overruns in excess
of the ceiling price.  
    
    Unit-price contract - A contract under which we are paid a
specified amount for every unit of work performed. A unit-price
contract is essentially a firm fixed-price contract with the only
variable being units of work performed. Variations in unit-price
contracts include the same type of variations as firm fixed-price
contracts. We are normally awarded these contracts on the basis of a
total price that is the sum of the product of the specified units and
unit prices. Our cost-reimbursable contracts include the following:  
    
    Cost-plus contract - A contract under which we are reimbursed
for allowable or otherwise defined costs incurred plus a fee or
mark-up. These contracts usually require that we use our best efforts
to accomplish the scope of the work within a specified time;
otherwise, we could be held liable for damages which in some cases
are limited to agreed upon liquidated damages. The contracts may also
include incentives for various performance criteria including areas
as quality, timeliness, ingenuity, safety and cost-effectiveness. In
addition, our costs are generally subject to review by our customers
and such reviews could result in costs being disputed as not
reimbursable under the terms of the contract.  
    
    Target-price contract - A contract under which we are
reimbursed for costs plus a fee consisting of two parts: (i) a fixed
amount which does not vary with performance and (ii) an award amount
based on the 20




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performance and cost-effectiveness of the project. As a result, we are
generally able to recover any cost overruns on these contracts;
however, we can be assessed liquidated or actual damages for late
delivery or the failure to meet certain performance criteria.
Target-price contracts also generally provide for sharing of costs in
excess of or below the target. In some contracts, we may agree to
share cost overruns in excess of our fee which could result in a loss
on the project. U.S. Government contracts are typically awarded through competitive bidding or
negotiations pursuant to federal acquisition regulations and may involve
several bidders or offerors. Government contracts also typically have annual
funding limitations and are limited by public sector budgeting constraints.
Government contracts may be terminated at the discretion of the government
agency with payment of compensation only for work performed and commitments
made at the time of termination. In the event of termination, we generally
receive some allowance for profit on the work performed. Many of these
contracts are multi-year Indefinite Delivery Order agreements. These programs
provide estimates of a maximum amount the agency expects to spend. Our program
management and technical staffs work closely with the client to define the
scope and amount of work required. Although these contracts do not initially
provide us with any specific amount of work, as projects are defined, the work
may be awarded to us without further competitive bidding. Although we generally serve as the prime contractor on our federal government
contracts, or as part of a joint venture which is the prime contractor, we also
serve as a subcontractor to other prime contractors. With respect to bidding on
large, complex environmental contracts, we have entered into and may continue
to enter into joint venture or teaming arrangements with competitors. Also, U.S. Government contracts generally are subject to oversight audits by
government representatives, to profit and cost controls and limitations, and to
provisions permitting modification or termination, in whole or in part, without
prior notice, at the governments convenience. Government contracts are subject
to specific procurement regulations and a variety of socio-economic and other
requirements. Failure to comply with such regulations and requirements could
lead to suspension or debarment, for cause, from future government contracting
or subcontracting for a period of time. Among the causes for debarment are
violations of various statutes, including those related to employment
practices, the protection of the environment, the accuracy of records and the
recording of costs. Our continuing service agreements with customers expedite individual project
contract negotiations through means other than the formal bidding process.
These agreements typically contain a standardized set of purchasing terms and
pre-negotiated pricing provisions and often provide for periodic price
adjustments. Service agreements allow our customers to achieve greater cost
efficiencies and reduced cycle times in the design and fabrication of complex
piping systems for power, chemical and refinery projects. In addition, while
these agreements do not typically contain committed volumes, we believe that
these agreements provide us with a steady source of new projects and help
minimize the impact of short-term pricing volatility. Customers And Marketing Our customers are principally major multi-national industrial corporations,
regulated utilities, independent and merchant power providers, governmental
agencies and equipment manufacturers. For the year ended August 31, 2004, we had revenues from seven customers of
approximately $814.2 million, which represented approximately 52% of our ECM
segments revenues and 27% of our total revenues. We also had total revenues
from U.S. Government agencies or entities owned by the U.S. Government of
approximately $1,170.0 million (38% of our total revenues) that included E&I
segment revenues totaling approximately $908.6 million (68% of E&I segment
revenues). Additionally, as of August 31, 2004, approximately 54% of our total backlog,
and approximately 93% of the E&I segments backlog is with U.S Government
agencies or entities owned by the U.S. Government. Contracts with seven
separate commercial customers of the ECM segment represent approximately 31% of
total backlog and 63% of ECM backlog at August 31, 2004. 21




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For the year ended August 31, 2003, we had revenues from entities owned or
controlled by PG&E National Energy Group, Inc. of approximately $435.9 million,
which represented approximately 24% of our ECM segments revenues and 13% of
our total revenues. Also, we had total revenues from U.S. Government agencies
or entities owned by the U.S. Government of approximately $948.9 million (29%
of our total revenues) that included E&I segment revenues totaling
approximately $815.0 million (68% of E&I segment revenues). We conduct our marketing efforts principally with an in-house sales force. In
addition, we engage independent contractors as agents to market to certain
customers and territories. We pay our sales force a base salary plus, when
applicable, an annual bonus. We pay our independent contractors on a commission
basis which may also include a monthly retainer. Raw Materials And Suppliers For our engineering, procurement and construction services, we often rely on
third party equipment manufacturers and subcontractors to complete our
projects. We are not substantially dependent on any individual third party to
support these operations; however, we are subject to possible cost escalations
based on inflation and other market price fluctuations. Our principal raw materials for our pipe fabrication operations are carbon
steel, stainless steel and other alloy piping, which we obtain from a number of
domestic and foreign primary steel producers. The market for most raw materials
is extremely competitive, and our relationships with suppliers are strong.
Certain types of raw materials, however, are available from only one or a few
specialized suppliers. Our inability to obtain materials from these suppliers
could jeopardize our ability to timely complete a project or realize a profit. We purchase directly from manufacturers, or manufacture, a majority of our pipe
fittings. These arrangements generally lower our pipe fabrication costs because
we are often able to negotiate advantageous purchase prices as a result of the
volumes of our purchases. If a manufacturer is unable to deliver the materials
according to the negotiated terms, we may be required to purchase the materials
from another source at a higher price. We keep items in stock at each of our
facilities and transport items between our facilities as required. We obtain
more specialized materials from suppliers when required for a project. Industry Certifications In order to perform fabrication and repairs of coded piping systems, our
domestic construction operations and fabrication facilities, as well as our
subsidiaries in Derby, U.K. and Maracaibo, Venezuela, maintain the required
American Society of Mechanical Engineers (ASME) certification (U & PP
stamps). The majority of our fabrication facilities, as well as our
subsidiaries, in Derby, U.K. and Maracaibo, Venezuela have also obtained the
required ASME certification (S stamp) and the National Board certification (R
stamp). Our domestic subsidiary engineering and construction operations in Stoughton,
Massachusetts also maintain the required ASME certification (S stamp) and the
National Board repair certification (R stamp) in addition to the ASME
certifications (A, PP, & U stamps) and the National Board registration
certification (NB stamp) for S, A, PP, and U stamped items. In order to perform nuclear construction, fabrication, and installation
activities of ASME III Code items such as vessels, piping systems, supports,
and spent fuel canister/storage containments at nuclear plant sites, our
domestic subsidiary engineering and construction operations in Stoughton,
Massachusetts maintain the required American Society of Mechanical Engineers
(ASME) certifications (N, N3, NPT, & NA stamps)(NS Cert). These ASME
certifications also authorize our Stoughton location to serve as a material
organization for the supply of ferrous and nonferrous material. Stoughton,
Massachusetts also maintains the National Board nuclear repair certification
(NR stamp) and National Board registration certification (NB stamp) for N & N3
stamped nuclear components. The Laurens, South Carolina facility also maintains a nuclear piping ASME
certification (NPT stamp) and is authorized to fabricate piping for nuclear
power plants and to serve as a material organization to manufacture and supply
ferrous and nonferrous material. This facility is also registered by the
International Organization of Standards (ISO 9002). Substantially all of our
North American engineering operations, as well as our UK operations, are also 22




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registered by the International Organization of Standards (ISO 9001). Patents, Trademarks And Licenses And Other Intellectual Property We have several items that we believe constitute valuable intellectual
property. We consider our computerized project control system, SHAW-MAN, to be
a proprietary asset. We believe that our Stone & Webster subsidiary has a
leading position in technology associated with the design and construction of
plants that produce ethylene, which we protect and develop with license
restrictions and a research and development program. Our Power Technologies
Inc. (PTI) subsidiary is the owner of a recently issued patent for a line
rating monitor, sold as the ThermalRate® System. The ThermalRate® System allows
transmission and distribution lines to carry more power while maintaining high
reliability and safety. For lines that thermally limit power flow, the
ThermalRate® System is a cost-effective solution which can avoid physical
modifications of the lines. Through the acquisition of the Badger® technologies, we have obtained several
technology partnerships. In the key area of zeolite catalysis, the association
with ExxonMobil Chemical has resulted in the successful development of what we
believe to be the worlds leading technologies to produce ethyl benzene and
cumene, which are available for license through Badger Licensing LLC, our joint
venture with ExxonMobil Chemical. Complementing this relationship in alkylation
is the licensing of the Fina/Badger Styrene Monomer Technology, a relationship
that has spanned 40 years. In the area of gas to liquids, we are the exclusive
provider of front end/basic engineering for Sasols Fischer-Tropsch
technologies. Through our acquisition of the assets of the IT Group, we have acquired certain
patents that are useful in environmental remediation and related technologies.
The technologies include the Biofast® in-situ remediation method, a vacuum
extraction method for treating contaminated formations, and a method for soil
treatment which uses ozone. The IT Group acquisition also included the
acquisition of proprietary software programs that are used in the management
and control of hazardous wastes and the management and oversight of remediation
projects. In fiscal 2003, we acquired Envirogen, Inc. which had certain patents and
trademarks. Envirogens patented technologies include processes for the control
of biomass in Fluidized Bed Reactors which processes enhance overall system
degradative performance and operating costs, biodegradation of MTBE and other
compounds utilizing specialized bacteria and degradative techniques, and
designs for Membrane Biological Reactors reducing operating costs and downtime
associated with membrane cleaning for water treatment. Competition The markets served by both our ECM and E&I segments are highly competitive and
for the most part require substantial resources and highly skilled and
experienced technical personnel. A large number of regional, national and
international companies are competing in the markets we serve, and certain of
these competitors have greater financial and other resources. Further, we are a
recent entrant into certain areas of these businesses, and certain competitors
possess substantially greater experience, market knowledge and customer
relationships. In pursuing piping, engineering and fabrication projects, we experience
significant competition in both international and domestic markets. In the
United States, there are a number of smaller pipe fabricators; while
internationally, our principal competitors are divisions of large industrial
firms. Some of our competitors, primarily in the international sector, have
greater financial and other resources than us. Employees At August 31, 2004, we employed approximately 17,200 employees, and
approximately 600 of these employees were represented by labor unions pursuant
to collective bargaining agreements. We also employ union labor from time to
time on a project-specific basis. We believe current relationships with our
employees (including those represented by unions) are satisfactory. We are not
aware of any circumstances that are likely to result in a work stoppage at any
of our facilities. At August 31, 2004, approximately 950 of our employees work in our wholly-owned
subsidiaries in Canada and 180 in the United Kingdom. 23




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Environmental Laws And Regulations We are subject to environmental laws and regulations, including those
concerning emissions into the air, discharges into waterways, generation,
storage, handling, treatment and disposal of hazardous materials and wastes and
health and safety. The environmental, health and safety laws and regulations to which we are
subject are constantly changing, and it is impossible to predict the effect of
such laws and regulations on us in the future. We believe we are in substantial
compliance with all applicable environmental, health and safety laws and
regulations. To date, our costs with respect to environmental compliance have
not been material, and we have not incurred any material environmental
liability. However, we cannot assure you that we will not incur material
environmental costs or liabilities in the future. For more information on the
impact of environment regulation upon our businesses, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations  Risk
Factors. 
 Item 2. Properties Our principal properties at August 31, 2004 are as follows: ApproximateLocation
    
    Description
    
    Square FeetBaton Rouge, LA
    
    Corporate Headquarters
    
    
    240,000
    (1)Laurens, SC
    
    Pipe Fabrication Facility
    
    
    184,100Prairieville, LA
    
    Pipe Fabrication Facility
    
    
    44,000
    (5)Shreveport, LA
    
    Pipe Fabrication Facility
    
    
    62,600
    (5)West Monroe, LA
    
    Pipe Fabrication Facility
    
    
    78,500Walker, LA
    
    Pipe Fabrication Facility
    
    
    169,500Maracaibo, Venezuela
    
    Pipe Fabrication Facility
    
    
    45,000
    (4)Tulsa, OK
    
    Pipe Fabrication Facility
    
    
    144,800
    (7)Clearfield, UT
    
    Pipe Fabrication Facility
    
    
    391,200
    (1)Troutville, VA
    
    Pipe Fabrication Facility
    
    
    152,200
    (3)Derby, U.K.
    
    Pipe Fabrication Facility
    
    
    200,000
    (1)Baton Rouge, LA
    
    Distribution Facility
    
    
    25,700
    (1)Shreveport, LA
    
    Piping Components and Manufacturing Facility
    
    
    208,000Houston, TX
    
    Pipe Fittings Distribution Facility
    
    
    57,100
    (1)Delcambre, LA
    
    Fabrication Facility
    
    
    61,000Laconia, NH
    
    Fabrication Facility
    
    
    28,000
    (5)Longview, TX
    
    Fabrication Facility
    
    
    25,500
    (6)Addis, LA
    
    Fabrication Facility
    
    
    109,200
    (1)Vacaville, CA
    
    Fabrication Facility
    
    
    96,000
    (1)(5)Stoughton, MA
    
    Office Building
    
    
    197,000
    (1)Cambridge, MA
    
    Office Building
    
    
    62,300
    (1)Weymouth, MA
    
    Laboratory
    
    
    19,350
    (1)Milton Keynes, U.K.
    
    Office Building
    
    
    86,500
    (1)Houston, TX
    
    Office Building
    
    
    206,000
    (1)Denver, CO
    
    Office Building
    
    
    128,500
    (1)Toronto, Canada
    
    Office Building
    
    
    99,600
    (1)Washington, D.C.
    
    Office Building
    
    
    14,000
    (1)Schenectady, NY
    
    Office Building
    
    
    69,500
    (1)Monroeville, PA
    
    Office Building
    
    
    91,800
    (1)Findlay, OH
    
    Office Building and shops
    
    
    146,000
    (1)Knoxville, TN
    
    Office Buildings and laboratory
    
    
    83,200
    (1)(2)Charlotte, NC
    
    Office Building
    
    
    23,900
    (1)Toddville, NC
    
    Office Building
    
    
    29,400
    (1)
   (1)
    
    Leased facility. 24




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(2)
    
    Facility includes 16,000 square foot laboratory, which is owned.(3)
    
    Facility is being marketed for sale.(4)
    
    This facility has been temporarily closed due to political and economic
conditions.(5)
    
    Facility scheduled to be closed in fiscal 2005.(6)
    
    Facility is closed and is subleased to a third party who has the option to
purchase the facility.(7)
    
    Facility available for use but idle in fiscal 2004. In addition to these locations, we occupy other owned and leased facilities in
various cities that are not considered principal properties. Portions of
certain of the office buildings described above are currently being subleased
for various terms. The square footage above is not reduced to reflect subleased
space. We consider each of our current facilities to be in good operating
condition and adequate for its present use. 
 Item 3. Legal Proceedings NEG Covert & Harquahala Early in fiscal 2002, we entered into two target-price contracts with a
customer, PG&E National Energy Group, Inc. (NEG), and its project entities, to
provide EPC services for two gas-fired combined-cycle power plants in Covert,
Michigan and Harquahala Valley, Arizona. In October 2002, the parent company of
NEG, PG&E Corp. (PG&E) announced that NEG had notified its lenders that it did
not intend to make further equity contributions required under the credit
facility to fund the Covert and Harquahala projects. We believed this notice
raised doubt about whether we would continue to be paid for the work we
performed under these target-price contracts. In May 2003, after extensive negotiations
with NEGs project entities, NEG, and
their lenders, we reached a definitive settlement agreement for settlement of claims
existing as of that date related to the Covert and Harquahala projects. The
settlement provided for fixed-price EPC contracts which increased the original
target-price for both projects by a total of $65.0 million; termination of the
target-priced components of the original agreements which provided for recovery
of costs in excess of the fixed-price contracts; dismissal of pending legal
proceedings, our release of claims based on existing change orders and the
incurrence of additional costs, and the extension of the schedule for
completion of the projects. The revised schedule provided for us to complete
the Harquahala project in September 2003 and the Covert project in December
2003. NEG paid us $32.5 million in May 2003 as a result of this settlement
agreement and required us to post a letter of credit in its favor for the same
amount which was assigned by them to its lenders. During fiscal 2003, we recognized a loss of $42.8 million (which includes a
$30.0 million loss recorded in the second quarter of 2003) on these two
projects, $33.1 million of which was reversal of profit recognized prior to
fiscal 2003. During the first quarter of fiscal 2004, we recorded an additional loss on
these two projects of $39.3 million ($4.8 million of which was reversal of
profit recognized prior to fiscal 2004). Approximately $34.5 million represents
actual and estimated increased costs to complete the Covert project primarily
due to the failure of installed equipment, required rework and vendor and
subcontractor delays. The $39.3 million loss was net of additional expected
claims of approximately $1.2 million. During the third quarter of 2004, we
recorded a reduction in the gross profit on the Harquahala project resulting
from a $2.2 million reduction in our estimated claims recovery and an increase
of $2.2 million in estimated cost of completion related primarily to the
duration of our involvement in start-up and warranty related activities. During the first quarter of fiscal 2004, we notified the owner of substantial
completion on two of the three power island units on Covert and communicated
that the remaining unit would achieve substantial completion in January 25




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2004. We also communicated that the total facility would achieve substantial
completion in February 2004. We notified the owner of substantial completion on
the Harquahala facility on December 24, 2003. While we previously
demonstrated substantial completion on all six units at the two plants, the
owners did not accept our various unit and facility completion dates and
continued to assess liquidated damages. The owners accepted substantial
completion of the Covert units in January 2004 and the Harquahala units in
March 2004. The owners have not accepted facility completion on either project,
in part because they believe we must post letters of credit on two projects totaling
$43.0 million as security for warranty work in order to achieve facility
completion. We firmly disagree with this position, and until all outstanding
disputes are resolved, we do not intend to post additional letters of credit.
In the meantime, we intend to comply with our warranty obligations. As of August 31, 2004, the owners have withheld $55.4 million from milestone
payments due us as an offset to liquidated damages they have claimed. In
addition, in August 2004, the owners drew $18.8 million under an outstanding
letter of credit for liquidated damages they have claimed due. As of August
31, 2004, the owners have indicated that they may claim as much as $89 million
in liquidated damages. The ultimate assessment could be higher as the owners
are claiming that they can assess daily liquidated damages until facility
completion is accepted ($70,000 per day at Covert and $63,000 per day at
Harquahala) up to a maximum of approximately $130 million for
both projects. On March 29, 2004, we
filed liens against both projects and have initiated binding arbitration
regarding our claims. Arbitration with the owners is not expected to
occur until the summer of calendar year 2005 at the earliest. On February 20, 2004, we were notified by the lenders of the Harquahala project
of their intention to draw $18.7 million under the existing $32.5 million
letter of credit for assessed liquidated damages. We sought an injunction in
the Supreme Court of the State of New York to preclude the lenders from drawing
under the letter of credit until arbitration with the owners on the underlying
claims is resolved. A temporary restraining order was granted prohibiting the
lenders from drawing under the $32.5 million letter of credit but was lifted in
August 2004 at which time the lenders drew $18.8 million under the outstanding
letter of credit. As of August 31, 2004, a $13.7 million letter of credit
remains outstanding for these projects. Based on our evaluation and advice of legal counsel, we believe we have
defenses to the owners claims of liquidated damages. We intend to vigorously
contest the assessment. Additionally, we believe a substantial portion of the
delays were caused by our vendors, subcontractors and equipment manufacturers
from whom we may collect delay and related damages, and we are pursuing these
actions. For these reasons, our revenue and cost estimates reflect our
expectation that we will not incur liquidated damages in excess of amounts we
believe would be recoverable from others. However, there can be no absolute
assurance that delay damages will not have to be paid. If we are required to
pay the owners delay damages that we cannot recover from subcontractors,
vendors, or equipment manufacturers, that amount will be recorded as a loss. Unrelated to the claims for delay damages discussed above, we have recorded
approximately $26.5 million in claims receivable from the owners, vendors,
subcontractors, equipment manufacturers, and insurance. Based on our evaluation
of the contractual terms, our claims documentation, and the advice of legal
counsel, we believe we have a strong basis for these claims (including claims
against vendors based on their delivery of incomplete and/or defective
equipment and claims against various subcontractors for their delays in
providing services) in excess of the recorded amounts; but we have only
recorded a claim receivable for the portion that we estimate will ultimately be
collected. Recovery of the claims is dependent upon our negotiations,
arbitration and litigation with the owners and their lenders, several
subcontractors, vendors and equipment manufacturers. Due to the uncertainties
surrounding litigation or arbitration of this nature, we cannot provide
absolute assurance to you as to the outcome of these claims or their
collectibility. If we collect amounts different than the amounts that we have recorded as
claims receivable of $26.5 million, that difference will be recognized as
income or loss. Timing of collection is uncertain at this time, but is not
expected in the next twelve months unless a settlement occurs or the disputes
are resolved through the dispute resolution process pursuant to the contract. The following table summarizes contract amounts due from the owners and claims
recorded on these projects, excluding claims related to liquidated damages as
of August 31, 2004 (in millions): 26




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Amounts due from the owners:Amounts remaining to be paid under the original contract terms:Billed milestones receivable
    
    $
    55.4Milestones unbilled at August 31, 2004 (to be billed upon final acceptance)
    
    
    1.7Reimbursement of letter of credit draws
    
    
    18.8Claims for additional costs incurred
    
    
    7.7Total amounts receivable from the owners
    
    
    83.6Claims receivable from subcontractors and others,
excluding amounts related to liquidated damages
    
    
    18.8Less: Amounts collected by drawing letters of credit posted by
the turbine manufacturer on the Covert project(1)
    
    
    (25.6
    )Total amounts receivable, excluding amounts related to
liquidated damages
    
    $
    76.8
  (1)
    
    Amounts collected under this letter of credit draw are for both
liquidated damages and for other claims against the turbine
manufacturer. The above amounts are recorded in costs and estimated earnings in excess of
billings on uncompleted contracts including claims on the consolidated balance
sheet at August 31, 2004. In March 2004, we drew the entire amount available under a letter of credit
posted by the turbine manufacturer on the Covert project for $25.6 million. The
turbine manufacturer disputes the draw under the letter of credit and
arbitration is currently scheduled for March 2005. We believe we will prevail
in this matter and believe the draw under the letter of credit is in accordance
with the terms of the letter of credit. The turbine manufacturer has also filed
a demand for arbitration against us for approximately $3.6 million in alleged
unpaid technical assistance services which has been considered in our
overall claims position with the turbine manufacturer. Although NEG, the parent of the project entities, filed for Chapter 11
bankruptcy in July 2003, the project entities that own these two projects are
not included in the bankruptcy proceedings, and we do not believe NEGs current
financial position will negatively impact future payments to us related to
these projects. Based on our evaluation and the advice of legal counsel, we believe it is
probable we will recover at least the recorded amount of claims in the
arbitration process. We believe we have a strong basis for claims and
backcharges in excess of the recorded amounts; however, recovery of the claims
and other amounts is dependent upon negotiations with the applicable parties,
which are ongoing, and the results of arbitration. We cannot provide absolute
assurance to you as to the timing or outcome of these negotiations or results
of arbitration. In addition, we hold liens against the projects in connection
with our claims under the contract. We cannot provide assurances to you of the
value of such liens or our ability to execute on such liens in a timely manner. AES  Wolf Hollow Project On March 8, 2002, AES Frontier, L.P. and AES Wolf Hollow, L.P. (collectively
AES) entered into a series of contracts (collectively the EPC contract)
with us to complete the engineering, design, procurement, and construction of a
gas-fired, combined-cycle power plant in Texas for an aggregate contract amount
of $99.0 million. AES represented and warranted at the time of contracting with
us that the project was 67% complete and that engineering was 99.8% complete,
and we relied upon this stage of completion in contracting with AES. At the time we entered into the EPC contract, the projects provisional
acceptance was scheduled for October 15, 2002; however, acceptance of this
project was delayed. We believe the delay from October 15, 2002 was primarily
due to (i) the significant overstatement of the percentage completion by AES
and Parsons (the engineers on the project) at the time we entered into the
contract; (ii) a fire that occurred in June of 2002 at the project site; and
(iii) failure of a turbine during start-up testing in May 2003. We believe the
project reached provisional acceptance on July 24, 2003, although AES did not
agree to provisional acceptance until August 8, 2003. The contract terms
include liquidated damages in the event of late completion of $120,000 per day
from October 15, 2002 through June 27




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##### Table of Contents



1, 2003 and $185,000 per day thereafter until provisional acceptance occurs,
for which AES has billed us $40.0 million in aggregate. We were unable to resolve our claims with AES through the dispute resolution
process called for in the contract with respect to a force majeure claim we
made resulting from the fire and other change orders. On November 5, 2002, we
filed suit against AES in the District Court of Hood County, Texas for breach
of contract. On May 9, 2003, we added Parsons as a defendant and expanded the
complaint to include claims related to misrepresentation. In June 2003, the AES
Corporation was also added as a defendant. In addition, we initiated an arbitration action in September 2003 against the
heavy equipment supplier to recover $38 million in costs and liquidated damages
incurred as a result of defects in their equipment. Discovery is underway in
that proceeding, and a hearing is set to begin on January 31, 2005. Discovery is currently underway in the AES litigation, and the case is
scheduled for a jury trial in March 2005. Unless we reach a settlement prior to
the trial date, we would not expect recovery of disputed amounts due from AES
before 2005. As of August 31, 2004, there have been no significant changes with
regard to this project and related disputes when compared to August 31, 2003.
During fiscal 2004, we have continued to incur additional project costs related
to punch list and warranty items which have been considered in our total
estimate of claims against the owners, subcontractors and vendors due. In excess of the original $99.0 million
contract price, we have recorded claims
receivable from AES of $17.9 million for additional costs incurred due to the
fire, misrepresentation of the percentage-of-completion, disputed change orders
and other claims. In addition, we have claims of approximately $7.3 million
that we expect to recover from insurance proceeds related to the fire and
backcharges from subcontractors and vendors. Of the $7.3 million, we have
collected $1.5 million through a draw on a letter of credit posted by Parsons.
Parsons disputes our claims and has filed a counterclaim alleging payments due
of $1.9 million and the return of the $1.5 million letter of credit draw. Of the original $99.0 million contract
price, AES has not paid $22.0 million of
billed milestones and $7.1 million of retention. In addition,
$3.0 million of
milestones remain unbilled related to final completion and acceptance, which we
expect to occur in early fiscal 2005. Under the terms of the EPC contract, AES,
at its option, may pay up to $27.7 million of the contract price in
subordinated notes or cash. The subordinated notes, $24.8 million of which we
consider issued as of August 31, 2004 for payment of billed milestones, bear
interest at prime plus 4% and mature in October 2009. If any amounts under the
notes are unpaid eight months following final acceptance of the project, the
unpaid notes, plus a cash payment of the amounts, if any, paid on the notes
through the conversion date, is convertible, at our option, into a 49.9% equity
interest in the project. Further, at the initiation of the project, we secured our obligations under the
contract by providing letters of credit totaling $28.0 million. In August and
September 2003, AES drew the full amount of the letters of credit in two draws
of $13.9 million and $14.1 million, respectively. We have recorded an
additional receivable of $28.0 million from AES for reimbursement of these
draws which remained outstanding as of August 31, 2004. We recorded revenue of
$43.1 million and a loss of $2.3 million from this contract for the year ended
August 31, 2003. For the year ended August 31, 2004, no gross margin has been
recorded on this contract. The following table summarizes contract amounts due from AES and claims
recorded on the project (in millions): 28




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##### Table of Contents



Amounts due from AES:Amounts remaining to be paid under the original contract terms:Billed milestones receivable
    
    $
    22.0Subordinated Notes receivable from AES
    
    
    24.8Retention receivable
    
    
    7.1Milestones unbilled at August 31, 2004 (to be billed upon
completion of final testing and final acceptance)(1)
    
    
    3.0Total contractual amounts due from AES
    
    
    56.9Reimbursement of letter of credit draws
    
    
    28.0Claims for additional costs incurred
    
    
    17.9Less: Amount of liquidated damages that have been included in costs
    
    
    (6.6
    )Total receivables from AES recorded as of August 31, 2004
    
    
    96.2Claims receivable from subcontractors and others
    
    
    7.3Less: Amount collected by drawing letter of credit posted by Parsons
    
    
    (1.5
    )Less: Amounts collected by drawing letters of credit posted by the
turbine manufacturer (2)
    
    
    (15.0
    )Total receivables recorded as of August 31, 2004
    
    $
    87.0
  (1)
    
    Of the total milestones unbilled at August 31, 2004, $2.9 million
could be paid by AES in Subordinated Notes.  (2)
    
    Amounts collected under this letter of credit draw are for both
liquidated damages and for other claims against the turbine
manufacturer. The above amounts are recorded in costs and estimated earnings in excess of
billings on uncompleted contracts including claims on the consolidated balance
sheet at August 31, 2004. If we collect amounts different than the amounts that we have recorded as
receivables from AES of $96.2 million or if we collect amounts different than
the amounts receivable from subcontractors and others of $8.0 million, the
difference would be recognized as income or loss. AES has assessed and billed us approximately $40.0 million in liquidated
damages due to the late completion of the project. While we dispute or expect
to recover the liquidated damages because late delivery was primarily due to
the fire, misrepresentation of the percentage-of-completion and other delays
caused by AES, subcontractors and vendors, we recognized a reduction of revenue
of approximately $6.6 million of liquidated damages. Of the remaining $34.8
million of liquidated damages, we have excluded $15.4 million from our cost
estimates and we have recorded recoveries of approximately $18.0 million from
subcontractors and vendors, including the turbine manufacturer. In the first
quarter of fiscal 2004, we drew down $15.0 million from a letter of credit
posted by the turbine manufacturer. The turbine manufacturer disputes the
letter of credit draw and has initiated arbitration through a counterclaim for
the return of the $15.0 million letter of credit draw and has asserted
additional claims of $12.7 million for equipment, parts and services allegedly
provided. The following table summarizes how we have accounted for the liquidated damages
that AES has assessed on the project (in millions): Amount of liquidated damages that have been included in costs
    
    $
    6.6Amounts related to liquidated damages that have been excluded from our
recorded costs:Liquidated damages relief from AES
    
    
    15.4Liquidated damages to be reimbursed by subcontractors and vendors
    
    
    18.033.4Total liquidated damages assessed by AES
    
    $
    40.0
 29




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##### Table of Contents



If we are required to pay
liquidated damages to AES of more than the $6.6 million and are unable to recover that excess amount from our subcontractors or
vendors, then that difference would be recognized as a loss. Based on our evaluation and the advice of legal counsel, we believe it is
probable we will recover at least the recorded amount of claims and that we
will not pay AES any liquidated damages in excess of the amounts recorded. We
believe we have a strong basis for claims and backcharges in excess of the
recorded amounts. However, recovery of the claims and other amounts is
dependent upon negotiations with the applicable parties, which are ongoing, and
the results of litigation. We cannot provide absolute assurance to you as to
the timing or outcome of these negotiations or results of litigation. We hold a
mortgage on the project assets, second to the lenders, to secure AES
obligations under the subordinated notes. We also filed a lien against the
project in connection with our claims under the contract. We cannot provide
absolute assurance to you of the value of such mortgage or lien or our ability to execute
on either in a timely manner. FPLE  Marcus Hook Our EPC project with
FPL-Energy (FPLE) for a combined-cycle cogeneration plant
and auxiliary boiler facility in Marcus Hook, Pennsylvania, has been delayed
for various reasons. Each party commenced legal proceedings against the other for
various claims. Shortly thereafter, the
parties withdrew their lawsuits. The parties are continuing attempts to resolve these issues. Additionally, two of our subcontractors on the project have filed claims
against us alleging total damages of approximately $20 million related to
claims for extra costs incurred. We have asserted a counterclaim of
approximately $8.3 million for costs associated with us obtaining another
subcontractor to perform the work after one initial subcontractor failed to
complete the project. Mediation with these subcontractors has not been
successful to date. We believe any amounts that we incur related to this
project, including legal costs to pursue these issues with subcontractors, are
recoverable from FPLE under the terms of the EPC contract. However, FPLE has
disputed whether these costs are fully reimbursable. We cannot provide absolute assurance as to the timing or outcome of the
mediation or results of the litigation, or disputes with FPLE, or with the
subcontractors. SEC Inquiry On June 1, 2004, we were notified by the staff of the Securities and Exchange
Commission (SEC) that the staff is conducting an informal inquiry
relating to us. The SEC has not advised us as to either the reason for the
inquiry or its scope. The staffs notice states that it should not be
construed as an indication of any improper or unlawful conduct by us. We are
cooperating fully with the staffs informal inquiry; however, if the
inquiry elevates to a formal investigation, the resolution could have a
material adverse effect on us. Securities Litigation We and certain of our current officers have been named as defendants in
purported shareholder class action lawsuits alleging violations of federal
securities laws. These types of class action lawsuits are not uncommon when
there has been a notification of even an informal inquiry by the SEC. The
first filed lawsuit is styled Earl Thompson v. The Shaw Group Inc. et al and
was filed on June 16, 2004 in the United States District Court for the Eastern
District of Louisiana, Case No. 04-1685. The complaint filed in the Thompson
action alleges claims under Sections 10(b) and Rule 10(b-5) promulgated
thereunder and 20(a) of the Securities Exchange Act of 1934 on behalf of a
class of purchasers of our common stock during the period from October 19, 2000
to June 10, 2004. The complaint alleges, among other things, that (i) certain
of our press releases and SEC filings contained material misstatements and
omissions, (ii) that the manner in which we accounted for certain acquisitions
was improper and (iii) that we improperly recorded revenue on certain projects,
and as a result, our financial statements were materially misstated at all
relevant times. The complaint does not specify the amount of damages sought.
Since the filing of the Thompson lawsuit, ten additional purported shareholder
class action lawsuits have been filed and other actions may also be commenced.
Each of the additional lawsuits includes the same defendants, and essentially
alleges the same statutory violations based on the same or similar alleged
misstatements and omissions. Ten of these actions have been consolidated under
the Thompson caption in the Eastern District of Louisiana. In addition, two shareholder derivative actions, styled as Jonathan Nelson v.
J.M. Bernhard, Jr., et al. and Larry F. Reusche v. Tim Barfield, Jr., et al.,
have been filed based on essentially the same allegations as the purported
class actions. The derivative actions, which the plaintiffs purport to be
bringing on behalf of the Company, name certain of our directors and current
and former officers as defendants, and name the Company as a nominal defendant.
The derivative suits collectively make claims of breach of fiduciary duty,
abuse of control, gross mismanagement, waste of corporate assets and unjust
enrichment based on allegations that the named defendants committed, condoned
or failed to identify and disclose the alleged misconduct alleged in the
purported class actions, and that certain defendants sold company stock while
in possession of knowledge of the alleged misconduct. The complaints do not
specify the amount of damages sought. Both the purported shareholder class action lawsuits and the derivative
lawsuits are in the early stages of litigation. We believe our financial
statements were prepared in accordance with GAAP and that none of our press
releases or public filings contained misrepresentations or omissions.
Accordingly, we intend to defend the Company and our directors and officers
vigorously against each of these actions. Although it is not possible at this
early stage to predict the likely outcome of these actions, an adverse result
in any of these lawsuits could have a material adverse effect on us. 30




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Other 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 and
other matters. These are typically actions that arise in the normal course of
business, including employment-related claims, contractual disputes and claims
for personal injury or property damage that occur in connection with our
business. Such contractual disputes normally involve claims against us relating
to the performance of equipment, design or other engineering services and
project construction services. Although the outcome of such legal proceedings
cannot be predicted and no assurances can be provided, we believe that, based
upon information currently available, the likelihood of an adverse
determination in the now pending legal proceedings is remote, and are not
expected to have a material adverse effect on our financial position or results
of operations either individually or in the aggregate. However, we cannot
guarantee such a result. See also Note 20 of the notes to our consolidated financial statements. 
 Item 4. Submission Of Matters To A Vote Of Security Holders We did not submit any matters to a vote of security holders during the fourth
quarter of fiscal 2004. 
 PART II 
 Item 5. Market For The Registrants Common Equity And Related Stockholder
Matters Our common stock, no par value, is traded on the New York Stock Exchange (NYSE)
under the symbol SGR. The following table sets forth, for the quarterly
periods indicated, the high and low sale prices per share for the common stock
as reported by the NYSE, for our two most recent fiscal years and for the
current fiscal year to date. HIGH
    
    LOWFiscal year ended August 31, 2003First quarter
    
    $
    18.30
    
    
    $
    8.90Second quarter
    
    
    19.34
    
    
    
    9.54Third quarter
    
    
    12.50
    
    
    
    8.48Fourth quarter
    
    
    12.95
    
    
    
    6.80Fiscal year ending August 31, 2004First quarter
    
    $
    13.96
    
    
    $
    8.50Second quarter
    
    
    14.45
    
    
    
    11.09Third quarter
    
    
    13.33
    
    
    
    10.33Fourth quarter
    
    
    12.46
    
    
    
    8.89Fiscal year ending August 31, 2005First quarter (through October  29, 2004)
    
    $
    12.99
    
    
    $
    10.29
 The closing sales price of
the common stock on October 29, 2004, as reported on
the NYSE, was
$12.19 per
share. As of October 29,
2004, we had 350 shareholders
of record. We have not paid any cash dividends on the common stock and currently
anticipate that, for the foreseeable future, any earnings will be retained for
the development of our business. Accordingly, no dividends are expected to be
declared or paid on the common stock at the present. The declaration of
dividends is at the discretion of our Board of Directors. Our dividend policy
will be reviewed by the Board of Directors as may be appropriate in light of
relevant factors at the time. We are, however, subject to certain prohibitions
on the payment of dividends under the terms of existing credit facilities and
our indenture relating to our senior notes. See Item 12. Security Ownership of Certain Beneficial Owners and Management
with respect to information to be incorporated by reference regarding equity
compensation plans. 
 Item 6. Selected Consolidated Financial Data The following table presents, for the periods and as of the dates indicated,
selected statement of income data and balance sheet data on a consolidated
basis. The selected historical consolidated financial data for each of the five
fiscal years in the period ended August 31, 2004 presented below has been
derived from our audited consolidated financial statements. Ernst & Young LLP
audited our consolidated financial statements for each of the three fiscal 31




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years in the three-year period ended August 31, 2004. Arthur Andersen LLP
audited our consolidated financial statements for each of the two fiscal years
in the two-year period ended August 31, 2001. Such data should be read in
conjunction with the Consolidated Financial Statements and related notes
thereto included elsewhere in this Annual Report on Form 10-K and Item 7. -
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Year Ended August 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(1)
    
    (2)(8)
    
    (3)(8)
    
    (4)(8)
    
    (5)(8)(In Millions, Except Per Share Amounts)Consolidated Statements of OperationsRevenues
    
    $
    3,076.9
    
    
    $
    3,292.8
    
    
    $
    3,149.1
    
    
    $
    1,521.2
    
    
    $
    744.0Income (loss) from continuing operations
    
    $
    (26.3
    )
    
    $
    20.6
    
    
    $
    96.5
    
    
    $
    60.2
    
    
    $
    29.4Basic income (loss) per common share
before discontinued operations and
cumulative effect of change in
accounting principle (6)
    
    $
    (0.45
    )
    
    $
    0.54
    
    
    $
    2.36
    
    
    $
    1.50
    
    
    $
    0.99Diluted income (loss) per common share
before discontinued operations and
cumulative effect of change in
accounting principle (6)
    
    $
    (0.45
    )
    
    $
    0.53
    
    
    $
    2.22
    
    
    $
    1.44
    
    
    $
    0.96Consolidated Balance SheetsTotal assets
    
    $
    2,029.9
    
    
    $
    1,986.1
    
    
    $
    2,301.1
    
    
    $
    1,701.9
    
    
    $
    1,335.1Long-term debt and capital lease
obligations, net of current maturities
(7)
    
    $
    261.2
    
    
    $
    251.7
    
    
    $
    522.1
    
    
    $
    512.9
    
    
    $
    255.0Cash dividends declared per common share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
  (1)
    
    Includes the acquisition of certain assets of Energy Delivery Services,
Inc., Coastal Engineering and Environmental Consultants Inc. and LFG&E
International, Inc. in fiscal 2004 (see Note 4 of the notes to our
consolidated financial statements).  (2)
    
    Includes the acquisition of certain assets of Badger Technologies,
Envirogen, Inc., and LFG&E International, Inc. in fiscal 2003 (see Note 4
of the notes to our consolidated financial statements).  (3)
    
    Includes the acquisition of certain assets of the IT Group and PsyCor
Inc. in fiscal 2002 (see Note 4 of the notes to our consolidated financial
statements).  (4)
    
    Includes the acquisition of certain assets of Scott, Sevin & Schaffer,
Inc. and Technicomp, Inc. in fiscal 2001 and amortization of goodwill, net of tax, of $13.3 million ($0.33 per basic share and
$0.32 per diluted share).  (5)
    
    Includes the acquisition of certain assets of Stone & Webster and PPM
Contractors, Inc. in fiscal 2000 and amortization of goodwill, net of tax, of $1.2 million ($0.06 per basic share and
$0.06 per diluted share).  (6)
    
    Earnings per share for fiscal 2000 has been restated to reflect the
effect of the December 2000 two-for-one stock split of our common stock.  (7)
    
    Fiscal 2003 excludes $260.0 million of current maturities of long-term
debt consisting primarily of the LYONs convertible debt of $251.5 million.  (8)
    
    Restated to reflect discontinued operations (see Note 21 of the notes to
our consolidated financial statements). 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations. 32




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The following analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements,
including the notes thereto. The following analysis contains forward-looking
statements about our future revenues, operating results and expectations. See
Forward-Looking Statements and Associated Risks for a discussion of the
risks, assumptions and uncertainties affecting these statements as well as
Risk Factors. Critical Accounting Policies and Related Estimates That Have a Material Effect
on Our Consolidated Financial Statements Set forth below is a discussion of 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 which require complex management judgments and estimates, or
involve uncertainties. Information regarding our other accounting policies is
included in the notes to our consolidated financial statements. Engineering, Procurement and Construction Contract and Environmental and
Infrastructure Revenue Recognition and Profit and Loss Estimates Including
Claims A substantial portion of our revenue from both the ECM and E&I segments is
derived from engineering, procurement and construction contracts. The contracts
may be performed as stand-alone engineering, procurement or construction
contracts or as combined contracts (i.e. one contract that covers engineering,
procurement and construction or a combination thereof). We use accounting
principles set forth in American Institute of Certified Public Accountants, or
AICPA, Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, and other applicable
accounting standards to account for our contracts. We recognize revenue for
these contracts on the percentage-of-completion method, primarily based on
costs incurred to date compared with total estimated contract costs. Revenues
from reimbursable or cost-reimbursable contracts are recognized on the basis of
costs incurred during the period plus the fee earned. Performance incentives
are included in our estimates of revenues using the percentage-of-completion
method when their realization is reasonably assured. Cancellation fees are
recognized when received. Provisions for estimated losses on uncompleted contracts are made in the period
in which the losses are identified. The cumulative effect of changes to
estimated contract profit and loss, including those arising from contract
penalty provisions such as liquidated damages, final contract settlements,
warranty claims and reviews of our costs performed by customers, are recognized
in the period in which the revisions are identified. To the extent that these
adjustments result in a reduction or elimination of previously reported
profits, we would report such a change by recognizing a charge against current
earnings, which might be significant depending on the size of the project or
the adjustment. The costs attributable to change orders and claims being
negotiated or disputed with customers, vendors or subcontractors or subject to
litigation are included in our estimates of revenue when it is probable they
will result in additional contract revenue and the amount can be reasonably
estimated. Profit from such change orders and claims is recorded in the period
such amounts are settled or approved. It is possible there will be future and currently unforeseeable significant
adjustments to our estimated contract revenues, costs and gross margins for
contracts currently in process, particularly in the later stages of the
contracts. These adjustments are common in the construction industry and
inherent in the nature of our contracts. These adjustments could, depending on
the magnitude of the adjustments and/or the number of contracts being
completed, materially, positively or negatively, affect our operating results
in an annual or quarterly reporting period. These adjustments are, in our
opinion, most likely to occur as a result of, or be affected by, the following
factors in the application of the percentage-of-completion accounting method
discussed above for our contracts.  A.
    
    Revenues and gross margins from cost-reimbursable, long-term contracts
can be significantly affected by contract incentives/penalties that may
not be known or finalized until the later stages of the contracts.
Substantially all of our revenues from cost-reimbursable contracts are
based on costs incurred plus the fee earned. Applying our revenue
recognition practices to these types of contracts usually results in
revenues being recognized as work is performed and costs are incurred and
generally results in a reasonably consistent gross margin during most of
the contract term. 33




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Our cost-reimbursable contracts are sometimes structured as target-price
contracts. Target-price contracts contain an incentive/penalty arrangement
which results in our fee being adjusted, within certain limits, for cost
underruns/overruns to an established target-price, representing our estimated
cost and fee for the project. In addition, certain target-price contracts
require that we share in cost overruns in excess of our fee which would
result in a loss on the contract should such a level of cost overruns occur.
Cost-reimbursable contracts generally provide for reimbursement of all of our
costs, but generally limit our fee to a fixed percentage of costs or to a
certain specified amount and often specify costs that are not reimbursable.
Usually, target-price contracts are priced with higher fees than
cost-reimbursable contracts because of the uncertainties relating to an
adjustable fee arrangement or for the sharing of potential cost overruns in
excess of the fee. Additionally, both the target cost and cost-reimbursable
contracts frequently have other incentive and penalty provisions for such
matters as schedule, testing and performance results.  Generally, the penalty provisions for our cost-reimbursable contracts are
capped to limit our monetary exposure to a portion of the contract gross
margin. Although we believe it is unlikely that we could incur losses or lose
all of our gross margin on our cost-reimbursable contracts, it is possible
for penalties to reduce or eliminate previously recorded profits. The
incentive/penalty provisions are usually finalized as contract change orders
either subsequent to negotiation with, or verification by, our customers.  Therefore, while cost-reimbursable, target-price and other
cost-reimbursable contracts generally limit our risks on the related
projects, we can and do incur losses on these contracts.  In most situations, the amount and impact of incentives/penalties are not, or
cannot be, finalized until the completion stages of the contract, at which
time we will record the adjustment amounts on a cumulative, catch-up basis.  B.
    
    The accuracy of gross margins from fixed-price contracts is dependent on
the accuracy of cost estimates and other factors. We have a number of
fixed-price contracts, most of which were entered into on a negotiated
basis. We also have fixed-price contracts awarded based on competitive
bids.  The accuracy of the gross margins we report for fixed-price contracts is
dependent upon the judgments we make with respect to our contract
performance, our cost estimates, and our ability to recover additional
contract costs through change orders, claims or backcharges to the customer,
subcontractors and vendors. Many of these contracts also have
incentive/penalty provisions. Increases in cost estimates, unless recoverable
from claims, will result in a reduction in margin equivalent to the cost
increase.C.
    
    Revenues and gross margin on contracts can be significantly affected by
change orders and claims that may not be ultimately negotiated until the
later stages of a contract or subsequent to the date a contract is
completed. During the course of our work on a contract, disputes with
other parties involved in the contract can and often do occur. These
disputes are generally the result of one party incurring costs or damages
caused by another party during execution of the project. We may incur
additional costs or be damaged and we may cause additional costs or damage
other parties. The other parties include our customer on the contract,
subcontractors and vendors we have contracted with to execute portions of
the project and others. We may claim damages against others and others
may claim damages against us. Collectively, we refer to disputes related
to collection of these damages as claims. Claims include amounts in
excess of the agreed contract price (or amounts not included in the
original contract price) that we seek to collect from our customers for
delays, errors in specifications and designs, contract terminations,
change orders in dispute or unapproved as to both scope and price, or
other causes of unanticipated additional costs. These claims against
customers are included in our revenue estimates as additional contract
revenue to the extent that contract costs have been incurred when the
recovery of such amounts is probable. Backcharges and claims against and
from our customers, vendors, subcontractors and others are included in our
cost estimates as a reduction or increase in total estimated costs when
recovery or payment of the amounts are probable and the costs can be
reasonably estimated.When estimating the amount of total gross margin or loss on a contract, we
include claims related to our customers as adjustments to revenue and claims
related to vendors, subcontractors and others as adjustments to cost of
revenues when the collection is deemed probable and the amounts can be
reasonably estimated. Including claims in this calculation increases the
gross margin (or reduces the loss) that would otherwise be recorded 34




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without consideration of the claims. Our claims against others are recorded
to the extent of costs incurred and include no profit. In most cases, the
claims included in determining contract gross margin are less than the actual
claim that will be or has been presented.  Claims are included in costs and estimated earnings in excess of billings on
the balance sheet.Claims at August 31, 2004 and 2003 relate primarily to three major contracts,
all of which are complete or substantially complete. We are actively engaged
in claims negotiation with the other parties or have commenced legal
proceedings. See Note 20 of the notes to our consolidated financial statements for further
discussion of our significant claims. Other Revenue Recognition and Profit and Loss Estimates The revenue recognition policies related to our fabrication contracts,
consulting services, and manufacturing operations are described in the
accompanying notes to our consolidated financial statements. Because of the
nature of the contracts and related work, estimates and judgments are usually
not as significant in the determination of revenue and profit and loss for
these services as they are for the engineering, procurement and construction
contracts. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts related to estimated losses that
could result from the inability of certain of our customers to make required
payments. We record to expense additions to the allowance for doubtful accounts
based on managements assessment of a specific customers inability to meet its
financial obligations, and the balance of the allowance for doubtful accounts
for the specific customer reduces the recognized receivable to the net amount
we believe will be ultimately collected. If the financial condition of our
customers were to deteriorate resulting in an impairment of their ability to
make payments, further additions to the allowance for doubtful accounts, which
would reduce our earnings, may be required. These increases to the allowance
for doubtful accounts could be significant, depending upon (i) the size of
certain of our EPC contracts and (ii) the potential for us to perform a
substantial amount of unreimbursed work on significant projects prior to
customers notifying us of their intent not to pay the amounts due (see Note 1
of the notes to our consolidated financial statements). Income Taxes Deferred income taxes are provided on a liability method whereby deferred tax
assets/liabilities are established for the difference between the financial
reporting and income tax basis of assets and liabilities, as well as operating
loss and tax credit carryforwards and other tax credits. Deferred tax assets
are reduced by a valuation allowance when, in our opinion, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the period in which those temporary
differences become deductible. We also consider the reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment of such realization. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment. As of August 31, 2004, we had gross deferred tax assets of $115.2
million including $85.8 million related to net operating losses and tax credit
carryforwards. As of August 31, 2004, we had a deferred tax asset valuation
allowance of $9.8 million. Acquisitions  Fair Value Accounting and Goodwill Impairment Goodwill represents the excess of the cost of acquired businesses over the fair
value of their identifiable net assets. Our goodwill balance as of August 31,
2004 was approximately $522.8 million, most of which related to the Stone &
Webster acquisition in fiscal 2000 and the IT Group acquisition in fiscal 2002
(see Notes 4 and 8 of the notes to our consolidated financial statements). We completed our annual impairment test during the third quarter of fiscal 2004
in accordance with SFAS No. 142, Goodwill and Other Intangible Assets and
determined that goodwill was not impaired. We test goodwill for 35




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impairment at our operating segment level. In evaluating whether an impairment
of goodwill exists, we calculate the estimated fair value of each of our three
segments based on projected discounted cash flows as of the date we perform the
impairment tests. We then compare the resulting fair values by segment to the
respective net book values, including goodwill. If the net book value of a
segment exceeds its fair value, we measure the amount of the impairment loss by
comparing the implied fair value (which is a reasonable estimate of the value
of goodwill for the purpose of measuring an impairment loss) of the segments
goodwill to the carrying amount of that goodwill. To the extent that the
carrying amount of a segments goodwill exceeds its implied fair value, we
recognize a goodwill impairment loss at that time. In evaluating whether there
was an impairment of goodwill, we also take into consideration changes in our
business mix and changes in our projected discounted cash flows, in addition to
our stock price and market value of interest-bearing obligations. We do not
believe any events have occurred since our annual impairment test that would
cause an impairment of goodwill. However, our businesses are cyclical and
subject to competitive pressures. Therefore, it is possible that the goodwill
values of our businesses could be adversely impacted in the future by these or
other factors and that a significant impairment adjustment, which would reduce
earnings and affect various debt covenants, could be required in such
circumstances. Our next required annual impairment test will be conducted in
the third quarter of fiscal 2005 unless indicators of impairment occur prior to
that time. Our estimates of the fair values of the tangible and intangible assets and
liabilities we acquire in acquisitions are determined by reference to various
internal and external data and judgments, including the use of third party
experts. These estimates can and do differ from the basis or value (generally
representing the acquired entitys actual or amortized cost) previously
recorded by the acquired entity for its assets and liabilities. Accordingly,
our post-acquisition financial statements are materially impacted by and
dependent on the accuracy of managements fair value estimates and adjustments.
Our experience has been that the most significant of these estimates are the
values assigned to construction contracts, production backlog, customer
relationships, licenses and technology. These estimates can also have a
positive or negative material effect on future reported operating results.
Further, our future operating results may also be positively or negatively
materially impacted if the final values for the assets acquired or liabilities
assumed in our acquisitions are materially different from the fair value
estimates which we recorded for the acquisition. Long-Lived Assets We periodically assess the
recoverability of the unamortized balance of our intangible assets,
including licenses,
patents, technology and related processes, based on
expected future profitability and undiscounted expected cash flows and their
contribution to our overall operations. Should the review indicate that the
carrying value is not fully recoverable, the excess of the carrying value over
the fair value of the other intangible assets would be recognized as an
impairment loss. Litigation, Commitments and Contingencies We are subject to various claims, lawsuits, environmental matters and
administrative proceedings that arise in the ordinary course of business.
Estimating liabilities and costs associated with these matters requires
judgment and assessment based on professional knowledge and experience of our
management and legal counsel. In accordance with SFAS No. 5, Accounting for
Contingencies, amounts are recorded as charges to earnings when we determine
that it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated. The ultimate resolution of any such exposure may
vary from earlier estimates as further facts and circumstances become known. Retirement Benefits Assumptions used in determining projected benefit obligations and the fair
value of plan assets for our pension plans are regularly evaluated by
management in consultation with outside actuaries who are relied upon as
experts. In the event that we determine that changes are warranted in the
assumptions used, such as the discount rate, expected long-term rate of return
on investments, or future salary costs, our future pension benefit expenses
could increase or decrease. As of August 31, 2004, we had a minimum pension
liability recorded of $20.9 million. This liability will likely require us to
increase our future cash contributions to the plans. General We segregate our business activities into three operating segments:
Environmental and Infrastructure (E&I) 36




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segment, Engineering, Construction & Maintenance (ECM) segment, and
Fabrication, Manufacturing and Distribution segment. Environmental & Infrastructure The E&I segment provides services which include the identification of
contaminants in soil, air and water and the subsequent design and execution of
remedial solutions. This segment also provides project and facilities
management and other related services to non-environmental construction,
watershed restoration and outsourcing privatization markets. Engineering, Construction & Maintenance The ECM segment provides a range of project-related services, including design,
engineering, construction, procurement, maintenance, technology and consulting
services, primarily to the power generation and process industries. Fabrication, Manufacturing and Distribution The Fabrication, Manufacturing and Distribution segment provides integrated
piping systems and services for new construction, site expansion and retrofit
projects for industrial plants. On August 31, 2004, we sold our hanger
engineering and pipe support businesses for approximately $1.3 million. These
businesses designed, engineered and fabricated pipe hangers, mechanical
scrubbers, and specialty stainless, alloy and carbon steel pipe fittings. The
results of operations for the hanger engineering and pipe support businesses
are presented as discontinued operations in the statements of operations for
the years ended August 31, 2004, 2003 and 2002. Comments Regarding Future Operations Historically, we have used acquisitions to pursue market opportunities and to
augment or increase existing capabilities and plan to continue to do so.
However, all comments concerning our expectations for future revenue and
operating results are based on our forecasts for our existing operations and do
not include the potential impact of any future acquisitions. Results Of Operations A substantial portion of our revenue and profit, particularly for our ECM and
E&I segments, is derived from EPC
projects. Some of these projects may span several years from start to finish.
We recognize revenue and margin for these contracts on the
percentage-of-completion method which requires estimates of the total revenue
and total costs at completion, as well as the progress towards completion.
These estimates are dependent upon judgments including material costs and
quantities, labor productivity, subcontractor performance and other factors.
In addition, disputes on our projects can and sometimes do occur with our
customers, subcontractors and equipment vendors that require significant
judgment as to the ultimate resolution and may take an extended period of time
to resolve. The percentage-of-completion method requires that adjustments to
estimated revenues and costs, including estimated claim recoveries, be
recognized on a cumulative basis, when the adjustments are identified. When
adjustments are identified, the impact of the change in estimate would be
recognized as a change in the margin on the contract in that period. This can
result in a material impact on our results for a single reporting period.
Therefore, our discussion of results includes descriptions of significant
changes in major projects and their impact on our results. The following table presents, for the periods indicated, summary revenues,
gross profit and gross profit percentages (in millions, except for
percentages): 37




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##### Table of Contents



Year Ended August 31,2004
    
    2003
    
    2002Revenues:E&I
    
    $
    1,329.4
    
    
    $
    1,203.8
    
    
    $
    489.8ECM
    
    
    1,567.2
    
    
    
    1,840.3
    
    
    
    2,276.4Fabrication, Manufacturing and Distribution
    
    
    180.3
    
    
    
    248.7
    
    
    
    382.9Total revenue
    
    $
    3,076.9
    
    
    $
    3,292.8
    
    
    $
    3,149.1Gross profit:E&I
    
    $
    160.6
    
    
    $
    133.4
    
    
    $
    69.3ECM
    
    
    28.6
    
    
    
    95.5
    
    
    
    170.4Fabrication, Manufacturing and Distribution
    
    
    30.6
    
    
    
    40.9
    
    
    
    81.3Total gross profit
    
    $
    219.8
    
    
    $
    269.8
    
    
    $
    321.0Gross profit percentage:E&I
    
    
    12.1
    %
    
    
    11.1
    %
    
    
    14.1
    %ECM
    
    
    1.8
    
    
    
    5.2
    
    
    
    7.5Fabrication, Manufacturing and Distribution
    
    
    17.0
    
    
    
    16.4
    
    
    
    21.2Total gross profit percentage
    
    
    7.1
    
    
    
    8.2
    
    
    
    10.2
 Our revenues by industry sector were as follows (in millions, except for
percentages): Year Ended August 31,2004
    
    2003
    
    2002Industry Sector
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %Environmental and
Infrastructure
    
    $
    1,329.4
    
    
    
    43
    %
    
    $
    1,203.8
    
    
    
    37
    %
    
    $
    489.8
    
    
    
    16
    %Power Generation
    
    
    1,115.5
    
    
    
    36
    
    
    
    1,536.2
    
    
    
    47
    
    
    
    2,217.8
    
    
    
    70Process Industries
    
    
    544.2
    
    
    
    18
    
    
    
    440.5
    
    
    
    13
    
    
    
    258.5
    
    
    
    8Other Industries
    
    
    87.8
    
    
    
    3
    
    
    
    112.3
    
    
    
    3
    
    
    
    183.0
    
    
    
    6$
    3,076.9
    
    
    
    100
    %
    
    $
    3,292.8
    
    
    
    100
    %
    
    $
    3,149.1
    
    
    
    100
    %
 The following tables present our revenues by geographic region (in millions,
except for percentages): Year Ended August 31,2004
    
    2003
    
    2002Geographic Region
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %United States
    
    $
    2,511.6
    
    
    
    82
    %
    
    $
    2,800.9
    
    
    
    85
    %
    
    $
    2,737.3
    
    
    
    87
    %Asia/Pacific Rim
    
    
    223.4
    
    
    
    7
    
    
    
    219.8
    
    
    
    7
    
    
    
    146.1
    
    
    
    5Middle East
    
    
    151.3
    
    
    
    5
    
    
    
    12.0
    
    
    
    
    
    
    
    10.8
    
    
    
    Europe
    
    
    96.3
    
    
    
    4
    
    
    
    101.9
    
    
    
    3
    
    
    
    103.7
    
    
    
    3Canada
    
    
    74.5
    
    
    
    2
    
    
    
    127.7
    
    
    
    4
    
    
    
    108.2
    
    
    
    4South America and
Mexico
    
    
    7.2
    
    
    
    
    
    
    
    14.7
    
    
    
    
    
    
    
    27.6
    
    
    
    1Other
    
    
    12.6
    
    
    
    
    
    
    
    15.8
    
    
    
    1
    
    
    
    15.4
    
    
    
    $
    3,076.9
    
    
    
    100
    %
    
    $
    3,292.8
    
    
    
    100
    %
    
    $
    3,149.1
    
    
    
    100
    %
 Backlog by segment is as follows (in millions, except for percentages): Year Ended August 31,2004
    
    2003
    
    2002(In Millions)
    
    %
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %E&I
    
    $
    2,856.4
    
    
    
    50
    %
    
    $
    2,783.9
    
    
    
    59
    %
    
    $
    2,313.7
    
    
    
    41
    %ECM
    
    
    2,793.8
    
    
    
    48
    
    
    
    1,868.3
    
    
    
    39
    
    
    
    3,017.0
    
    
    
    54Fabrication,
Manufacturing and
Distribution
    
    
    115.8
    
    
    
    2
    
    
    
    99.1
    
    
    
    2
    
    
    
    274.0
    
    
    
    5$
    5,766.0
    
    
    
    100
    %
    
    $
    4,751.3
    
    
    
    100
    %
    
    $
    5,604.7
    
    
    
    100
    %
 Backlog by industry sector is as follows (in millions, except for percentages): 38




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Year Ended August 31,2004
    
    2003
    
    2002Industry Sector
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %Environmental and
Infrastructure
    
    $
    2,856.4
    
    
    
    50
    %
    
    $
    2,783.9
    
    
    
    59
    %
    
    $
    2,313.7
    
    
    
    41
    %Power Generation
    
    
    2,176.7
    
    
    
    38
    
    
    
    1,399.7
    
    
    
    29
    
    
    
    2,690.2
    
    
    
    48Process Industries
    
    
    723.2
    
    
    
    12
    
    
    
    529.1
    
    
    
    11
    
    
    
    497.8
    
    
    
    9Other Industries
    
    
    9.7
    
    
    
    
    
    
    
    38.6
    
    
    
    1
    
    
    
    103.0
    
    
    
    2$
    5,766.0
    
    
    
    100
    %
    
    $
    4,751.3
    
    
    
    100
    %
    
    $
    5,604.7
    
    
    
    100
    %
 Executive Summary During fiscal 2004, we experienced increasing activity in our ECM and E&I
segments as reflected in our backlog, with new power generation projects in New
York and Utah, increasing activity in the process maintenance and process
technology sectors, and new awards in the Middle East. However, fiscal 2004
revenue was negatively impacted by a reduction in the number of domestic new
construction power projects offset by higher revenue from the transmission and
distribution sector through our EDS acquisition in December 2003, and E&I
service contracts supporting U.S. Government projects in Iraq. The major factors contributing to the decrease in our ECM segment gross profit
percentages for fiscal 2004 as compared to fiscal 2003 were:  
    
    charges related to the Covert and Harquahala projects; and  
    
    decrease in overall activity of domestic new construction power plants. During the third quarter of fiscal 2004, we determined that our hanger
engineering and pipe support businesses which are included in our Fabrication,
Manufacturing and Distribution segment should no longer be part of our core
business plan, and therefore began actively marketing these businesses. Placing
these businesses as available for sale resulted in an impairment charge and
restatement to reflect these businesses as discontinued operations. The
primary assets of these operations were sold on August 31, 2004. Our backlog increased significantly in fiscal 2004 with new project awards
including two EPC contracts in New York and Utah, desulphurization contracts
for two customers, new contracts related to clean fuels emissions projects as
well as increased awards on U.S. Government contracts in the Middle East. Backlog is largely a reflection of the broader positive economic trends being
experienced by our customers and is important in anticipating operational
needs. Backlog is not a measure defined in generally accepted accounting
principles, and our methodology in determining backlog may not be comparable to
the methodology used by other companies in determining their backlog. We cannot
provide any assurance that revenues projected in our backlog will be realized,
or if realized, will result in profits. See Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations  Backlog for
further discussion of our methodology in determining backlog. We have continued to use cash in support of our operations, capital
expenditures and acquisitions, specifically, our acquisition of Energy Delivery
Services, Inc. in December 2003 and capital contributions to our military
housing privatization joint venture entities. Our financing activities have
been a source of cash for us with two equity issuances in October 2003 and May
2004 which allowed us to pay down our LYONs debt. The following presents a comparison of our operating results (and certain other
information) for fiscal 2004 as compared with fiscal 2003 for our three
business segments. Fiscal 2004 Compared to Fiscal 2003 E&I Segment 39




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Revenues  E&I Segment The increase in revenues of $125.6 million or 10.4% for fiscal 2004 as compared
to fiscal 2003 is primarily attributable to:  
    
    project services supporting the U.S. Government customers in Iraq of $119.1 million;  
    
    public works and logistic support services for the U.S. Army
of $45.1 million; and  
    
    offset by a decrease in domestic federal remediation work of approximately $64.3 million. During fiscal 2004, we have incurred bid and proposal, business development,
start-up expenses, and other contract support costs of $8.1 million associated
with pursuing new opportunities for international projects in the Middle East
for our federal customers and others. To date, we have won federal contract
awards for unfunded projects in Iraq of approximately $1.5 billion. As of
August 31, 2004, we have approximately $273 million in unfunded backlog based
on task orders received and our estimate of backlog utilization based on the
current political and infrastructure developments in Iraq. Gross Profit and Gross Profit Percentage  E&I Segment The increase in gross profit and gross profit percentage for fiscal 2004 as
compared to fiscal 2003 is due primarily to:  
    
    a reduction in the estimated cost to complete a major fixed-price
contract impacting gross profit by $12.0 million in 2004;  
    
    a favorable contract settlement on a completed project of $5.0
million in 2004;  
    
    favorable completion activities on a major time and materials project
and revisions to cost estimates based on revised scope activities
yielded an additional $4.4 million gross profit in 2004;  
    
    a reduction in a warranty liability of approximately $2.2 million in
2004; and  
    
    an increase of $1.5 million for a one-time reduction in an employee
benefits accrual relating to a change in an employee benefits policy in
2004. Gross profit and gross profit percentage for fiscal 2004 and fiscal 2003
reflect an increase (decrease in cost of revenues) of $8.2 million and $19.3
million, respectively, for amortization of contract asset/liability adjustments
related to contracts acquired in the IT Group acquisition, and $9.0 million and
$12.2 million for fiscal 2004 and 2003, respectively, for the recognition of
accrued loss reserves related to contracts acquired in the IT Group
acquisition. Backlog  E&I Segment Backlog for the E&I segment was $2.9 billion as of August 31, 2004 compared to
$2.8 billion as of August 31, 2003. The increase in backlog is primarily
attributable to increased awards for services to U.S. Government customers in
Iraq of approximately $273 million, the award of a world wide contract with
backlog of approximately $165 million along with steady backlog derived from
our commercial customers domestically. These increases were offset by
scheduled work and completed projects during fiscal 2004. We believe E&I
segment revenues will remain consistent in fiscal 2005, but increase over the next several years as a result of a
combination of factors, including market opportunities in various environmental
clean-up, homeland security and both domestic and international infrastructure
markets, including the Middle East. 40




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We anticipate fiscal 2005 revenues to be generally consistent with fiscal 2004;
however, we expect our gross profit to decrease in fiscal 2005 due to a change
in the mix of work, with the completion of some of our large projects in fiscal
2004 with the expectation of new work based on a more competitive environment
in this industry sector. ECM Segment The following table presents ECM revenues from customers in the following
industry sectors: Year Ended August 31,2004
    
    2003Industry Sector
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %Power Generation
    
    $
    1,054.8
    
    
    
    67
    %
    
    $
    1,446.8
    
    
    
    79
    %Process Industries
    
    
    470.9
    
    
    
    30
    
    
    
    322.7
    
    
    
    17Other Industries
    
    
    41.5
    
    
    
    3
    
    
    
    70.8
    
    
    
    4$
    1,567.2
    
    
    
    100
    %
    
    $
    1,840.3
    
    
    
    100
    %
 Revenues  ECM Segment The decrease of $273.1 million or 14.8% in segment revenue for fiscal 2004
compared to fiscal 2003 is due to several contributing factors including:  
    
    the completion and winding-down of several domestic new construction
power plants that commenced prior to fiscal 2003, specifically the
completion of gas-fired power generation projects and related power
engineering and construction activity in fiscal 2003, with minimal
activity for new construction gas-fired power generation projects during
fiscal 2003 and early fiscal 2004 due to a weakened power market;  
    
    the decrease was offset by an increase in revenues from engineering
and procurement activities on the combined-cycle power plants in Queens,
New York and Mona, Utah and services to other customers related to the
process industries, nuclear restart project and engineering services
related to our proprietary technologies; an increase from maintenance
services related to multi-location service contracts signed with several
customers during fiscal 2003; and an increase in revenues of $111.0
million for fiscal 2004 generated by our EDS operations acquired in the
second quarter of fiscal 2004. Gross Profit and Gross Profit Percentages  ECM Segment The decrease in gross profit and gross profit percentage for fiscal 2004
compared to fiscal 2003 is due primarily to:  
    
    a $39.3 million charge related to the Covert and Harquahala projects
(the NEG projects) in fiscal 2004 and a reduction in our estimated
claims recovery and an increase in estimated cost at completion related
to the Harquahala project for costs related primarily to the duration of
our involvement in start-up and on warranty related activities compared
to a $30.0 million charge related to the NEG projects in fiscal 2003.
(see Note 20 to our consolidated financial statements for additional
discussion of the NEG projects);  
    
    a negative impact of $5.5 million related to a reduction of our
incentive fee on a target-price contract to build a combined-cycle
cogeneration facility near Philadelphia, Pennsylvania;  
    
    a reduction in our estimated claims recovery in the fourth
quarter of fiscal 2004 of approximately $4.0 million on a UK construction
project that was substantially complete in 2003;  
    
    pass-through equipment and other costs primarily on the power plant project in Queens, New York; and  
    
    a decrease in activity in our UK construction operations. 41




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Our margins for fiscal 2003 were positively impacted by approximately $28.0
million in gross profit recognition on certain projects that were substantially
complete prior to fiscal 2003 due to favorable resolution of remaining
estimated costs and exposures on such projects. The decrease in gross profit and gross profit percentage for fiscal 2004 as
compared to fiscal 2003 was partially offset by:  
    
    an increase in gross profit due to the increase in activity as we
ramp up progress on two combined-cycle power plants in Queens, New York
and Mona, Utah;  
    
    an increase in margin related to sales of our proprietary technology
from our Badger joint venture which we acquired in the third quarter of
fiscal 2003;  
    
    an increase in activity on the TVA nuclear restart project beginning
in the first quarter of fiscal 2004; and  
    
    the positive impact on gross profit from the acquisition of EDS which
occurred in the second quarter of fiscal 2004. Gross profit and gross profit percentage for fiscal 2004 and 2003 reflect an
increase (decrease in cost of revenues) of $5.2 million and $7.6 million for
amortization of contract liability adjustments related to contracts acquired in
the fiscal 2000 Stone & Webster acquisition. As major projects are completed and their project costs finalized, the ECM
segments margins have been, and we expect will continue to be, positively or
negatively impacted by contract completion negotiations with customers,
subcontractors and vendors on such projects as well as the outcome of litigation and settlement discussions. Backlog  ECM Segment Segment backlog at August 31, 2004 was approximately $2.8 billion, compared
with approximately $1.9 billion at August 31, 2003, and was comprised of the
following: August 31, 2004
    
    August 31, 2003Industry Sector
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %Power GenerationNuclear Power
    
    $
    1,033.1
    
    
    
    37
    %
    
    $
    1,113.7
    
    
    
    60
    %Fossil Fuel EPC
    
    
    1,013.2
    
    
    
    36
    
    
    
    198.6
    
    
    
    11Other
    
    
    58.7
    
    
    
    2
    
    
    
    39.9
    
    
    
    2Total Power Generation
    
    
    2,105.0
    
    
    
    75
    
    
    
    1,352.2
    
    
    
    73Process Industries
    
    
    686.3
    
    
    
    25
    
    
    
    504.3
    
    
    
    27Other Industries
    
    
    2.5
    
    
    
    
    
    
    
    11.8
    
    
    
    Total ECM
    
    $
    2,793.8
    
    
    
    100
    %
    
    $
    1,868.3
    
    
    
    100
    %
 ECM segments backlog has increased $925.5 million or 49.5% from August 31,
2003 primarily due to growth in our fossil fuel EPC backlog. Our fossil fuel
EPC backlog includes the uncompleted portions of a $565 million fixed-priced
EPC contract and a $170 million target-priced EPC contract to build gas-fired
combined-cycle power plants. Additionally, backlog has increased due to a new
customer contract for cleaner air emissions on four power plants as well as the
expansion of EPC services to an existing customer related to cleaner air
emissions. Backlog has also been increased for the expansion of nuclear and
process maintenance services to both new and existing customers. Given recent new project awards in fiscal 2004 for domestic gas-fired power
plants as well as an increase in demand for services in the power and process
industries, we expect revenues to increase in fiscal 2005 as compared to fiscal
2004 with improved gross profit percentages in fiscal 2005. Fabrication, Manufacturing and Distribution Segment Revenues  Fabrication, Manufacturing and Distribution Segment 42




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The decrease in revenue of $68.4 million or 27.5% in fiscal 2004 as compared to
fiscal 2003 is attributable to reduced domestic demand, primarily from power
generation customers, without material offsetting increases in other industry
sectors. The process industry (chemical, petro-chemical and refinery) comprises
the majority of our fiscal 2004 revenues. Revenue in fiscal 2004 also includes
$5.1 million in revenue from Shaw-Nass Middle East, W.L.L. and our China joint
venture which were consolidated effective May 31, 2004 in accordance with FIN
46(R). The China joint venture was subsequently deconsolidated effective
August 27, 2004. Gross Profit and Gross Profit Percentage  Fabrication, Manufacturing and
Distribution Segment The reduced demand for the segments products and the increase in overall
market competitiveness has had a negative impact on pricing which has impacted
gross profit and gross profit percentage for fiscal 2004; however, we continue
to experience an increase in activity into early fiscal 2005. This lower gross
profit and gross profit percentage in fiscal 2004 was slightly offset by
ceasing production at certain smaller facilities, consolidating operations, and
implementing other cost savings programs for this segment. During the third quarter of fiscal 2004, we began marketing for sale our hanger
engineering and pipe support businesses. In connection with this asset disposal
plan, we recognized a $3.0 million (net of tax of $2.0 million) impairment
charge for fiscal 2004 (see Note 21 to our consolidated financial statements).
The operating results of Fabrication, Manufacturing and Distribution have been
restated to reflect these businesses as discontinued operations. On August 31,
2004, we sold these businesses for $1.3 million in cash. Backlog  Fabrication, Manufacturing and Distribution Segment Backlog for this segment has increased from $99.1 million at August 31, 2003 to
$115.8 million at August 31, 2004. The increase in backlog reflects new
contracts to process industry customers and the addition of $3.4 million in
backlog from Shaw-Nass Middle East, W.L.L., a non-wholly owned entity that was
consolidated effective May 31, 2004 in accordance with FIN 46(R). The increase
in backlog was partially offset by work performed under existing contracts
during fiscal 2004. Based on our market outlook, we expect revenues and gross profit levels to
slightly increase for the first two quarters of fiscal 2005 with further
improvement in revenues and gross profit for the remainder of fiscal 2005 given
the recent increased demand. Unconsolidated Entities During fiscal 2004, we recognized earnings of $2.6 million (net of tax of $2.9
million) as compared to a loss of $3.0 million (net of a tax benefit of $1.6
million) for fiscal 2003 from operations of unconsolidated entities, including
joint ventures, which are accounted for using the equity method. Included in
the earnings of fiscal 2004 is $2.7 million related to the operations of Space
Gateway, LLC, an unconsolidated joint venture acquired in the IT Group
acquisition. In August 2004, we sold our interest for cash proceeds of $9.0
million and realized a gain on the sale of $0.8 million. The loss in fiscal
2003 includes a loss related to the winding down of operations for EntergyShaw
(see Note 6 to our consolidated financial statements). General and Administrative Expenses, Interest Expense and Income, Other Income
(Expense), Income Taxes, and Other Comprehensive Income General and administrative expenses were approximately $215.8 million in fiscal
2004 compared with approximately $197.7 million in fiscal 2003. Our general and
administrative expenses for fiscal 2004 included amortization expense of $29.4
million related to the acceleration of amortization of certain software assets
in the first quarter of fiscal 2004 as a result of a successful implementation
of software systems (see Note 8 to our consolidated financial statements). The
$29.4 million of accelerated depreciation includes $10.2 million of
amortization that would have been recorded on these assets in fiscal 2004 had
we not accelerated the amortization resulting in a net increase of general and
administrative expenses of $19.2 million for fiscal 2004 over fiscal 2003. The
remaining increase is due primarily to the inclusion of the results of Badger
Technologies, which we acquired in April 2003, for a full year in 2004, the
inclusion of the operating results of Shaw EDS which we acquired in 43




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December 2003 and the impact of the consolidation of several variable interest
entities as required by FIN 46(R) which were previously reported on an
unconsolidated basis. For fiscal 2004, general and administrative expenses were 7.0% of revenues as
compared to 6.0% for fiscal 2003. Without the additional amortization of $19.2
million, general and administrative expenses as a percentage of revenues were
relatively consistent with fiscal 2003. Interest expense was approximately $38.4 million for fiscal 2004, compared to
approximately $32.0 million for fiscal 2003. The increase over prior year is
primarily due to the issuance on March 17, 2003 of approximately $253.0
million, 10.75% Senior Notes, partially offset by a reduction in interest
expense related to LYONs repurchases with a total amortized value of
approximately $530.6 million in late fiscal 2003 and throughout fiscal 2004
(see Note 9 to our consolidated financial statements). Our interest costs also
include the amortization of loan fees associated with the Senior Notes, the
LYONs and the Credit Facility, as well as unused line of credit and letter of
credit fees, and therefore, our interest expense is higher than would be
expected based on our borrowing levels and the stated interest rates. Interest income for fiscal 2004 decreased to approximately $1.7 million as
compared to $5.4 million for fiscal 2003, as a result of lower levels of
invested funds due to use of working capital, acquisitions and cash paid for
the repurchase of a portion of the LYONs. The LYONs repurchases in fiscal 2004 resulted in a loss of approximately $1.3
million which included expenses and the write-off of unamortized debt issuance
costs (see Note 9 to our consolidated financial statements). We recognized a
gain of $2.7 million on LYON repurchases in fiscal 2003. We also recorded foreign currency transaction losses of $2.7 million in fiscal
2004, as compared to a gain of $0.1 million in fiscal 2003. These foreign
currency transaction losses are primarily due to U.S. dollar denominated cash
accounts held by our foreign subsidiaries whose functional currency
strengthened compared to the U.S. dollar in fiscal 2004 and fiscal 2003.
Although these foreign currency transaction gains (losses) are reflected in the
statements of operations, substantially all of these gains (losses) did not
directly impact our cash position on a consolidated basis. Our effective tax rate was 33% for both fiscal 2004 and 2003. Our tax rate is
significantly impacted by the mix of foreign (including foreign export
revenues) versus domestic work. We did not pay any federal income taxes in
fiscal 2004 primarily because of a projected taxable loss for fiscal
2004 and the availability of operating losses resulting from the IT
Group and Stone & Webster acquisitions. In fiscal 2004 and
2003, we recorded a valuation allowance of $6.4 million and $2.4 million,
respectively, against certain foreign net operating loss carryforwards. The
valuation allowance reflects our judgment that it is more likely than not that
a portion of the deferred tax assets will not be realized. We believe that the remaining deferred
tax assets at August 31, 2004 amounting to $105.4 million, are realizable
through future reversals of existing taxable temporary differences and future
taxable income and the timing of future reversals of existing taxable temporary
differences. Uncertainties that affect the ultimate realization of deferred tax
assets include the risk of not having future taxable income. These factors have
been considered in determining the valuation allowances. As of August 31,
2004, we have classified $53.5 million of deferred tax assets net of valuation
allowances, related to net operating loss carryforwards, research and
development credits and foreign tax credits as non-current as we do not
anticipate realization of these amounts in the next twelve months. The
long-term deferred tax assets have been offset by long-term deferred tax
liabilities resulting in a $20.6 million net long-term deferred tax asset as of
August 31, 2004. The loss from discontinued operations of $4.7 million (net of tax of $3.1
million), in fiscal 2004 includes a $3.0 million (net of a tax benefit of $2.0
million) impairment charge related to an asset disposal plan of our hanger
engineering and pipe support businesses within our Fabrication, Manufacturing
and Distribution segment which are classified as discontinued operations (see
Note 21 to the consolidated financial statements). On August 31, 2004, the
assets of these discontinued operations were sold for $1.3 million in net cash
proceeds. Fiscal 2003 Compared to Fiscal 2002 General 44




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Our revenues by industry sector were as follows: Year Ended August 31,2003
    
    2002Industry Sector
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %Environmental and Infrastructure
    
    $
    1,203.8
    
    
    
    37
    %
    
    $
    489.8
    
    
    
    16
    %Power Generation
    
    
    1,536.2
    
    
    
    47
    
    
    
    2,217.8
    
    
    
    70Process Industries
    
    
    440.5
    
    
    
    13
    
    
    
    258.5
    
    
    
    8Other Industries
    
    
    112.3
    
    
    
    3
    
    
    
    183.0
    
    
    
    6$
    3,292.8
    
    
    
    100
    %
    
    $
    3,149.1
    
    
    
    100
    %
 The increase in total revenue from 2002 to 2003 was primarily attributable to
an increase in revenue from our E&I segment, partially reduced by the extended
weakness in the domestic power market, which has had a pervasive negative
impact on our ECM and Fabrication, Manufacturing and Distribution segment
revenues. Revenue from the power generation sector was approximately $681.6
million less in fiscal 2003 than in fiscal 2002, as revenue from several large
gas-fired power generation projects, which commenced in fiscal 2001 and early
fiscal 2002, declined upon completion of those projects. The decrease in power
industry revenue was offset by a $713.8 million increase in environmental and
infrastructure revenue from fiscal 2002 to fiscal 2003, due primarily to the
acquisition of the IT Group in May 2002 (see Note 4 of the notes to our
consolidated financial statements), and a $182.0 million increase in process
revenue, due primarily to a 600,000 tons-per-year ethylene plant project in
China. The following tables present our revenues by geographic region: Year Ended August 31,2003
    
    2002Geographic Region
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %United States
    
    $
    2,800.9
    
    
    
    85
    %
    
    $
    2,737.3
    
    
    
    87
    %Asia/Pacific Rim
    
    
    219.8
    
    
    
    7
    
    
    
    146.1
    
    
    
    5Canada
    
    
    127.7
    
    
    
    4
    
    
    
    108.2
    
    
    
    4Europe
    
    
    101.9
    
    
    
    3
    
    
    
    103.7
    
    
    
    3South America and Mexico
    
    
    14.7
    
    
    
    1
    
    
    
    27.6
    
    
    
    1Middle East
    
    
    12.0
    
    
    
    
    
    
    
    10.8
    
    
    
    Other
    
    
    15.8
    
    
    
    
    
    
    
    15.4
    
    
    
    $
    3,292.8
    
    
    
    100
    %
    
    $
    3,149.1
    
    
    
    100
    %
 Revenues for projects in the United States increased $63.6 million for the year
ended August 31, 2003 due primarily to growth in environmental and
infrastructure revenues, partially offset by the previously mentioned decline
in power generation revenues. Revenues from international projects increased to $491.9 million for the year
ended August 31, 2003 from $411.8 million for the year ended August 31, 2002.
The revenue increase in the Asia Pacific Rim region was primarily due to the
result of the work performed on the ethylene plant in China. The increase in
revenue in Canada was due primarily to an environmental consulting unit
acquired through the IT Group acquisition. Backlog by industry sector is as follows: At August 31,2003
    
    2002Industry Sector
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %Environmental and Infrastructure
    
    $
    2,783.9
    
    
    
    59
    %
    
    $
    2,313.7
    
    
    
    41
    %Power Generation
    
    
    1,399.7
    
    
    
    29
    
    
    
    2,690.2
    
    
    
    48Process Industries
    
    
    529.1
    
    
    
    11
    
    
    
    497.8
    
    
    
    9Other Industries
    
    
    38.6
    
    
    
    1
    
    
    
    103.0
    
    
    
    2$
    4,751.3
    
    
    
    100
    %
    
    $
    5,604.7
    
    
    
    100
    %
 The decrease in backlog of $853.4 million from August 31, 2002 is attributable
to reduction in demand for gas-fired power generation services, which resulted
in a decrease in new orders for our services. Since August 31, 2002, the
decline in power generation awards has been partially offset by increases in
awards for environmental and infrastructure services, services to the process
industry, and nuclear maintenance services. Approximately 91% of 45




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the backlog relates to domestic projects and approximately 36% of the backlog
relates to work projected at the time to be completed during the twelve months
following August 31, 2003. Power generation backlog at August 31, 2003 does not
include our $565 million fixed-price EPC contract (signed and announced in
September 2003) to build a combined-cycle power plant in Queens, New York. We
included this project in our backlog when financing for the project was
completed in 2004. Backlog is largely a reflection of the broader economic trends being
experienced by our customers and is important in anticipating operational
needs. Backlog is not a measure defined in generally accepted accounting
principles, and our methodology in determining backlog may not be comparable to
the methodology used by other companies in determining their backlog. We cannot
provide any assurance that revenues projected in our backlog will be realized,
or if realized, will result in profits. The following presents a comparison of our operating results (and certain other
information) for the year ended August 31, 2003 as compared with the year ended
August 31, 2002 for our three business segments. We have conformed our prior
year segment financial information to be consistent with our current year
presentation of our reorganized segments. E&I Segment The increase in revenues is primarily attributable to our acquisition of the IT
Group assets and operations in May 2002, as twelve months of revenues are
included in fiscal 2003 as compared to four months in fiscal 2002. (see Note 4
of the notes to our consolidated financial statements). The increase in gross profit was primarily attributable to our acquisition of
the IT Group assets and operations in May 2002. Gross profit was increased
(cost of revenues decreased) by approximately $19.3 million in fiscal 2003 and
$2.8 million in fiscal 2002 for the amortization of asset/liability adjustments
to the fair value of contracts acquired in the IT Group acquisition. In
addition, gross profit was increased (cost of revenues decreased) by
approximately $12.2 million in fiscal 2003 and $2.8 million in fiscal 2002 for
the usage of accrued loss reserves related to contracts acquired in the IT
Group acquisition (see Note 4 and Note 8 of the notes to our consolidated
financial statements). The reduction in the gross profit percentage in fiscal 2003 compared to fiscal
2002 was attributable to lower margin contracts associated with the businesses
acquired in the IT Group acquisition. The difference in the gross profit
percentages between our pre-IT Group environmental and infrastructure
operations (primarily infrastructure and hazardous material clean up and
disposal) and those acquired in the IT Group acquisition (environmental
clean-up, landfills and facilities management) is primarily attributable to
differences in customers, competition and mix of services. Backlog for the E&I segment increased to approximately $2.8 billion as of
August 31, 2003 from approximately $2.3 billion as of August 31, 2002. 46




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##### Table of Contents



ECM Segment The following tables present ECM revenues from customers in the following
industry sectors: Year Ended August 31,2003
    
    2002Industry Sector
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %Power Generation
    
    $
    1,446.8
    
    
    
    79
    %
    
    $
    1,996.5
    
    
    
    88
    %Process Industries
    
    
    322.7
    
    
    
    17
    
    
    
    186.8
    
    
    
    8Other Industries
    
    
    70.8
    
    
    
    4
    
    
    
    93.1
    
    
    
    4$
    1,840.3
    
    
    
    100
    %
    
    $
    2,276.4
    
    
    
    100
    %
 The decrease in total segment revenue from fiscal 2002 to fiscal 2003 was due
to the downturn in the domestic power market, specifically the decline in
gas-fired power generation projects and power engineering and consulting
activity which reduced new orders for our ECM services, partially offset by an
increase in revenue from process projects and nuclear maintenance and restart
projects. Process industry revenues increased primarily due to work on the
ethylene plant project in China that is scheduled to continue into fiscal 2005. Gross profit for the ECM segment for fiscal 2003 decreased from fiscal 2002,
due primarily to the reduction of estimated margins on certain contracts for
the construction of new gas-fired power plants, offset by increases in margin
on nuclear maintenance and restart projects and the ethylene plant project in
China. The ethylene plant in China contributed significantly more to gross
margin in the fourth quarter of 2003 than in each of the first three quarters
due to a reduction in the estimated cost at completion. The impact of the
reduction in the estimated cost positively impacted gross profit in the fourth
quarter of 2003 by $6.1 million. Gross margin for the third and fourth quarters
of 2003 also was positively impacted by increasing activity on the TVA nuclear
restart project and recognition of components of project incentives earned
based on our performance to-date on this project. Further, in the fourth
quarter of 2003, we recorded $5.0 million in revenue that we earned as a fee
for providing a letter of credit to an independent power producer (IPP) to
secure the IPPs power purchase agreement. As EPC projects that began in fiscal 2001 and early fiscal 2002 are completed
and their project costs finalized, the ECM segments margins have been, and we
expect will continue to be, positively or negatively impacted by contract
completion negotiations with customers and vendors on such projects. We
recognized $33.6 million in margin in 2003 as a result of the favorable
resolution of various contingencies, contract claims and backcharges related to
projects that were substantially complete at August 31, 2002. During fiscal
2003, we also recognized $4.3 million in margin as a result of the favorable
resolution of estimated project obligations which were recorded when we
acquired Stone & Webster in fiscal 2000. Gross profit percentage was negatively impacted by the Covert and Harquahala
projects (the NEG projects), on which we recorded revenues of $433.4 million
during 2003 and a $42.8 million charge ($33.1 million of which resulted from
reversal of gross profit recorded prior to fiscal 2003) related to the NEG
projects that negatively impacted the ECM segments gross profit by 4.6% for
fiscal 2003. This charge was a result of increased estimated costs to complete
these projects combined with an agreement with the owners of these projects and
their lenders that increased the contract prices by a total of $65.0 million
and converted the contracts from target-price to fixed-price (see Note 20 of
the notes to our consolidated financial statements for a discussion of claims
related to major ECM projects, including additional discussion of the Covert
and Harquahala projects). Of the $42.8 million loss recorded during 2003 on the
NEG projects, $4.9 million was recorded in the fourth quarter reflecting a
$19.2 million increase in estimated cost at completion of the projects, offset
by an increase in expected recovery of claims from NEG and backcharges and
liquidated damages expected from vendors and subcontractors totaling $14.3
million. Gross profit percentage was negatively impacted by the AES Wolf Hollow project,
on which we recorded revenues of $43.1 million during 2003 with a reversal of
previously recorded profit of $2.3 million. On this project, we recorded claims
receivable from our customer, AES, of $25.4 million and claims, backcharges and
other cost recovery receivables from subcontractors, vendors and others of $7.2
million (see Note 20 of the notes to our consolidated financial statements for
additional discussion of the Wolf Hollow project) in 2003. We reversed previously recorded profit of $4.3 million in the fourth quarter of
2003 resulting from the settlement with our customer of disputed change orders
and other items on our target-price EPC contract to build a combined-cycle
cogeneration facility near Philadelphia, Pennsylvania. The settlement agreement
eliminates our exposure to 47




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schedule risk and related liquidated damages, maintains our guaranteed minimum
fee and provides for incentives that allow us to earn profit in excess of the
minimum fee. In October 2003, we entered into a settlement agreement with a customer for
which we executed three separate projects prior to fiscal 2003. Under the
settlement agreement, we received $9.6 million representing the return of
amounts our customer had drawn on our letter of credit and payment for costs
incurred which were previously in dispute. We will record no gain or loss on
the settlement because the settlement proceeds are equal to the net assets
recorded. Gross profit for the year ended August 31, 2003 was increased (cost of revenues
decreased) by approximately $7.9 million in fiscal 2003 and $32.0 million in
fiscal 2002 for the amortization of contract liability adjustments related to
contracts acquired in the Stone & Webster acquisition in 2000 (see Note 8 of
the notes to our consolidated financial statements). For the year ended August 31, 2003, less ECM segment revenues were derived from
large equipment purchases. Such revenues were approximately $159.0 million for
the year ended August 31, 2003, compared to approximately $540.0 million for
the year ended August 31, 2002. Segment backlog at August 31, 2003 was approximately $1.9 billion, compared
with approximately $3.0 billion at August 31, 2002, and was comprised of the
following: Year Ended August 31,2003
    
    2002Industry Sector
    
    (In Millions)
    
    %
    
    (In Millions)
    
    %Power GenerationNuclear Power
    
    $
    1,113.7
    
    
    
    60
    %
    
    $
    1,189.1
    
    
    
    40
    %Fossil Fuel EPC
    
    
    198.6
    
    
    
    11
    
    
    
    998.9
    
    
    
    33Other
    
    
    39.9
    
    
    
    2
    
    
    
    334.7
    
    
    
    11Total Power Generation
    
    
    1,352.2
    
    
    
    73
    
    
    
    2,522.7
    
    
    
    84Process Industries
    
    
    504.3
    
    
    
    27
    
    
    
    430.7
    
    
    
    14Other Industries
    
    
    11.8
    
    
    
    
    
    
    
    63.6
    
    
    
    2Total ECM
    
    $
    1,868.3
    
    
    
    100
    %
    
    $
    3,017.0
    
    
    
    100
    %
 The ECM segments backlog declined from August 31, 2002 because the amount of
work performed on power generation contracts was not fully replaced with new
orders due to the downturn in demand for power generation services. Our fossil
fuel EPC backlog does not include our $565 million fixed-price EPC contract
(signed and announced in September 2003) to build a combined-cycle power plant
in Queens, New York. Fabrication, Manufacturing and Distribution Segment The decreases in revenues and gross profit percentages in fiscal 2003 versus
fiscal 2002 were attributable to reduced domestic demand, primarily from power
generation customers, without offsetting increases in other industry sectors.
The reduced demand for the segments products has had a negative impact on
pricing and gross profit. Backlog for this segment has decreased from $274.0
million at August 31, 2002 to $99.1 million at August 31, 2003. This decrease
includes a $75.5 reduction of backlog from one customer in the power industry. As a result of the current market situation, we have decided to significantly
reduce or cease production at certain smaller facilities, consolidate certain
operations, and implement certain other cost savings programs for this segment.
Further, we have suspended operations at our facility in Venezuela due to the
political situation in that 48




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country. Unconsolidated Subsidiaries During fiscal 2003, we recognized a loss of $3.0 million (net of taxes of $1.6
million) from operations of unconsolidated subsidiaries, including joint
ventures, which are accounted for using the equity method. These losses were
primarily attributable to three joint ventures including our Entergy/Shaw,
Shaw-Nass and Shaw YPC Piping (Nanjing) Co. LTD joint venture. The Entergy/Shaw joint
venture has no active projects as of August 31, 2003. As of August 31, 2003, we
have a negative investment balance of $2.2 million, and we expect to continue
to fund the joint venture until it is dissolved as all projects were completed
as of August 31, 2003. The loss in the Shaw-Nass joint venture was due to
weaker sales of fabricated pipe in the Middle East in fiscal 2003 as compared
to 2002 while the loss in the China joint venture reflects costs incurred in
the early stages of the joint venture until its facility is running at full
capacity which is scheduled for early calendar year 2004. In fiscal 2002, we
realized income of approximately $2.9 million (net of taxes of $1.6 million)
from the Entergy/Shaw joint venture and losses of $0.7 million (net of taxes of
$0.4 million) from Shaw-Nass net of taxes due to the operations of these
unconsolidated subsidiaries and joint ventures. General and Administrative Expenses, Interest Expense and Income, Other Income
(Expense), Income Taxes, and Other Comprehensive Income General and administrative expenses increased to approximately $197.7 million
in fiscal 2003, compared with approximately $157.8 million in fiscal 2002. As a
percentage of revenues, general and administrative expenses increased to 6.0%
in fiscal 2003 compared to 5.0% in fiscal 2002. A substantial portion of the
approximate $39.9 million increase in general and administrative costs are
attributable to the operations of the E&I segment (comprised largely of the IT
Group operations which we acquired during the third quarter of fiscal 2002). We
also incurred increased depreciation and facilities costs in fiscal 2003
resulting from capital projects and the move into our new corporate facility in
Baton Rouge, Louisiana completed in the latter part of fiscal 2002. General and
administrative costs for the fourth quarter and the fiscal year 2003 were
reduced by $3.4 million resulting from the favorable resolution of estimated
obligations recorded in the acquisition of Stone & Webster in fiscal 2000. Interest expense was approximately $32.0 million in fiscal 2003, compared to
approximately $23.0 million in fiscal 2002. The increase over prior year is
primarily due to the issuance on March 17, 2003 of approximately $253 million
principal amount of 7-year, 10.75% Senior Notes, partially offset by a
reduction in interest expense related to the LYONs repurchase with an amortized
value of approximately $256.7 million in March 2003 (see Note 9 of the notes to
our consolidated financial statements). Our interest costs also include the
amortization of loan fees associated with the Senior Notes, the LYONs and the
Credit Facility, as well as unused line of credit and letter of credit fees,
and therefore, our interest expense is higher than would be expected based on
our borrowing levels and the stated interest rates. A significant portion of
our interest expense (accretion of zero-coupon discount interest and
amortization of loan fees) represents non-cash charges. Interest income in fiscal 2003 decreased to approximately $5.4 million from
$11.5 million in fiscal 2002 as a result of lower levels of invested funds due
to use of working capital, cash paid for the repurchase of a portion of the
LYONs, and the purchase of treasury stock. For fiscal 2003, other income (expense) included a charge of approximately
$12.4 million for the write-off of (i) investments in securities available for
sale of Orion of approximately $6.6 million, (ii) accounts and claims
receivable due from Orion of approximately $5.0 million, and (iii) other
accounts receivable of approximately $0.8 million. Also included in other
income (expense) for fiscal 2003 were gains of approximately $2.0 million and
$0.8 million, net of expenses and the write-off of unamortized debt issuance
costs, related to the March 2003 and August 2003, respectively, repurchases of
portions of the LYONs (see Note 9 of the notes to our consolidated financial
statements). Our effective tax rate was 33% for fiscal 2003 compared to 36% for fiscal 2002.
Our tax rate is significantly impacted by the mix of foreign (including foreign
export revenues) versus domestic work. The decrease in the tax rate in fiscal
2003 versus fiscal 2002 is due primarily to the decrease in income before
taxes, and the related increase in the ratio of favorable permanent differences
to income before taxes. Additionally, the increased foreign income in 49




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fiscal 2003 had a lower overall rate of tax than domestic income. We did not
pay any federal income taxes in fiscal 2003 primarily because of a taxable loss
for the fiscal 2003 year and the utilization of operating losses resulting from
the IT Group and Stone & Webster acquisitions. In fiscal 2003, we established a
valuation allowance against the deferred tax asset for the Venezuelan net
operating losses and in fiscal 2002, we established a valuation allowance
against the deferred tax asset for the Australian net operating losses. The
valuation allowance reflects our judgment that it is more likely than not that
a portion of the deferred tax assets will not be realized. We believe that the
remaining deferred tax assets at August 31, 2003, amounting to $95.9 million,
are realizable through future reversals of existing taxable temporary
differences and future taxable income. Uncertainties that affect the ultimate
realization of deferred tax assets include the risk of not having future
taxable income. This factor has been considered in determining the valuation
allowance. During fiscal 2003, the accumulated benefit obligations exceeded the fair value
of plan assets for two of our United Kingdom (U.K.) defined benefit retirement
plans and our Canadian defined benefit retirement plan, and a liability of
$14.9 million, net of tax was recorded (see Note 17 of the notes to our
consolidated financial statements). In accordance with SFAS No. 87, Employers
Accounting for Pensions, the increase in the minimum liability is recorded
through a direct charge to stockholders equity and is reflected, net of tax,
as a component of accumulated other comprehensive income (loss) on the
consolidated balance sheet as of August 31, 2003. This liability will likely
require us to increase our future cash contributions to the plan. Liquidity and Capital Resources Credit Facilities As of August 31, 2004, we had a $300 million Credit Facility that provides for
both revolving credit loans and letters of credit within the $300 million
limit. We primarily use this Credit Facility for the issuance of letters of
credit which relate to our projects and are issued in the normal course of
business. From time to time, we also use the Credit Facility for working
capital needs and to fund fixed asset purchases and acquisitions. On August 31,
2004, we did not have outstanding borrowings under the Credit Facility but had
outstanding letters of credit of approximately $215.6 million. Effective August 31, 2004, we received approval from our bank lenders for a
fourth amendment to our Credit Facility (Fourth Amendment) to amend various
financial covenants and certain other terms in our Credit Facility. In
particular, the Fourth Amendment (i) maintained the maximum leverage ratio at
3.5x, (ii) expanded the definition of EBITDA, as defined by the Credit
Facility, to exclude charges related to certain potential divestiture and
restructuring charges in fiscal 2005, (iii) provided for the ability to offset
proceeds from the sale of assets against capital expenditures in calculating
the fixed charge coverage ratio and maximum capital expenditure covenant and
(iv) clarified the treatment of restricted cash in calculating the minimum
working capital covenant. The Credit Facility provides for a first lien on certain property, including
equipment and real estate as collateral. We also have the ability to obtain
unsecured performance letters of credit outside of the Credit Facility of up to
$150 million. The Fourth Amendment did not otherwise change the interest rates
or the total capacity to borrow or obtain letters of credit under the Credit
Facility. The Credit Facility, as amended, contains certain financial covenants,
including:  
    
    a maximum leverage ratio of 3.5x through May 31, 2005 and 3.0x thereafter;  
    
    a minimum fixed charge coverage ratio of 2.0x;  
    
    a minimum net worth as defined by the Credit Facility;  
    
    a defined minimum earnings before interest expense, income taxes,
depreciation and amortization (EBITDA). EBITDA, as defined in the Credit
Facility, is adjusted for certain non-cash items and for the pro forma
impact of acquisitions and dispositions of operations (Adjusted EBITDA).
The minimum Adjusted EBITDA covenant requires a trailing twelve months
EBITDA of $75 million for the three fiscal quarters ended August 31,
2004 and $110 million thereafter on a rolling twelve month basis; and 50




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
    
    a minimum working capital ratio requirement, as defined by the Credit
Facility, of 1.0 to 1.0. The Credit Facility also imposes restrictions on annual capital
expenditures to 25% of annual EBITDA, as defined, among other restrictions. As of August 31, 2004, we were in compliance with the covenants contained in
the Credit Facility as amended. However, we would not have been in compliance
with the maximum capital expenditure covenant without the amendment. We would
not have complied with this capital expenditure covenant due to higher than
expected capital expenditures associated with consolidated variable interest
entities and a lower than expected trailing twelve months EBITDA in fiscal 2004
(which is used to determine the threshold for allowable capital expenditures).
As of August 31, 2004, we were in compliance with the other Credit Facility
covenants prior to the amendment. The leverage ratio limits the amount of cash that can be
borrowed. As of August 31, 2004, after applying the terms of the Fourth
Amendment, the maximum amount that could be borrowed under the
leverage ratio is approximately $115 million, subject to the overall availability under the
Credit Facility which was $84.4 million as of August 31, 2004,
after consideration for outstanding letters of credit. We are required, with certain exceptions, to prepay loans outstanding under the
Credit Facility with (i) the proceeds of new indebtedness; (ii) net cash
proceeds from equity sales to third parties (if not used for acquisitions or
other general corporate purposes within 90 days after receipt); and (iii)
insurance proceeds or condemnation awards in excess of $5 million that are not
used to purchase a similar asset or for a like business purpose within 90 days
of the receipt thereof. As of August 31, 2004, we do not have outstanding
borrowings under our Credit Facility. Further, we are required to obtain the
consent of the lenders to prepay or amend the terms of the 10.75% Senior Notes
due 2010. As of August 31, 2004 and 2003, our foreign subsidiaries had short-term
revolving lines of credit permitting borrowings totaling approximately $16.1
million and $17.3 million, respectively. These subsidiaries had outstanding
borrowings under these lines of approximately $2.5 million and $1.3 million,
respectively, at a weighted average interest rate of approximately 4.25% at
August 31, 2004 and August 31, 2003. These subsidiaries also had outstanding
letters of credit under these lines of $3.5 million and $4.2 million, at August
31, 2004 and 2003, respectively, leaving $10.1 million of availability under
these lines at August 31, 2004. As of August 31, 2004, one of our consolidated joint ventures had a committed
short-term revolving line of credit of $4.0 million with borrowings of $3.5
million at a weighted average interest rate of 5.75% and we guarantee the debt. Liquidity Our liquidity position is improved by cash generated from operations, customer
advances on contracts in progress and access to capital financial markets. As
customer advances are reduced through project execution, our cash position will
be reduced if not replaced by advances on new projects. Cash is used to fund
operations, capital expenditures, acquisitions, contributions to joint ventures
and debt service. As of August 31, 2004, we had cash and cash equivalents of $88.6 million, $84.4
million of availability under our $300 million Credit Facility and a shelf
registration statement with a remaining $471 million available for the issuance
of any combination of equity or debt securities. Management believes that cash
generated from operations, the sale of certain non-core or under performing
assets, available borrowings under our Credit Facility and, if necessary,
available sales of equity or debt under our shelf registration will be
sufficient to fund operations for the next twelve months. Cash Flow for Fiscal 2004 versus Fiscal 2003 Net cash used in operations
was approximately $25.0 million for fiscal 2004 as
compared with $202.0 million for fiscal 2003. For fiscal 2004, cash was
adjusted for non-cash items including (i) depreciation and amortization of
$60.8 million, (ii) interest accretion and loan fee amortization of $6.6
million, (iii) a loss on the repurchase of the LYONs of $1.3 million, (iv)
losses on foreign currency transactions of $2.7 million, (v) loss from
discontinued operations, net of taxes of $4.7 million and (vi) stock-based compensation of
$2.1 million. These increases in cash 51




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were offset by (i) a net loss of $31.0 million, (ii) amortization of purchase
accounting contract reserves of $13.4 million, (iii) a deferred tax benefit of
$12.9 million and (iv) minority interest of $5.3 million. Normally, billings and cash receipts on construction contracts exceed costs
incurred early in the lives of the contracts and the contracts require net cash
outflow in the later stages of completion. As we are completing a number of
large EPC contracts and did not enter into any significant new EPC contracts in
fiscal 2003, normal contract execution has required a net use of cash. Further,
we have been involved in various customer disputes, most significantly NRG, NEG
and AES projects. The NEG projects resulted in net cash outflow of
approximately $73.9 million for fiscal 2004 (see Note 20 to our consolidated
financial statements). The AES dispute involved unpaid billings, claims, letter
of credit draws by AES, and other factors, which resulted in a cash outflow of
$17.3 million in fiscal 2004 which was offset by a $15.0 million draw on a
letter of credit held by us. An offset to these uses in cash is the settlement
of the NRG dispute related to the Pike project in October 2003, in which we
received $14.7 million in cash during the first quarter of fiscal 2004. This
use of cash was also partially offset in fiscal 2004 by the impact of cash
advances related to significant EPC contracts entered into in fiscal 2004
including the Astoria project which contributed net positive cash of $55.4
million. In fiscal 2005, we expect we will begin new EPC projects which will provide
cash as down payments on such projects. However, the timing of these new
projects is uncertain and a single or group of large projects could have a
significant impact on sources and uses of cash. We also expect to have a
project nearing completion that will generate approximately $61 million in
cash outflow, the majority of which will occur in fiscal 2005. Because of
these projects, changes in working capital could be highly variable from one
period to the next, although over an extended period of time, significant
increases and decreases would tend to offset one another. Net cash used in investing
activities was approximately $32.4 million for
fiscal 2004, as compared with net cash provided by of $40.9 million for fiscal
2003. During fiscal 2004, we used cash for acquisitions of $23.8 million and
purchased $31.5 million of property and equipment which is comparable to $22.5
million for acquisitions and $26.2 million of property and equipment for fiscal
2003. We also received cash proceeds of $17.3 million for the sale of property
and equipment, assets held for sale and the sale of an investment in an
unconsolidated entity. In addition, maturities of marketable securities were
$5.1 million for fiscal 2004 as compared to $157.1 million for fiscal 2003
attributable to less cash on hand to invest since we utilized the cash to
support operating activities during fiscal 2004. For fiscal 2004, investing
activities also included the deposit and withdrawal of $23.2 million into
escrow cash for the repurchase of LYONs debt (see Note 3 to our consolidated
financial statements) and cash received and deposited in project-related
restricted and escrowed cash of $168.2 million and $166.7 million,
respectively. Net cash used in financing activities totaled approximately $33.2 million for
fiscal 2004, compared to $61.3 million for the same period in fiscal 2003. The
net cash used by financing activities for fiscal 2004 reflects (i)
approximately $217.5 million in net proceeds from the issuance of our common
stock in October 2003 with the majority of the proceeds used to purchase $195.2
million in outstanding LYONs in the first quarter of fiscal 2004 at a cost of
$194.7 million, (ii) approximately $28.6 million in net proceeds from the
issuance of our common stock in April 2004, (iii) proceeds
from issuance of debt of $8.0 million, (iv) deferred credit costs of
$2.6 million and (v) stock option exercises
generating $0.1 million. The net proceeds of the April equity offering along
with the remaining net proceeds from our October equity offering and available
cash on hand were used to repurchase approximately $57.2 million of our
outstanding LYONs under a tender offer on May 3, 2004 (see Note 9 of the notes
to our consolidated financial statements). Off Balance Sheet Arrangements We provide financial guarantees to certain of our joint ventures which are
reported under the equity method and are not consolidated on our balance sheet (see Note 14 to our consolidated financial statement). At August 31, 2004, we
had committed to guarantee $0.7 million of bank debt or letters of credit with
approximately $0.2 million outstanding as of August 31, 2004. We also provide
performance bonds with respect to our unconsolidated joint ventures. These
performance bonds outstanding totaled $69.9 million as of August 31, 2004. We
would generally be required to perform under these guarantees in the event of
default by the joint venture(s). No amounts were recorded related to these
guarantees as of August 31, 2004. On a limited basis, performance assurances are extended to customers, primarily
in our power and process divisions within our ECM segment, which guarantee
certain performance measurements upon completion of a project. If 52




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performance assurances are extended to customers, our maximum potential
exposure would be the remaining cost of the work to be performed by or on
behalf of third parties under engineering and construction contracts with
potential recovery from third party vendors and subcontractors for work
performed in the ordinary course of contract execution. As a result, the total
costs of the project could exceed our original cost estimates and we could
experience reduced gross profit or a loss for that project. In some cases,
where we fail to meet certain performance standards, we may be subject to
contractual liquidated damages and/or the actual damages. In January 2003, our subsidiary, Stone & Webster, Inc., was awarded a
subcontract to perform engineering services for a company (the Related
Company) for whom an executive officer and a significant owner is the brother
to our Chief Executive Officer for total consideration of approximately $2
million. In connection with the services agreement, we entered into a guaranty
agreement with the Related Company under which we agreed, under certain
circumstances, to guarantee the payment of certain sums which may be owed by
the Related Company to its client under a performance-based services and
equipment contract. That guaranty, by its terms, may be assigned by the Related
Company to its client. We also entered into an indemnification and fee
agreement between us and the Related Company pursuant to which, among other
things, the Related Company must pay us an annual fee in consideration for our
entering into the guaranty agreement. The amount of the annual fee varies, but
totals approximately $0.8 million over the 20-year term. Although we believe
the probability we will have to make any payments under the guaranty agreement
is remote, we have recorded the guarantee at its fair value which we believe is
$0.3 million at August 31, 2004. We have the right, but not the obligation, to
take over all of the Related Companys rights and obligations under its
contract with the customer, if a demand by the customer under the contract with
the Related Company ever occurs and remains unsatisfied. Although we believe
that we will not be required to make any payments under the guaranty agreement,
we believe that the maximum potential amount of future payments (undiscounted)
we could be required to make would be approximately $13 million over the
20-year term of the contract. Commercial Commitments Our lenders issue letters of credit on our behalf to customers or sureties in
connection with our contract performance and in limited circumstances certain
other obligations to third parties. We are required to reimburse the issuers of
these letters of credit for any payments which they make pursuant to these
letters of credit. At August 31, 2004, we had both letter of credit commitments
and bonding obligations, which were generally issued to secure performance and
financial obligations on certain of our construction contracts, which expire as
follows (in millions): Amounts of Commitment Expiration by PeriodLess ThanCommercial Commitments
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsLetters of Credit  Domestic and Foreign
    
    $
    219.0
    
    
    $
    13.2
    
    
    $
    172.3
    
    
    $
    10.8
    
    
    $
    22.7Surety bonds
    
    
    438.3
    
    
    
    362.9
    
    
    
    53.8
    
    
    
    0.1
    
    
    
    21.5Total Commercial Commitments
    
    $
    657.3
    
    
    $
    376.1
    
    
    $
    226.1
    
    
    $
    10.9
    
    
    $
    44.2
   At August 31, 2003, we had both letter of credit commitments and bonding
obligations as follows (in millions): Amounts of Commitment Expiration by PeriodLess ThanCommercial Commitments
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsLetters of Credit  Domestic and Foreign
    
    $
    164.3
    
    
    $
    43.6
    
    
    $
    108.8
    
    
    $
    0.9
    
    
    $
    11.0Surety bonds
    
    
    443.2
    
    
    
    181.6
    
    
    
    193.3
    
    
    
    0.7
    
    
    
    67.6Total Commercial Commitments
    
    $
    607.5
    
    
    $
    225.2
    
    
    $
    302.1
    
    
    $
    1.6
    
    
    $
    78.6
 53




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Note:
    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 August 31, 2003. The $54.7 million increase in letters of credit reflects a new letter of credit
for approximately $37.0 million for a new EPC project and
additional letters of credit
for an existing project that we issued in exchange for the release of escrowed
cash of approximately $38.0 million. Surety bonds of $438.3 million at August
31, 2004 remained consistent with the $443.2 million at August 31, 2003. Fees
related to these commercial commitments were $9.3 million and $4.9 million, and
were recorded in the accompanying statements of operations for fiscal 2004 and
2003, respectively. These fees have significantly increased due to a higher
letter of credit outstanding balance under our Credit Facility as well as
higher surety fees due to the overall current insurance market and the decrease
in our bond rating in fiscal 2004. During fiscal 2004, we made three payments totaling $47.9 million to reimburse
issuers of our letters of credit which had a negative impact on our working
capital and cash position. In the fourth quarter fiscal 2004, $23.0 million
was subsequently returned by the customer as a result of negotiations to
continue the project and our agreement to post a $23.0 million letter of
credit. During fiscal 2004, customers who had been issued letters of credit in
connection with certain contracts received payments under outstanding letters
of credit of $47.9 million which we reimbursed our lenders. There were no such
payments in fiscal 2003. Of the amount of outstanding letters of credit at
August 31, 2004, $190.4 million are issued to customers in connection with
contracts. Of this amount, $190.4 million customers held $138.5 million or 73%
of outstanding letters of credit related to five contracts. The largest single
amount of outstanding letters of credit issued to a single customer on a single
project is $48.8 million. Aggregate Contractual Obligations As of August 31, 2004 we had the following contractual obligations (in
millions): Payments Due by PeriodLess ThanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsLong-term debt
    
    $
    261.1
    
    
    $
    4.6
    
    
    $
    1.3
    
    
    $
    3.8
    
    
    $
    251.4Capital lease obligations
    
    
    6.8
    
    
    
    2.1
    
    
    
    3.0
    
    
    
    1.7
    
    
    
    Operating leases
    
    
    283.1
    
    
    
    58.9
    
    
    
    88.3
    
    
    
    61.8
    
    
    
    74.1Unconditional purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    551.0
    
    
    $
    65.6
    
    
    $
    92.6
    
    
    $
    67.3
    
    
    $
    325.5
 As of August 31, 2003, we had the following contractual obligations (in
millions): Payments Due by PeriodLess ThanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsLong-term debt
    
    $
    509.6
    
    
    $
    258.8
    
    
    $
    0.7
    
    
    $
    
    
    
    $
    250.1Capital lease obligations
    
    
    2.3
    
    
    
    1.5
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    Operating leases
    
    
    266.5
    
    
    
    57.2
    
    
    
    80.1
    
    
    
    53.2
    
    
    
    76.0Unconditional purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    778.4
    
    
    $
    317.5
    
    
    $
    81.2
    
    
    $
    53.6
    
    
    $
    326.1
 The reduction in long-term debt reflects the repurchase of LYONs with a book
value totaling $252.4 million at various dates of repurchase during fiscal
2004. Capital lease obligations have increased due to our EDS acquisition on
December 31, 2003 while operating leases have increased slightly due to our EDS
acquisition and general operating needs during fiscal 2004. See Note 9 and Note 13 of the notes to our consolidated financial statements
for a discussion of long-term debt and leases. 54




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Also see Note 14 of the notes to our consolidated financial statements for a
discussion of contingencies. Recent Accounting Pronouncements FIN 46  Consolidation of Variable Interest Entities and FIN 46
Implementation Issues (FIN 46(R)) In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Series Interpretation No. (FIN) 46, Consolidation of
Variable Interest Entities which was revised in December 2003 to address
certain FIN 46 implementation issues (FIN 46(R)). This interpretation requires
a variable interest entity (VIE) to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of the entitys residual
returns or both. In general, a variable interest entity is a corporation,
partnership, limited liability company (LLC), trust, or any other legal
structure used for business purposes that either (1) has insufficient financial
support, (2) has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive returns generated
by its operations. The interpretation also requires disclosures about variable
interest entities that we are not required to consolidate but in which we have
a significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and is
effective for existing variable interest entities for the period ending May 31,
2004. Effective, May 31, 2004 we implemented FIN 46(R). As of August 31, 2004, the
total assets and liabilities before intercompany eliminations of those VIEs for
which we are the primary beneficiary were approximately
$47.6 million and
$35.2 million, respectively. The total assets and liabilities of those VIEs
that we are not the primary beneficiary were approximately $37.2 million and
$13.7 million, respectively, as of August 31, 2004. See Note 6 of the notes to our consolidated financial statements for a
discussion of our VIEs. FASB Exposure Draft  Share-Based Payment, an Amendment of FASB Statement No.
123 and APB No. 25. On March 31, 2004, the FASB published an Exposure Draft, Share-Based Payment,
an Amendment of FASB Statement No. 123 and APB No. 25. The proposed change in
accounting would replace the existing requirements under FAS No. 123 and APB
No. 25. Under the proposal, all forms of share-based payments to employees,
including employee stock options and employee stock purchase plans, would be
treated the same as other forms of compensation by recognizing the related cost
in the statement of income. This proposed Statement would eliminate the ability
to account for stock-based compensation transactions using the intrinsic value
method of APB No. 25 and generally would require that such transactions be
accounted for using a fair-value based method, with a binomial or lattice model
preferred to the Black-Scholes valuation model. The comment period for the
exposure draft ended June 30, 2004. We are currently analyzing what impact, if
any, the adoption of the exposure draft, if issued as a final standard, will
have on our financial position and results of operations in fiscal 2005. Effects of Inflation We expect to continue to focus our operations on cost-reimbursable and
negotiated fixed-price contracts. To the extent that a significant portion of
our revenues are earned under cost-reimbursable type contracts, the effects of
inflation on our financial condition and results of operations should be
reduced. However, if we expand our business into markets and geographical areas
where fixed-price work is more prevalent, inflation may begin to have a larger
impact on our results of operations. To the extent permitted by competition, we
expect to continue to emphasize contracts that are either cost-reimbursable or
negotiated fixed-price. For contracts where we accept with fixed-price terms,
we monitor closely the actual costs on the project as they compare to the
budget estimates. On these projects, we also attempt to secure fixed-price
commitments from key subcontractors and vendors. However, due to the
competitive nature of our industry, combined with the fluctuating demands and
prices associated with personnel, equipment and materials we traditionally need
in order to perform on our contracts, there can be no guarantee that inflation
will not affect our result of operations in the future. Risk Factors 55




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Investing in our common stock will provide an investor with an equity ownership
interest. Shareholders will be subject to risks inherent in our business. The
performance of our shares will reflect the performance of our business relative
to, among other things, general economic and industry conditions, market
conditions and competition. The value of the investment may increase or
decrease and could result in a loss. An investor should carefully consider the
following factors as well as other information contained in this Form 10-K,
including the discussion of our Critical Accounting Polices, before deciding to
invest in shares of our common stock. This Form 10-K also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of many factors,
including the risk factors described below and the other factors described
elsewhere in this Form 10-K. Demand for our products and services is cyclical and vulnerable to downturns in
the industries to which we market our products and services. The demand for our products and services depends on conditions in the
environmental and infrastructure industries and the power generation industry
which accounted for approximately 50% and 38%, respectively, of our backlog as
of August 31, 2004, and, to a lesser extent, on conditions in the
petrochemical, chemical and refining industries. These industries historically
have been, and will likely continue to be, cyclical in nature and vulnerable to
general downturns in the domestic and international economies. For example, since fiscal 2002, there has been a slowdown in construction
activity and new construction awards for power generation projects, primarily
as a result of less activity by certain independent power producers who had
encountered financing and liquidity problems. These factors contributed to the
cancellation or suspension of a number of projects by our customers in the
fourth quarter of fiscal 2002, resulting in a reduction of our backlog at that
time, with depressed activity during fiscal 2003 and the first half of fiscal
2004, resulting in a decrease in our revenues, backlog and awards of new
business. Our results of operations have varied and may continue to vary depending on the
demand for future projects from these industries. The dollar amount of our backlog, as stated at any given time, is not
necessarily indicative of our future earnings. As of August 31, 2004, our backlog was approximately $5.8 billion. There can be
no assurance that the revenues projected in our backlog will be realized or, if
realized, will result in profits. Further, project terminations, suspensions or
adjustments in scope may occur with respect to contracts reflected in our
backlog. For example, during the fourth quarter of fiscal 2002, three domestic
power projects previously reflected in our backlog were suspended or cancelled,
resulting in a reduction of our backlog of approximately $300 million. Reductions in backlog due to cancellation by a customer or for other reasons
adversely affect, potentially to a material extent, the revenue and profit we
actually receive from contracts projected in backlog. In the event of project
cancellation, we may be reimbursed for certain costs but typically have no
contractual right to the total revenues reflected in our backlog. In addition,
projects may remain in our backlog for extended periods of time. If we were to
experience significant cancellations or delays of projects in our backlog, our
financial condition could be significantly adversely affected. We define backlog as a working backlog which includes projects for which we
have received a commitment from our customers. This commitment may be in the
form of a written contract for a specific project, a purchase order or an
indication of the amount of time or material we need to make available for a
customers anticipated project. In certain instances, the engagement is for a
particular product or project for which we estimate anticipated revenue, often
based on engineering and design specifications that have not been finalized and
may be revised over time. Also, we estimate (based on our prior experience) the
amount of future work we will receive for multi-year government contracts for
which funding is approved on an annual or periodic basis during the term of the
contract. In the E&I segment, many of these contracts are multi-year indefinite
delivery order, or IDO, agreements with the federal government. These contracts
do not initially provide for a specific amount of work, and we derive the
contract backlog of IDO agreements from our historical experience with similar
awards and customers, and such backlog averages approximately 75% of the total
unfunded awards. 56




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Estimates are reviewed periodically and appropriate adjustments are made to the
amounts included in backlog and in unexercised contract options. Our backlog
does not include any awards (funded or unfunded) for work expected to be
performed more than five years after the date of our financial statements. The
amount of future actual awards may be more or less than our estimates. Our backlog for maintenance work is derived from maintenance contracts, some of
which do not specify actual dollar amounts of maintenance work, in which case
our backlog is based on an estimate of work to be performed in light of such
customers historic maintenance requirements. Accordingly, the amount of future
actual awards may be more or less than our estimates. We also include in backlog commitments from certain individual customers that
have committed to more than one significant EPC project and other customers who
have committed to multi-year orders for environmental, piping or maintenance
services. There can be no assurance that the customers will complete all of
these projects or that the projects will be performed in the currently
anticipated time-frame. Our significant Engineering, Procurement and Construction projects may
encounter difficulties that may result in additional costs to us, reductions in
revenues or the payment of actual and/or liquidated damages. Our EPC projects generally involve complex design and engineering, significant
procurement of equipment and supplies, and extensive construction management.
Many of our EPC projects involve design, engineering, procurement and
construction phases that may occur over extended time periods, often in excess
of two years. We may encounter difficulties in the design or engineering,
equipment and supply delivery, schedule changes, and other factors, some of
which are beyond our control, that impact our ability to complete the project
in accordance with the original delivery schedule. In addition, we generally
rely on third-party equipment manufacturers as well as third-party
subcontractors to assist us with the completion of EPC contracts. In come
cases, the equipment we purchase for a project or that is provided to us by the
customer does not perform as expected, and these performance failures may
result in delays in completion of the project or additional costs to us or the
customer to complete the project and, in some cases, may require us to obtain
alternate equipment at additional cost. Any delay by subcontractors to complete
their portion of the project, or any failure by a subcontractor to
satisfactorily complete its portion of the project, and other factors beyond
our control may result in delays in the overall progress of the project or may
cause us to incur additional costs, or both. These delays and additional costs
may be substantial, and we may be required to compensate the project customer
for these delays. While we may recover these additional costs from the
responsible vendor, subcontractor or other third-party, we may not be able to
recover all of these costs in all circumstances. For example, we recorded a
$39.3 million pre-tax loss ($26.3 million, net of tax) for
the first quarter of fiscal 2004 relating to two EPC projects for
gas-fired combined cycle power plants in Michigan and Arizona. The charges
were the result of project completion delays. In addition, we have been assessed
liquidated damages by the owners due to such delays. We believe that such project completion
delays were primarily attributable to our vendors, subcontractors and equipment manufacturers from whom we may recover
certain costs. However, there can be no assurance that we will
recover any additional costs we
incurred as a result of such project completion delays. Recovery of these amounts is dependent upon our negotiations,
arbitration and litigation with the owners, subcontractors, vendors and equipment manufacturers. We are also currently involved in litigation with a customer and a third-party
subcontractor relating to the engineering, design, procurement and construction
of a gas-fired, combined-cycle power plant in Texas. In this litigation we are
seeking payment from the customer for additional costs incurred by us as a
result of a fire at the construction site and certain misrepresentations and we
are seeking payment from a third-party equipment vendor for additional costs
and liquidated damages potentially payable by us as a result of the failure of
a turbine during start-up testing. To the extent we do not receive these
amounts, we will recognize a charge to earnings. For further information
regarding current legal disputes in which we are currently involved, see Item
3. Legal Proceedings in our Annual Report on Form 10-K for the year ended
August 31, 2004. In addition, certain contracts may require that our customers provide us with
design or engineering information or with equipment or materials to be used on
the project. In some cases, the customer may provide us with deficient design
or engineering information or equipment or may provide the information or
equipment to us later than required by the project schedule. The customer may
also determine, after commencement of the project, to change various elements
of the project. Our EPC project contracts generally require the customer to
compensate us for additional work or expenses incurred due to customer
requested change orders or failure of the customer to provide us with specified
design or engineering information or equipment. Under these circumstances, we
generally negotiate with the customer with respect to the amount of additional
time required and the compensation to be paid to us. We are subject to the risk
that we are unable to obtain, through negotiation, arbitration, litigation or
otherwise, adequate amounts to compensate us for the additional work or
expenses incurred by us due to customer-requested change orders or failure by
the customer to timely provide required items. A failure to obtain adequate
compensation for these matters could require us to record an adjustment to
amounts of revenue and gross profit that were 57




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recognized in prior periods. Any such adjustments, if substantial, could have
a material adverse effect on our results of operations and financial condition. Our use of percentage-of-completion accounting could result in a reduction or
elimination of previously reported profits. As is more fully discussed in Critical Accounting Policies and Related
Estimates That Have a Material Effect on Our Consolidated Financial Statements
and in the notes to our consolidated financial statements, a substantial
portion of our revenues are recognized using the percentage-of-completion, or
POC, method of accounting. This accounting method is standard for engineering,
procurement and construction, or EPC, contracts. The POC accounting practices
that we use result in our recognizing contract revenues and earnings ratably
over the contract term in proportion to our incurrence of contract costs. The
earnings or losses recognized on individual contracts are based on estimates of
contract revenues, costs and profitability. Contract losses are recognized in
full when determined, and contract profit estimates are adjusted based on
ongoing reviews of contract profitability. Further, a substantial portion of
our contracts contain various cost and performance incentives and penalties
that impact the earnings we realize from the contracts, and adjustments related
to these incentives and penalties are recorded when known or finalized, which
is generally during the latter stages of the contract. In addition, we record
claims when we believe recovery or payment is probable and the amounts can be
reasonably estimated. Actual collection or payment of claims could differ from
estimated amounts. Although a significant portion of our contracts are cost-reimbursable and our
financial loss exposure on cost-reimbursable contracts is generally limited, it
is possible that the loss provisions or adjustments to the contract profit and
loss resulting from future changes in our estimates or contract penalty
provisions could be significant and could result in a reduction or elimination
of previously recognized earnings or result in losses. In certain circumstances
it is possible that such adjustments could be material to our operating
results. Actual results could differ from the estimates and assumptions that we use to
prepare our financial statements. To prepare financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions, as of the date of the financial statements, which affect the
reported values of assets and liabilities and revenues and expenses and
disclosures of contingent assets and liabilities. Areas requiring significant
estimates by our management include:  
    
    contract costs and profits and application of
percentage-of-completion accounting and revenue recognition of
contract claims;  
    
    recoverability of inventory and application of lower of cost or
market accounting;  
    
    provisions for uncollectible receivables and customer claims
and recoveries of costs from subcontractors, vendors and others;  
    
    provisions for income taxes and related valuation allowances;  
    
    recoverability of goodwill;  
    
    recoverability of other intangibles and related estimated lives;  
    
    valuation of assets acquired and liabilities assumed in connection with business combinations;  
    
    valuation of defined benefit pension plans; and  
    
    accruals for estimated liabilities, including litigation and insurance reserves. Our actual results could differ from those estimates. 58




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Non-compliance with covenants in our Credit Facility, without waiver or
amendment from the lenders of the Credit Facility, could adversely affect our
ability to borrow under the Credit Facility. Our Credit Facility contains certain financial covenants, including a leverage
ratio (which becomes more restrictive over time), a minimum fixed-charge
coverage ratio, a defined minimum net worth, a minimum working capital ratio, a
limit on capital expenditures, and defined minimum earnings before interest
expense, income taxes, depreciation and amortization (EBITDA). In
addition, the defined terms used in calculating the financial
covenants, in accordance with the Credit Facility, often require us to
follow generally accepted accounting principles which requires the
use of judgments and estimates, and may change from time to time
based on new accounting pronouncements. We may not be
able to satisfy these ratios, especially if our operating results fall below
managements expectations as a result of, but not limited to,
the impact of other risk factors
that may have a negative impact on our future
earnings. See Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations  Liquidity and Capital
Resources for a discussion of our Credit Facility. A future breach of any of these covenants or our inability to comply with the
required financial ratios could result in a default under our Credit Facility,
and we cannot assure you that we will be able to obtain the necessary waivers
or amendments. In the event of any default under our Credit Facility not
otherwise amended, the lenders thereunder will not be required to lend any
additional amounts to us and could elect to declare all outstanding borrowings,
together with accrued interest and other fees, to be due and payable, or
require us to apply all of our available cash to repay these borrowings and
cash collateralize any outstanding letters of credit at that time. The
acceleration of outstanding loans under our Credit Facility in excess of $20.0
million constitutes an event of default with respect to the Senior Notes. If we
are unable to repay borrowings with respect to our Credit Facility when due,
the lenders thereunder could proceed against their collateral, which consists
of substantially all of our assets, including property, equipment and real
estate. If the indebtedness under our Credit Facility or the Senior Notes were
to be accelerated, we cannot assure you that our assets would be sufficient to
repay such indebtedness in full. As of August 31, 2004, we did not have
outstanding borrowings under the Credit Facility but had outstanding letters of
credit of approximately $215.6 million and indebtedness under our Senior Notes
of $250.5 million. In addition, although our Senior Notes contain no cross-default provisions, we
have entered into indemnity agreements with our sureties that do contain
cross-default provisions. Accordingly, in the event of a default under our
Credit Facility, we would need to obtain a waiver or amendment to these
provisions. We cannot assure you that we would be successful in obtaining any
such amendment or waiver. Restrictive covenants in our Credit Facility and the indenture relating to the
Senior Notes may restrict our ability to pursue our business strategies. Our Credit Facility and the indenture relating to the Senior Notes contain
certain restrictions on our ability to, among other things:  
    
    incur additional indebtedness or contingent obligations or issue preferred stock;  
    
    pay dividends or make distributions to our shareholders;  
    
    repurchase or redeem our capital stock or subordinated indebtedness;  
    
    make investments;  
    
    create liens;  
    
    enter into sale/leaseback transactions;  
    
    incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us;  
    
    make capital expenditures; 59




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
    
    enter into transactions with our stockholders and affiliates;  
    
    sell assets; and  
    
    acquire the assets of, or merge or consolidate with, other
companies or transfer all or substantially all of our assets. Our Credit Facility requires us to achieve certain financial ratios, including
a leverage ratio (which becomes more restrictive over time) and a minimum fixed
charge coverage ratio. We may not be able to satisfy these ratios, especially
if our operating results fall below managements expectations. In addition, in
order to remain in compliance with the covenants in our Credit Facility, we may
be limited in our flexibility to take actions resulting in non-cash charges,
including as a result of our settling claims. These covenants may impair our
ability to engage in favorable business activities and our ability to finance
future operations or capital needs. A breach of any of these covenants or our inability to comply with the required
financial ratios could result in a default under our Credit Facility. See Risk
Factor, Non-compliance with covenants in our Credit Facility without, waiver
or amendment from the lenders of the Credit Facility, could adversely affect
our ability to borrow under the Credit Facility. Our indebtedness could adversely affect our financial condition and impair our
ability to fulfill our obligations under our Senior Notes and our Credit
Facility. As of August 31, 2004 we had total outstanding indebtedness of approximately
$273.9 million, approximately $14.4 million of which was secured indebtedness,
including obligations under capital leases. In addition, as of August 31, 2004,
letters of credit, domestic and foreign, issued for our account in an aggregate
amount of $219.0 million were outstanding. Our substantial indebtedness could
have important consequences, including the following:  
    
    it will require us to dedicate a substantial portion of our
cash flow from operations to payments on our indebtedness, including
our outstanding 10.75% Senior Notes due 2010, or Senior Notes,
reducing the availability of cash flow to fund acquisitions, working
capital, capital expenditures and other general corporate purposes;  
    
    it will limit our ability to borrow money or sell stock for
working capital, capital expenditures, debt service requirements and
other purposes;  
    
    it will limit our flexibility in planning for, and reacting to,
changes in our business;  
    
    it may place us at a competitive disadvantage if we are more
highly leveraged than some of our competitors;  
    
    it may make us more vulnerable to a further downturn in the economy of our business; and  
    
    it may restrict us from making additional acquisitions or exploiting other business opportunities. To the extent that new debt is added to our currently anticipated debt levels,
the substantial leverage risks described above would increase. We are currently the subject of an informal inquiry by the SEC. On June 1, 2004 we were notified by the staff of the Securities and Exchange
Commission (SEC) that the staff is conducting an informal inquiry relating to the Company. The SEC has not advised us as to either the reason for
the inquiry or its scope. If the inquiry elevates to a formal
investigation, the resolution could have a material adverse effect on us and
result in:  
    
    increased review and scrutiny of us by regulatory authorities;  
    
    civil or injunctive proceedings; and 60




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
    
    possible payment of fines and penalties. We cannot provide any guarantees as to the outcome of this informal
inquiry. We have been named in various purported class action shareholder lawsuits and
shareholder derivative lawsuits. The Company, our directors and certain of our current and former officers have
been named as defendants in various purported class action shareholder lawsuits
and shareholder derivative lawsuits. A discussion of these lawsuits appears in
Item 3. Legal Proceedings in our Annual Report on Form 10K for the year ended
August 31, 2004. Although it is not possible at this early stage to predict
the likely outcome of these actions, an adverse result in any of these lawsuits
could have a material adverse effect on us. We are and will continue to be involved in litigation. 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 and
other matters. These are typically actions that arise in the normal course of
business, including employment-related claims and contractual disputes or
claims for personal injury or property damage which occurs in connection with
services performed relating to project or construction sites. Our contractual
disputes normally involve claims relating to the performance of equipment,
design or other engineering services or project construction services provided
by our subsidiaries. To date, we have been able to obtain liability insurance
for the operation of our business. However, if we sustain damages that
materially exceed our insurance coverage or that are not insured, there could
be a material adverse effect on our liquidity, which could impair our
operations. Downgrades by Rating Agencies In the fourth quarter of 2004, Moodys Investors Service or Moodys lowered its
rating of our guaranteed senior unsecured notes or Senior Notes to Ba3 from Ba2
and the rating on our Credit Facility to Ba2 from Ba1 along with downgrading
the Companys outlook to negative from stable. Moodys indicated that these
ratings were lowered primarily due to weaker-than-expected earnings and cash
flow along with persistent charges related to certain contracts during fiscal
2004 and 2003 (see Note 20 of the notes to our consolidated financial
statements for additional discussion of charges related to the NEG projects). In the event our debt ratings are lowered by Moodys Investors Service or
Standard and Poors in the future, we may not comply with our bonding
facilities which could impact our ability to obtain bonding for new projects in
the future and we may be required to increase or provide cash collateral to
obtain surety bonds in order to obtain bonding for new projects in the future,
which would reduce our available cash or availability under our Credit
Facility. We anticipate that any such new or modified bonding facilities would
not be on terms as attractive as those we have currently and that we would also
be subject to increased costs of capital and interest rates. The nature of our contracts could adversely affect us. Although approximately 78% of our backlog as of August 31, 2004 was from
cost-reimbursable contracts, the remaining 22% was from fixed-price or
unit-price contracts. A significant number of our domestic piping contracts and
substantially all of our international piping contracts are fixed-price or
unit-price. In addition, a number of the contracts we assumed in the Stone &
Webster and IT Group acquisitions were fixed-price contracts, and we will
continue to enter into these types of contracts in the future. Under
fixed-price or unit-price contracts, we agree to perform the contract for a
fixed-price and, as a result, benefit from costs savings and earnings from
approved change orders; but we are generally unable to recover any cost
overruns to the approved contract price. Under certain incentive contracts, we
share with the customer any savings up to a negotiated or target ceiling. When
costs exceed the negotiated ceiling price, we may be required to reduce our fee
or to absorb some or all of the cost overruns. Contract prices are established
based in part on cost estimates that are subject to a number of assumptions,
including assumptions regarding future economic conditions. If these estimates
prove inaccurate or circumstances change, cost overruns could have a material
adverse effect on our business and results of our operations. Our profit for
these projects could decrease or we could experience losses if we are unable to
secure fixed pricing commitments from our suppliers at the time the contracts
are entered into or if we experience cost increases for material or labor
during 61




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the performance of the contracts. We enter into contractual agreements with customers for some of our
engineering, procurement and construction services to be performed based on
agreed upon reimbursable costs and labor rates. Some of these contracts provide
for the customers review of the accounting and cost control systems to verify
the completeness and accuracy of the reimbursable costs invoiced. These reviews
could result in reductions in reimbursable costs and labor rates previously
billed to the customer. Many of our contracts require us to satisfy specified design, engineering,
procurement or construction milestones in order to receive payment for the work
completed or equipment or supplies procured prior to achievement of the
applicable milestone. As a result, under these types of arrangements, we may
incur significant costs or perform significant amounts of services prior to
receipt of payment. If the customer determines not to proceed with the
completion of the project or if the customer defaults on its payment
obligations, we may face difficulties in collecting payment of amounts due to
us for the costs previously incurred or for the amounts previously expended to
purchase equipment or supplies. In addition, many of our customers for large
EPC projects are project-specific entities that do not have significant assets
other than their interests in the EPC project. It may be difficult for us to
collect amounts owed to us by these customers against the customers more
credit-worthy parent company. If we are unable to collect amounts owed to us
for these matters, we may be required to record a charge against earnings
related to the project which could result in a material loss. We are subject to the risks associated with being a government contractor. We are a major provider of services to governmental agencies and therefore are
exposed to risks associated with government contracting, including reductions in government spending, cancelled or delayed appropriations specific to our projects, heightened competition and modified or terminated contracts. For example, most of
our government contracts are awarded through a regulated competitive bidding
process. Some government contracts are awarded to multiple competitors, which
increases overall competition and pricing pressure and may require us to make
sustained post-award efforts to realize revenues under these government
contracts. Legislatures typically appropriate funds for a given program on a
year-by-year basis, even though contract performance may take more than one
year and are not always guaranteed. As a result, at the beginning of a project,
the related contract may be only partially funded, and additional funding is
normally committed only as appropriations are made in each subsequent year.
These appropriations, and the timing of payment of appropriated amounts, may be
influenced by, among other things, the state of the economy, competing
political priorities, curtailments in the use of government contracting firms,
budget constraints, the timing and amount of tax receipts and the overall level
of government expenditures. If legislative appropriations are not made in
subsequent years of a multiple-year contract, we will not realize all of our
potential revenues and profits from that contract. A reduction in spending by
federal government agencies could also limit our ability to obtain additional
contracts, which could have a material adverse effect on our business. In addition, government customers typically can terminate or modify any of
their contracts with us at their convenience, and some of these government
contracts are subject to renewal or extension annually. If a government
customer terminates a contract or fails to renew or extend a contract, our
backlog may be reduced or we may incur a loss, either of which could impair our
financial condition and operating results. For the year ended August 31, 2004,
54% of revenue was generated from U.S. governmental agencies. A termination due to our unsatisfactory performance could expose us to
liability and have a material adverse effect on our ability to compete for
future contracts and orders. In cases where we are a subcontractor, the prime
contract under which we are a subcontractor could be terminated, regardless of
the quality of our services as a subcontractor or our relationship with the
relevant government agency. Our government customers can also reduce the value
of existing contracts, issue modifications to a contract and control and
potentially prohibit the export of our services and associated materials. As a result of our government contracting business, we have been, are and will
be in the future, the subject of audits and/or cost reviews by the Defense
Contract Audit Agency, which we refer to as DCAA, or by other contracting
agencies. Additionally, we have been and may in the future be the subject of
investigations by governmental agencies such as the Office of Inspector General
of the Environmental Protection Agency. During the course of an audit, the
DCAA may disallow costs if it determines that we improperly accounted for such
costs in a manner inconsistent with Cost Accounting Standards or regulatory and
contractual requirements. Under the type of cost- 62




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reimbursable government contracts that we typically perform, only those costs
that are reasonable, allocable and allowable are recoverable under the Federal
Acquisition Regulation and Cost Accounting Standards. In addition, our failure to comply with the terms of one or more of our
government contracts, other government agreements, or government regulations
and statutes could result in our being suspended or barred from future
government contract projects for a significant period of time and possible
civil or criminal fines and penalties of applicable regulations and statutes
and the risk of public scrutiny of our performance at high profile sites. This
could materially adversely affect our business. Our failure to meet schedule or performance requirements of our contracts could
adversely affect us. In certain circumstances, we guarantee facility completion by a scheduled
acceptance date or achievement of certain acceptance and performance testing
levels. Failure to meet any such schedule or performance requirements could
result in additional costs, and the amount of such additional costs could
exceed projected profit margins. Performance problems for existing and future
contracts could cause actual results of operations to differ materially from
those anticipated by us and could cause us to suffer damage to our reputation
within our industry and our client base. Our dependence on subcontractors and equipment manufacturers could adversely
affect us. We rely on third-party equipment manufacturers as well as third-party
subcontractors to complete our projects. To the extent that we cannot engage
subcontractors or acquire equipment or materials, our ability to complete a
project in a timely fashion or at a profit may be impaired. If the amount we
are required to pay for these goods and services exceeds the amount we have
estimated in bidding for fixed-price work, we could experience losses in the
performance of these contracts. In addition, if a subcontractor or a
manufacturer is unable to deliver its services, equipment or materials
according to the negotiated terms for any reason, including the deterioration
of its financial condition, we may be required to purchase the services,
equipment or materials from another source at a higher price. This may reduce
the profit to be realized or result in a loss on a project for which the
services, equipment or materials were needed. Possible cost escalation associated with our fixed-price contracts which could
impact our profitability. We estimate total contract costs in pricing our fixed-price contracts
incorporating assumptions to address inflation and fluctuations in market price
for materials. However, we can not predict these variable components with
certainty as they related to our pricing of fixed-price contracts. As a
result, we may incur total costs that exceed original estimates due to
increased materials, labor or other costs. These increased costs could
contribute to a lower than expected return or losses on our projects. Our results of operations depend on the award of new contracts and the timing
of the performance of these contracts. A substantial portion of our revenues is directly or indirectly derived from
large-scale domestic and international projects. It is generally very difficult
to predict whether and when we will receive such awards as these contracts
frequently involve a lengthy and complex bidding and selection process which is
affected by a number of factors, such as market conditions, financing
arrangements, governmental approvals and environmental matters. Because a
significant portion of our revenues is generated from large projects, our
results of operations and cash flows can fluctuate from quarter to quarter
depending on the timing of our contract awards. In addition, many of these
contracts are subject to financing contingencies and, as a result, we are
subject to the risk that the customer will not be able to secure the necessary
financing for the project. In certain circumstances, customers may require us to provide credit
enhancements, including bonds or letters of credit. In line with industry
practice, we are often required to provide performance and surety bonds to
customers. These bonds indemnify the customer should we fail to perform our
obligations under the contract. If a bond is required for a particular project
and we are unable to obtain an appropriate bond, we cannot pursue that project.
We have a bonding facility but, as is typically the case, the issuance of
bonds under that facility is at the suretys sole discretion. Moreover, due to
events that affect the insurance and bonding markets generally, bonding may be
more 63




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difficult to obtain in the future or may only be available at significant
additional cost. There can be no assurance that bonds will continue to be
available to us on reasonable terms. Our inability to obtain adequate bonding
and, as a result, to bid on new work could have a material adverse effect on
our future revenues and business prospects. The uncertainty of our contract award timing can also present difficulties in
matching workforce size with contract needs. In some cases, we maintain and
bear the cost of a ready workforce that is larger than called for under
existing contracts in anticipation of future workforce needs for expected
contract awards. If an expected contract award is delayed or not received, we
would incur costs that could have a material adverse effect on us. Further, our
significant customers vary between years, and the loss of any one or more of
our key customers could have a material adverse impact on us. In addition, timing of the revenues, earnings and cash flows from our projects
can be affected by a number of factors beyond our control, including
unavoidable delays from weather conditions, unavailability of material and
equipment from vendors, changes in the scope of services requested by clients
or labor disruptions. Our environmental and infrastructure operations may subject us to potential
contractual and operational costs and liabilities. Many of our E&I segment customers attempt to shift financial and operating
risks to the contractor, particularly on projects involving large scale
cleanups and/or projects where there may be a risk that the contamination could
be more extensive or difficult to resolve than previously anticipated. In this
competitive market, customers increasingly try to pressure contractors to
accept greater risks of performance, liability for damage or injury to third
parties or property and liability for fines and penalties. Prior to our
acquisition of the IT Group, it was involved in claims and litigation involving
disputes over such issues. Therefore, it is possible that we could also become
involved in similar claims and litigation in the future as a result of our
acquisition of the assets of IT Group and our participation in environmental
and infrastructure contracts. Environmental management contractors also potentially face liabilities to third
parties for property damage or personal injury stemming from exposure to or a
release of toxic substances resulting from a project performed for customers.
These liabilities could arise long after completion of a project. Although the
risks we face in our anthrax and other biological agent work are similar to
those faced in our toxic chemical emergency response business, the risks posed
by attempting to detect and remediate these biological agents may include risks
to our employees, subcontractors and those who may be affected should detection
and remediation prove less effective than anticipated. Because anthrax and
similar contamination is so recent, there may be unknown risks involved; and in
certain circumstances there may be no body of knowledge or standard protocols
for dealing with these risks. The risks we face also include the potential
ineffectiveness of developing technologies to detect and remediate the
contamination, claims for infringement of these technologies, difficulties in
working with the smaller, specialized firms that may own these technologies and
have detection and remediation capabilities, our ability to attract and retain
qualified employees and subcontractors in light of these risks, the high
profile nature of the work and the potential unavailability of insurance and
indemnification for the risks associated with biological agents and terrorism. Over the past several years, the EPA and other federal agencies have
constricted significantly the circumstances under which they will indemnify
their contractors against liabilities incurred in connection with CERCLA, and
similar projects. We are exposed to certain risks associated with our integrated environmental
solutions businesses. Certain subsidiaries within our Environmental & Infrastructure division are
engaged in two similar programs that may involve assumption of a clients
environmental remediation obligations and potential claim obligations. One
program involves our subsidiary, The LandBank Group, Inc., or LandBank, which
was acquired in the IT Group acquisition. Under this program, LandBank
purchases and then remediates and/or takes other steps to improve
environmentally impaired properties. The second program is operated by our
subsidiary Shaw Environmental Liability Solutions, LLC, which will
contractually assume responsibility for environmental matters at a particular
site or sites and provide indemnifications for defined cleanup costs and post
closing third party claims in return for compensation by the client. These
subsidiaries may operate and/or purchase and redevelop environmentally 64




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impaired property. As the owner or operator of such properties, we may be
required to clean up all contamination at these sites even if we did not place
the contamination there. We attempt to reduce our exposure to unplanned risks
through the performance of environmental due diligence, the use of liability
protection provisions of federal laws like the Brownfields Revitalization Act
and similar state laws and the purchase of environmental and cost cap insurance
coverage or other risk management products. However, we cannot assure you that
our risk management strategies and these products and laws will adequately
protect us in all circumstances or that no material adverse impact will occur. Our ability to be profitable in this type of business also depends on our
ability to accurately estimate cleanup costs. While we engage in comprehensive
engineering and cost analyses, if we were to materially underestimate the
required cost of cleanup at a particular project, such underestimation could
significantly adversely affect us. Further, the continued growth of this type
of business is dependent upon the availability of environmental and cost cap
insurance or other risk management products. We cannot assure you that such
products will continue to be available to us in the future. Moreover,
environmental laws and regulations governing the cleanup of contaminated sites
are constantly changing. We cannot predict the effect of future changes to
these laws and regulations on our LandBank and Environmental Liability
Solutions businesses. In addition, prior to the IT Group acquisition, we had
not previously conducted this type of business and we have had no material
transactions in this business. Additionally, when we purchase real estate in
this business, we are subject to many of the same risks as real estate
developers, including the timely receipt of building and zoning permits,
construction delays, the ability of markets to absorb new development projects,
market fluctuations and the ability to obtain additional equity or debt
financing on satisfactory terms, among others. The limitation or the expiration of the Price-Anderson Acts indemnification
authority could adversely affect our business. The Price-Anderson Act, or PAA, comprehensively regulates the manufacture, use
and storage of radioactive materials, while promoting the nuclear power
industry by offering broad indemnification to nuclear power plant operators and
DOE contractors. Because we provide services for the DOE relating to its
nuclear weapons facilities and the nuclear power industry in the on-going
maintenance and modification, as well as decontamination and decommissioning,
of its nuclear power plants, we are entitled to the indemnification protections
under the PAA. Although the PAAs indemnification provisions are broad, it does
not apply to all liabilities that we might incur while performing services as a
radioactive materials cleanup contractor for the DOE and the nuclear power
industry. In addition, the PAAs ability to indemnify us with respect to any
new facilities expired on August 1, 2002, but was reauthorized and extended
through December 31, 2004. Because nuclear power remains controversial, there
can be no assurance that the PAAs indemnification authority will be
reauthorized and extended when that authority expires again at the end of
calendar year 2004. If the PAAs indemnification authority is not extended, our
business could be adversely affected by either a refusal of operations of new
facilities to retain us or our inability to obtain commercially adequate
insurance and indemnification. Environmental factors and changes in laws and regulations could increase our
costs and liabilities and affect the demand for our services. In addition to the environmental risks described above relating to the
businesses acquired from IT Group and our environmental remediation business,
our operations are subject to environmental laws and regulations, including
those concerning:  
    
    emissions into the air;  
    
    discharges into waterways;  
    
    generation, storage, handling, treatment and disposal of hazardous materials and wastes; and  
    
    health and safety. Our projects often involve highly regulated materials, including hazardous and
nuclear materials and wastes. Environmental laws and regulations generally
impose limitations and standards for regulated materials and require 65




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us to obtain a permit and comply with various other requirements. The improper
characterization, handling, or disposal of regulated materials or any other
failure to comply with federal, state and local environmental laws and
regulations or associated environmental permits may result in the assessment of
administrative, civil, and criminal penalties, the imposition of investigatory
or remedial obligations, or the issuance of injunctions that could restrict or
prevent our ability to perform. In addition, under CERCLA and comparable state laws, we may be required to
investigate and remediate regulated materials. CERCLA and these comparable
state laws typically impose liability without regard to whether a company knew
of or caused the release, and liability for the entire cost of clean-up can be
imposed upon any responsible party. The principal federal environmental
legislation affecting our Environmental & Infrastructure subsidiaries and
clients include: the National Environmental Policy Act of 1969, or NEPA; the
Resource Conservation and Recovery Act of 1976, or RCRA; the Clean Air Act; the
Federal Water Pollution Control Act; and CERCLA, together with the Superfund
Amendments and Reauthorization Act of 1986, or SARA. Our foreign operations are
also subject to similar governmental controls and restrictions relating to
environmental protection. We could also incur environmental liability at sites where we have been hired
by potentially responsible parties, or PRPs, to remediate contamination of the
site. Such PRPs have sought to expand the reach of CERCLA, RCRA and similar
state statutes to make the remediation contractor responsible for cleanup
costs. These companies claim that environmental contractors are owners or
operators of hazardous waste facilities or that the contractors arranged for
treatment, transportation or disposal of hazardous substances. If we are held
responsible under CERCLA or RCRA for damages caused while performing services
or otherwise, we may be forced to incur such cleanup costs by ourselves,
notwithstanding the potential availability of contribution or indemnification
from other parties. The environmental health and safety laws and regulations to which we are
subject are constantly changing, and it is impossible to predict the effect of
any future changes to these laws and regulations on us. We do not yet know the
full extent, if any, of environmental liabilities associated with many of our
recently acquired properties undergoing or scheduled to undergo site
restoration, including any liabilities associated with the assets we acquired
from Stone & Webster and IT Group. We cannot assure you that our operations
will continue to comply with future laws and regulations will not significantly
adversely affect us. The level of enforcement of these laws and regulations also affects the demand
for many of our services. Proposed changes in regulations and the perception
that enforcement of current environmental laws has been reduced has decreased
the demand for some services, as clients have anticipated and adjusted to the
potential changes. Future changes could result in increased or decreased demand
for some of our services. The ultimate impact of the proposed changes will
depend upon a number of factors, including the overall strength of the economy
and clients views on the cost-effectiveness of remedies available under the
changed regulations. If proposed or enacted changes materially reduce demand
for our environmental services, our results of operations could be adversely
affected. Development and Construction Risks and Other Risks associated with our military
housing privatization contracts could impact our profitability and a loss of
our investment. Development and construction activities conducted through various joint
ventures with one strategic partner expose us to risks including:  
    
    we may be unable to obtain, or may be subject to delays in
obtaining necessary permitting, land-use, building, occupancy and
other required governmental permits and authorizations, which could
result in increased development costs;  
    
    we may incur construction costs related to new construction or
renovations that exceed original estimates due to increased
materials, labor or other costs. These increased costs could
contribute to a lower than expected return and we may not be able to
increase rents to compensate for the increased in construction costs
annually;  
    
    we may be unable to complete construction of a property on
schedule and meet financial goals for development factors; and 66




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
    
    we may incur construction costs that are higher or have project
delays if we are not successful in our ability to form strategic
alliances with key material suppliers and vendors. Other risks directly associated with our dependence on the U.S. military
include:  
    
    we may be unable to obtain the necessary levels of occupancy
and rents, which could result in lower than expected returns and in
some cases losses. Rents are determined by Congress annually through
appropriations for Basic Allowance for Housing (BAH) for all of the
branches of the U.S. military. We cannot assure you that the
appropriations each year will occur on a timely basis, or that the
amount of BAH appropriations will be sufficient to keep up with
escalations in the cost of living expenses. Congress may change the law
and the DOD can revise its procedures at any time. We cannot assure
you that such changes will not be made and, if changes are made, such
changes may have a material adverse effect on the level of our
operating revenues generated by our privatization projects;  
    
    we cannot assure you that the military bases where we have
military housing projects will remain active or that their functions
and/or staffing levels will not be materially reduced such that we
will be unable to lease military housing units to members of the U.S.
military. The DOD has, from time to time, closed military bases and
realigned and/or reduced the functions and staffing levels at certain
bases under the Base Realignment and Closure (BRAC) initiative. These
military housing projects are supported by military residents based
on current military needs and geographic deployment of the residents;
and  
    
    we may not be able to close on our five remaining military
housing privatization projects as we have only been selected to
receive the right to enter into exclusive negotiations and the award
is subject to final approval from the U.S. military branch and
Congress. Until final approval is obtained, which generally can last
between six months to one year, we will incur costs associated with
the development plan and design that may be significant. We cannot
assure you that we will receive final approval and failure to recover
these development costs may result in losses. Ultimately, these risks could have an adverse effect on our profitability and
expose us to possible losses as well as the loss of our investment in these
military housing privatizations. As of August 31, 2004, our investment in
these housing privatizations was $10.4 million. Our working capital requirements may increase as a result of our entry into the
military housing privatization market. During fiscal 2004, we were awarded seven contracts to privatize military
family housing with our joint venture partner, CEI, under the DODs Military
Housing Privatization Initiative. As of August 31, 2004, two of these
contracts were closed with the other five scheduled to close in fiscal 2005. These privatization contracts require initial capital contributions in the
early stages of the project and ultimately permanent financing from a third
party lender. As of August 31, 2004, we are obligated to make capital
contributions of approximately $20 million related to these privatization
contracts; however, the timing of these capital contributions are dependent
upon the progress of each underlying project. In addition, because occupancy
rates and rents at a newly developed property may fluctuate depending on a
number of factors, including market and economic conditions, we may be unable
to meet our profitability goals for that property. If our partners fail to perform their contractual obligations on a project, we
could be exposed to loss of reputation and additional financial performance
obligations that could result in reduced profits or losses. We often enter into various joint ventures as part of our environmental and
engineering, procurement and construction businesses so that we can jointly bid
and perform on a particular project. The success of these and other joint
ventures depends, in large part, on the satisfactory performance of the
contractual obligations of our joint venture partners. If our partners do not
meet their obligations, the joint venture may be unable to adequately perform
and deliver its contracted services. Under these circumstances, we may be
required to make additional investments and provide additional services to
ensure the adequate performance and delivery of the contracted services. These 67




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additional obligations could result in reduced profits or, in some cases,
significant losses for us with respect to the joint venture, which could also
affect our reputation in the industries we serve. Our dependence on one or a few customers could adversely affect us. Due to the size of many engineering and construction projects, one or a few
clients have in the past and may in the future contribute a substantial portion
of our consolidated revenues in any one year or over a period of several
consecutive years. For example, in fiscal 2004, approximately 46% of our
revenues were generated from ten major customers. Similarly, our backlog
frequently reflects multiple projects for individual clients; therefore, one
major customer may comprise a significant percentage of backlog at a point in
time. An example of this is the TVA, with which we have two contracts
representing an aggregate of 8% of our backlog at August 31, 2004. Including
our backlog from TVA, a Government-owned entity, backlog from the U.S.
Government or U.S. Government-owned entities accounted for 54% of backlog at
August 31, 2004. Because these significant customers generally contract with us for specific
projects, we may lose these customers from year to year as their projects with
us are completed. If we do not replace them with other customers or other
projects, our business could be materially adversely affected. Additionally, we have long-standing relationships with many significant
customers, including customers with which we have alliance agreements that have
preferred pricing arrangements. However, our contracts with these customers are
on a project by project basis, and they may unilaterally reduce or discontinue
their purchases at any time. The loss of business from any one of such
customers could have a material adverse effect on our business or results of
operations. If we experience delays and/or defaults in customer payments, we could be
unable to recover all expenditures. Because of the nature of our contracts, at times we commit resources to
projects prior to receiving payments from the customer in amounts sufficient to
cover expenditures on client projects as they are incurred. Delays in customer
payments may require us to make a working capital investment. If a customer
defaults in making its payments on a project in which we have devoted
significant resources, it could have a material negative effect on our results
of operations. Our projects expose us to potential professional liability, product liability,
warranty and other claims. We engineer, construct and perform services in large industrial facilities in
which accidents or system failures can be disastrous. Any catastrophic
occurrences in excess of insurance limits at locations engineered or
constructed by us or where our products are installed or services performed
could result in significant professional liability, product liability, warranty
and other claims against us. In addition, under some of our contracts, we must
use new metals or processes for producing or fabricating pipe for our
customers. The failure of any of these metals or processes could result in
warranty claims against us for significant replacement or reworking costs. Further, the engineering and construction projects we perform expose us to
additional risks including cost overruns, equipment failures, personal
injuries, property damage, shortages of materials and labor, work stoppages,
labor disputes, weather problems and unforeseen engineering, architectural,
environmental and geological problems. In addition, once our construction is
complete, we may face claims with respect to the performance of these
facilities. We face substantial competition in each of our business segments. In our E&I segment, we compete with a diverse array of small and large
organizations, including national and regional environmental management firms,
national, regional and local architectural, engineering and construction firms,
environmental management divisions or subsidiaries of international
engineering, construction and systems companies, and waste generators that have
developed in-house capabilities. Increased competition in this business,
combined with changes in client procurement procedures, has resulted in changes
in the industry, including among other things, lower contract margins, more
fixed-price or unit-price contracts and contract terms that may increasingly
require us to indemnify our clients against damages or injuries to third
parties and property and environmental fines and penalties. We believe,
therefore, these market conditions may require us to accept more 68




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contractual and performance risk than we have historically for the
environmental and infrastructure segment to be competitive. The entry of large systems contractors and international engineering and
construction firms into the environmental services industry has increased
competition for major federal government contracts and programs, which have
been a primary source of revenue in recent years for our environmental &
infrastructure business. There can be no assurance that our E&I segment will be
able to compete successfully given the intense competition and trends in its
industry. In our ECM segment, we face competition from numerous regional, national and
international competitors, many of which have greater financial and other
resources than we do. Our competitors include well-established, well-financed
concerns, both privately and publicly held, including many major power
equipment manufacturers and engineering and construction companies, some
engineering companies, internal engineering departments at utilities and
certain of our customers. The markets that we serve require substantial
resources and particularly highly skilled and experienced technical personnel. In our Fabrication, Manufacturing and Distribution segment, we face substantial
competition on a domestic and international level. In the United States, there
are a number of smaller pipe fabricators. Internationally, our principal
competitors are divisions of large industrial firms. Some of our competitors,
primarily in the international sector, have greater financial and other
resources than we do. Political and economic conditions in foreign countries in which we operate
could adversely affect us. Approximately 18% of our fiscal 2004 revenues and 15% of our revenues for
fiscal 2003 were attributable to projects in international markets, some of
which are subject to political unrest and uncertainty. We have operations in
the Middle East, Russia, China, Europe and Australia. The services we provide
to our customers in Iraq and other Middle East countries have created several
challenges, including identifying and retaining the appropriate subcontractors,
the recruiting of qualified personnel and the ability to retain them, the
safety of our employees and subcontractors and the increased working capital
demands. It is possible that our employees may suffer injury or death,
repatriation problems or other unforeseen costs and risks in the course of
their international projects, which could negatively impact our operations. In addition to these specific challenges we face in the Middle East,
international contracts, operations and expansion expose us to risks inherent
in doing business outside the United States, including:  
    
    uncertain economic conditions in the foreign countries in which
we make capital investments, operate and sell products and services;  
    
    the lack of well-developed legal systems in some countries in
which we operate and sell products and services, which could make it
difficult for us to enforce our contractual rights;  
    
    security and safety of employees;  
    
    expropriation of property;  
    
    restrictions on the right to convert or repatriate currency;  
    
    political risks, including risks of loss due to civil strife,
acts of war, guerrilla activities and insurrection;  
    
    greater risk of uncollectible accounts and longer collection cycles;  
    
    currency fluctuations;  
    
    logistical and communications challenges; 69




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
    
    potential adverse changes in laws and regulatory practices,
including export license requirements, trade barriers, tariffs and
tax laws;  
    
    changes in labor conditions;  
    
    exposure to liability under the Foreign Corrupt Practices Act; and  
    
    general economic and political conditions in these foreign markets. Work stoppages and other labor problems could adversely affect us. Some of our employees in the United States and abroad are represented by labor
unions. We experienced a strike, without material impact on pipe production, by
union members in February 1997 relating to the termination of collective
bargaining agreements covering our pipe facilities in Walker and Prairieville,
Louisiana. A lengthy strike or other work stoppage at any of our facilities
could have a material adverse effect on us. From time to time we have also
experienced attempts to unionize our non-union shops. While these efforts have
achieved limited success to date, we cannot give any assurance that we will not
experience additional union activity in the future. Adverse events could negatively affect our liquidity position. Our operations could require us to utilize large sums of working capital,
sometimes on short notice and sometimes without the ability to recover the
expenditures. Circumstances or events which could create large cash outflows
include losses resulting from fixed-price contracts, environmental liabilities,
litigation risks, unexpected costs or losses resulting from acquisitions,
contract initiation or completion delays, political conditions, customer
payment problems, foreign exchange risks, professional and product liability
claims, among others. We cannot provide assurance that we will have sufficient
liquidity or the credit capacity to meet all of our cash needs if we encounter
significant working capital requirements as a result of these or other factors. Insufficient liquidity could have important consequences to us. For example, we
could:  
    
    have less operating flexibility due to restrictions which could
be imposed by our creditors, including restrictions on incurring
additional debt, creating liens on our properties and paying
dividends;  
    
    have less success in obtaining new work if our sureties or our
lenders were to limit our ability to provide new performance bonds or
letters of credit for our projects;  
    
    be required to dedicate a substantial portion of cash flows
from operations to the repayment of debt and the interest associated
with that debt;  
    
    fail to comply with the terms of our credit facility;  
    
    incur increased lending fees, costs and interest rates; and  
    
    experience difficulty in financing future acquisitions and/or continuing operations. All or any of these matters could place us at a competitive disadvantage
compared with competitors with more liquidity and could have a negative impact
upon our financial condition and results of operations. Foreign exchange risks may affect our ability to realize a profit from certain
projects or to obtain projects. We generally attempt to denominate our contracts in U.S. dollars; however, from
time to time we enter into contracts denominated in a foreign currency. This
practice subjects us to foreign exchange risks, particularly to the extent
contract revenues are denominated in a currency different than the contract
costs. We attempt to minimize our exposure from foreign exchange risks by
obtaining escalation provisions for projects in inflationary economies,
matching the contract revenue currency with the contract costs currency or
entering into hedge contracts when there 70




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are different currencies for contract revenues and costs. However, these
actions will not always eliminate all foreign exchange risks. Foreign exchange controls may also adversely affect us. For instance, foreign
exchange controls were instituted in Venezuela on February 6, 2003. These
controls may limit our ability to repatriate profits from our Venezuelan
subsidiaries or otherwise convert local currency into U.S. dollars. These
limitations could adversely affect us. Further, our ability to obtain
international contracts is impacted by the relative strength or weakness of the
U.S. dollar to foreign currencies. We may incur unexpected liabilities associated with the Stone & Webster and IT
Group acquisitions, as well as other acquisitions. In July 2000, we acquired substantially all of the operating assets and assumed
certain liabilities of Stone & Webster, Inc., and during fiscal 2002, we
acquired substantially all of the operating assets and assumed certain
liabilities of The IT Group, Inc. We believe, pursuant to the terms of the
agreements for the Stone & Webster and IT Group asset acquisitions, that we
assumed only certain liabilities, which we refer to as assumed liabilities,
specified in those agreements. In addition, those agreements provide that
certain other liabilities, including but not limited to, certain outstanding
borrowings, certain leases, certain contracts in process, completed contracts,
claims or litigation that relate to acts or events occurring prior to the
acquisition date, and certain employee benefit obligations are specifically
excluded from our transactions. We refer to these as excluded liabilities.
There can be no assurance, however, that we do not have any exposure related to
the excluded liabilities. In addition, some of the former owners of companies that we have acquired are
contractually required to indemnify us against liabilities related to the
operation of their companies before we acquired them and for misrepresentations
made by them in connection with the acquisitions. In some cases, these former
owners may not have the financial ability to meet their indemnification
responsibilities. If this occurs, we may incur unexpected liabilities. Any of these unexpected liabilities could have a material adverse effect on us
and our financial condition. If we must write off a significant amount of intangible assets or long-lived
assets, our earnings will be negatively impacted. Because we have grown in part through acquisitions, goodwill and other acquired
intangible assets represent a substantial portion of our assets. Goodwill was
approximately $522.8 million as of August 31, 2004. If we make additional
acquisitions, it is likely that we will record additional intangible assets on
our books. We also have long-lived assets consisting of property and equipment
and other identifiable intangible assets of $204.6 million as of August 31,
2004 which are reviewed for impairment whenever events or circumstances
indicate the carrying amount of an asset may not be recoverable. If a
determination that a significant impairment in value of our unamortized
intangible assets or long-lived assets occurs, such determination would require
us to write off a substantial portion of our assets. Such a write off would
negatively affect our earnings. Difficulties integrating our acquisitions could adversely affect us. From time to time, we have made acquisitions to pursue market opportunities,
increase our existing capabilities and expand into new areas of operation. We
plan to pursue select acquisitions in the future. If we are unable to identify
acquisition opportunities or complete acquisitions we have identified, our
business could be materially adversely affected. In addition, we may encounter
difficulties integrating our future acquisitions and in successfully managing
the growth we expect from the acquisitions. In addition, our expansion into new
businesses, such as with our IT Group acquisition, may expose us to additional
business risks that are different from those we have traditionally experienced.
To the extent we encounter problems in identifying acquisition risks or
integrating our acquisitions, we could be materially adversely affected.
Because we may pursue acquisitions around the world and may actively pursue a
number of opportunities simultaneously, we may encounter unforeseen expenses,
complications and delays, including difficulties in employing sufficient staff
and maintaining operational and management oversight. Our failure to attract and retain qualified personnel, including key officers,
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Our ability to attract and retain qualified engineers, scientists and other
professional personnel in accordance with our needs, either through direct
hiring or acquisition of other firms employing such professionals, will be an
important factor in determining our future success. The market for these
professionals is competitive, and there can be no assurance that we will be
successful in our efforts to attract and retain needed professionals. In
addition, our ability to be successful depends in part on our ability to
attract and retain skilled laborers and craftsmen in our pipe fabrication and
construction businesses. Demand for these workers can at times be high and the
supply extremely limited. Our success is also highly dependent upon the continued services of our key
officers. The loss of any of our key officers could adversely affect us. We do
not maintain key employee insurance on any of our executive officers. Changes in technology could adversely affect us, and our competitors may
develop or otherwise acquire equivalent or superior technology. We believe that we have a leading position in technologies for the design and
construction of ethylene processing plants. We protect our position through
patent registrations, license restrictions and a research and development
program. However, it is possible that others may develop competing processes
that could negatively affect our market position. Additionally, we have developed construction and power generation and
transmission software which we believe provide competitive advantages. The
advantages currently provided by this software could be at risk if competitors
were to develop superior or comparable technologies. Our induction pipe bending technology and capabilities favorably influence our
ability to compete successfully. Currently this technology and our proprietary
software are not patented. Even though we have some legal protections against
the dissemination of this know-how, including non-disclosure and
confidentiality agreements, our efforts to prevent others from using our
technology could be time-consuming, expensive and ultimately may be
unsuccessful or only partially successful. Finally, there is nothing to prevent
our competitors from independently attempting to develop or obtain access to
technologies that are similar or superior to our technology. Market prices of our equity securities have changed significantly and could
change further. The market prices of our common stock may change significantly in response to
various factors and events beyond our control, including the following:  
    
    the other risk factors described in this Form 10-K, including
changing demand for our products and services;  
    
    a shortfall in operating revenue or net income from that
expected by securities analysts and investors;  
    
    changes in securities analysts estimates of our financial
performance or the financial performance of our competitors or
companies in our industry generally;  
    
    general conditions in our industries;  
    
    general conditions in the securities markets;  
    
    issuance of a significant number of shares upon exercise of
employee stock options or conversion of the LYONs; and  
    
    issuance of a significant number of shares of common stock to
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We may experience adverse impacts on our results of operations as a result of
adopting new accounting standards or interpretations. Our implementation of and compliance with changes in accounting rules,
including new accounting rules and interpretations, could adversely affect our
operating results or cause unanticipated fluctuations in our operating results
in future periods. For example, effective August 31, 2005, we are required by the Sarbanes-Oxley
Act of 2002 to begin filing an annual report on the effectiveness of our
internal controls. Although we believe our internal controls are operating
effectively, and we have committed internal resources and engaged external
consultants to ensure compliance, we cannot guarantee that we will not have any
material weaknesses as reported by our external auditors and such determination
could materially adversely affect our business. Provisions in our articles of incorporation and by-laws and rights agreement
could make it more difficult to acquire us and may reduce the market price of
our common stock. Our articles of incorporation and by-laws contain certain provisions, such as a
provision establishing a classified Board of Directors (in the event the entire
Board of Directors is increased to twelve or more members), provisions
entitling holders of shares of common stock that have been beneficially owned
for four years or more to five votes per share, a provision prohibiting
shareholders from calling special meetings, a provision requiring super
majority voting (75% of the outstanding voting power) to approve certain
business combinations and provisions authorizing the Board of Directors to
issue up to 20 million shares of preferred stock without approval of our
shareholders. Also, we have adopted a rights plan that limits the ability of
any person to acquire more than 15% of our common stock. These provisions could
have the effect of delaying or preventing a change in control or the removal of
management, of deterring potential acquirers from making an offer to our
shareholders and of limiting any opportunity to realize premiums over
prevailing market prices for the common stock. Provisions of our shareholder
rights agreement could also have the effect of deterring changes of control. Terrorists actions have and could continue to negatively impact the U.S.
economy and the markets in which we operate. Terrorist attacks, like those that occurred on September 11, 2001, have
contributed to economic instability in the United States, and further acts of
terrorism, violence or war could affect the markets in which we operate, our
business and our expectations. There can be no assurance that armed hostilities
will not increase or that terrorist attacks, or responses from the United
States, will not lead to further acts of terrorism and civil disturbances in
the United States or elsewhere, which may further contribute to economic
instability in the United States. These attacks or armed conflicts may directly
impact our physical facilities or those of our suppliers or customers and could
impact our domestic or international revenues, our supply chain, our production
capability and our ability to deliver our products and services to our
customers. Political and economic instability in some regions of the world may
also result and could negatively impact our business. 
 Item 7a. Quantitative And Qualitative Disclosures About Market Risk Interest Rate Risk We are exposed to interest rate risk due to changes in interest rates,
primarily in the United States. Our policy is to manage interest rates through
the use of a combination of fixed and floating rate debt and short-term fixed
rate 73




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##### Table of Contents



investments. We currently do not use any derivative financial instruments to
manage our exposure to interest rate risk. The table below provides information
about our future maturities of principal for outstanding debt instruments
(including capital leases) and fair value at August 31, 2004 (in millions): Expected Maturity Dates
    
    Fair2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    Total
    
    ValueLong-term debtFixed rate
    
    $
    5.7
    
    
    
    2.7
    
    
    
    1.2
    
    
    
    1.0
    
    
    
    0.8
    
    
    
    250.5
    
    
    $
    261.9
    
    
    $
    247.8Average interest rate
    
    
    4.4
    %
    
    
    5.3
    %
    
    
    8.0
    %
    
    
    8.0
    %
    
    
    8.0
    %
    
    
    10.75
    %
    
    
    
    
    
    
    Variable rate
    
    $
    2.0
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    3.8
    
    
    
    
    
    
    
    
    
    
    $
    6.0
    
    
    $
    6.0Average interest rate
    
    
    5.0
    %
    
    
    4.7
    %
    
    
    4.7
    %
    
    
    4.7
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term line of creditVariable rate
    
    $
    6.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6.0
    
    
    $
    6.0Average interest rate
    
    
    5.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 At August 31, 2004, the interest rate on our primary Credit Facility was either
5.5% (if the prime rate index had been chosen) or 4.17% (if the LIBOR rate
index had been chosen) with an availability of $84.4 million (see Note 10 of
the notes to our consolidated financial statements for further discussion of
our Credit Facility). The estimated fair value of long-term debt and capital leases as of August 31,
2004 and 2003 was approximately $253.8 million and $466.3 million,
respectively. The fair value of the convertible debt and Senior Notes as of
August 31, 2004 was based on recent sales of such debt as of August 31, 2004.
The fair value of our other long-term debt and capital leases were based on
borrowing rates currently available to us for notes with similar terms and
average maturities. Foreign Currency Risks The majority of our transactions are in U.S. dollars; however, certain of our
subsidiaries conduct their operations in various foreign currencies. Currently,
when considered appropriate, we use hedging instruments to manage our risks
associated with our operating activities when an operation enters into a
transaction in a currency that is different from its local currency. In these
circumstances, we will frequently utilize forward exchange contracts to hedge
the anticipated purchases and/or revenues. We attempt to minimize our exposure
to foreign currency fluctuations by matching our revenues and expenses in the
same currency for our contracts. As of August 31, 2004, we had minimal forward
exchange contracts outstanding that were hedges of certain commitments of
foreign subsidiaries. The exposure from the commitments is not material to our
results of operations or financial position (see Notes 1 and 19 of the notes to
our consolidated financial statements). 74




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Item 8. Financial Statements And Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    76Consolidated Balance Sheets as of August 31, 2004 and 2003
    
    
    77-78Consolidated Statements of Operations for the years ended
August 31, 2004, 2003 and 2002
    
    
    79Consolidated Statements of Shareholders Equity for the years
ended August 31, 2004, 2003 and 2002
    
    
    80-81Consolidated Statements of Cash Flows for the years
ended August 31, 2004, 2003 and 2002
    
    
    82-83Notes to Consolidated Financial Statements
    
    
    84-139
 75




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders
The Shaw Group Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of The Shaw Group
Inc. and subsidiaries as of August 31, 2004 and 2003, and the related
consolidated statements of operations, shareholders equity and cash flows for
each of the three years in the period ended August 31, 2004. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Shaw Group
Inc. and subsidiaries at August 31, 2004 and 2003, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended August 31, 2004 in conformity with U. S. generally accepted
accounting principles. As discussed in Note 6 to the consolidated financial statements, effective May
31, 2004, the Company adopted Financial Accounting Standards Board
Interpretation No. 46(R), Consolidation of Variable Interest Entities. /s/ Ernst & Young LLP New Orleans, Louisiana
October 22, 2004 76




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##### Table of Contents



THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of August 31, 2004 and 2003
(Dollars in thousands) ASSETS 2004
    
    2003Current assets:Cash and cash equivalents
    
    $
    88,557
    
    
    $
    179,852Restricted and escrowed cash
    
    
    56,574
    
    
    
    58,035Marketable securities, held to maturity
    
    
    
    
    
    
    5,096Accounts receivable, including retainage, net
    
    
    451,393
    
    
    
    427,823Accounts receivable from unconsolidated entities
    
    
    7,450
    
    
    
    7,942Inventories
    
    
    80,073
    
    
    
    86,246Cost and estimated earnings in excess of billings
on uncompleted contracts, including claims
    
    
    384,011
    
    
    
    233,895Deferred income taxes
    
    
    48,926
    
    
    
    82,311Prepaid expenses
    
    
    10,755
    
    
    
    19,306Assets held for sale
    
    
    1,784
    
    
    
    2,001Other current assets
    
    
    8,260
    
    
    
    11,856Total current assets
    
    
    1,137,783
    
    
    
    1,114,363Investment in and advances to unconsolidated entities, joint ventures
and limited partnerships
    
    
    25,689
    
    
    
    33,173Property and equipment:Transportation equipment
    
    
    5,249
    
    
    
    5,251Furniture, fixtures and software
    
    
    86,386
    
    
    
    107,895Machinery and equipment
    
    
    122,262
    
    
    
    106,255Buildings and improvements
    
    
    56,415
    
    
    
    60,121Assets acquired under capital leases
    
    
    5,756
    
    
    
    5,325Land
    
    
    7,596
    
    
    
    7,891Construction in progress
    
    
    8,045
    
    
    
    10,442291,709
    
    
    
    303,180Less: accumulated depreciation
    
    
    (122,221
    )
    
    
    (118,850
    )169,488
    
    
    
    184,330Goodwill
    
    
    522,783
    
    
    
    511,376Deferred income taxes
    
    
    20,597
    
    
    
    Other assets
    
    
    153,596
    
    
    
    142,873$
    2,029,936
    
    
    $
    1,986,115
 (Continued) The accompanying notes are an integral part of these consolidated statements. 77




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THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of August 31, 2004 and 2003
(Dollars in thousands) LIABILITIES AND SHAREHOLDERS EQUITY 2004
    
    2003Current liabilities:Accounts payable
    
    $
    316,022
    
    
    $
    307,971Accrued liabilities
    
    
    143,930
    
    
    
    155,258Advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts
    
    
    357,472
    
    
    
    259,338Contract liability adjustments
    
    
    17,347
    
    
    
    32,551Deferred
revenue - prebilled
    
    
    6,233
    
    
    
    10,785Current maturities of long-term debt
    
    
    4,637
    
    
    
    258,758Short-term revolving lines of credit
    
    
    5,983
    
    
    
    1,274Current portion of obligations under capital leases
    
    
    2,113
    
    
    
    1,378Total current liabilities
    
    
    853,737
    
    
    
    1,027,313Long-term debt, less current maturities
    
    
    256,437
    
    
    
    250,861Obligations under capital leases, less current portion
    
    
    4,736
    
    
    
    884Deferred income taxes
    
    
    
    
    
    
    25,985Other liabilities
    
    
    19,641
    
    
    
    17,980Minority interest
    
    
    10,614
    
    
    
    802Commitments and contingencies
    
    
    
    
    
    
    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; 69,101,493
and 43,121,871 shares issued, respectively; and 63,769,838
and 37,790,216 shares outstanding, respectively
    
    
    750,077
    
    
    
    496,148Retained earnings
    
    
    255,836
    
    
    
    286,811Accumulated other comprehensive loss
    
    
    (15,157
    )
    
    
    (20,540
    )Unearned stock-based compensation
    
    
    (6,072
    )
    
    
    (216
    )Treasury stock, 5,331,655 shares
    
    
    (99,913
    )
    
    
    (99,913
    )Total shareholders equity
    
    
    884,771
    
    
    
    662,290$
    2,029,936
    
    
    $
    1,986,115
 The accompanying notes are an integral part of these consolidated statements. 78




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THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended August 31, 2004, 2003 and 2002
(Dollars in thousands, except per share amounts) 2004
    
    2003
    
    2002Revenues
    
    $
    3,076,945
    
    
    $
    3,292,804
    
    
    $
    3,149,077Cost of revenues
    
    
    2,857,162
    
    
    
    3,023,048
    
    
    
    2,828,036Gross profit
    
    
    219,783
    
    
    
    269,756
    
    
    
    321,041General and administrative expenses
    
    
    215,792
    
    
    
    197,725
    
    
    
    157,781Operating income
    
    
    3,991
    
    
    
    72,031
    
    
    
    163,260Interest expense
    
    
    (38,429
    )
    
    
    (32,043
    )
    
    
    (23,028
    )Interest income
    
    
    1,718
    
    
    
    5,406
    
    
    
    11,518(Loss) gain on LYONs repurchase
    
    
    (1,325
    )
    
    
    2,723
    
    
    
    Foreign currency transaction gains (losses), net
    
    
    (2,702
    )
    
    
    135
    
    
    
    (1,158
    )Other income (expense), net
    
    
    1,523
    
    
    
    (12,905
    )
    
    
    (2,669
    )(39,215
    )
    
    
    (36,684
    )
    
    
    (15,337
    )Income (loss) before income taxes, minority interest, earnings
(losses) from unconsolidated entities and (loss) income from
discontinued operations
    
    
    (35,224
    )
    
    
    35,347
    
    
    
    147,923Provision (benefit) for income taxes
    
    
    (11,624
    )
    
    
    11,580
    
    
    
    53,099Income (loss) before minority interest, earnings (losses) from
unconsolidated entities and (loss) income from discontinued
operations
    
    
    (23,600
    )
    
    
    23,767
    
    
    
    94,824Minority interest, net of taxes
    
    
    (5,284
    )
    
    
    (169
    )
    
    
    (33
    )Earnings (losses) from unconsolidated entities, net of taxes
    
    
    2,578
    
    
    
    (2,979
    )
    
    
    1,703Income (loss) from continuing operations
    
    
    (26,306
    )
    
    
    20,619
    
    
    
    96,494(Loss) income from discontinued operations of the
hanger engineering and pipe support businesses, net of taxes:(Loss) income from operations
    
    
    (1,674
    )
    
    
    247
    
    
    
    1,873Impairment of discontinued operations
    
    
    (2,995
    )
    
    
    
    
    
    
    (Loss) income from discontinued operations, net of taxes
    
    
    (4,669
    )
    
    
    247
    
    
    
    1,873Net income (loss)
    
    $
    (30,975
    )
    
    $
    20,866
    
    
    $
    98,367Net income (loss) per common share:Basic:Income (loss) from continuing operations
    
    $
    (0.45
    )
    
    $
    0.54
    
    
    $
    2.36(Loss) income from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    0.01
    
    
    
    0.05Net income (loss)
    
    $
    (0.53
    )
    
    $
    0.55
    
    
    $
    2.41Diluted:Income (loss) from continuing operations
    
    $
    (0.45
    )
    
    $
    0.53
    
    
    $
    2.22(Loss) income from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    0.01
    
    
    
    0.04Net income (loss)
    
    $
    (0.53
    )
    
    $
    0.54
    
    
    $
    2.26
 The accompanying notes are an integral part of these consolidated statements. 79




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##### Table of Contents



THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Dollars in thousands, except share amounts)
 Unearned
    
    AccumulatedCommon
    
    Treasury
    
    Common
    
    Treasury
    
    Stock-
    
    Other
    
    
    
    
    
    TotalStock
    
    Stock
    
    Stock
    
    Stock
    
    Based
    
    Comprehensive
    
    Retained
    
    ShareholdersShares
    
    Shares
    
    Amount
    
    Amount
    
    Compensation
    
    Income (Loss)
    
    Earnings
    
    EquityBalance, September 1, 2001
    
    
    41,012,292
    
    
    
    
    
    
    
    437,015
    
    
    
    
    
    
    
    
    
    
    
    (6,200
    )
    
    
    167,578
    
    
    
    598,393Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,367
    
    
    
    98,367Other comprehensive income:Foreign translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,633
    )
    
    
    
    
    
    
    (2,633
    )Unrealized net loss on
hedging activities,
net of tax
benefit of $72
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    
    
    
    
    (115
    )Unrealized net losses on
securities available
for sale, net of tax
benefit of $74
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (119
    )
    
    
    
    
    
    
    (119
    )Additional pension
liability not yet
recognized in net
periodic pension
expense, net of tax
benefit of $3,054
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,126
    )
    
    
    
    
    
    
    (7,126
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,374Shares issued to
acquire IT Group
    
    
    1,671,336
    
    
    
    
    
    
    
    52,463
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,463PPM acquisition earn
out shares
    
    
    83,859
    
    
    
    
    
    
    
    1,971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,971Exercise of options
    
    
    235,190
    
    
    
    
    
    
    
    2,262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,262Tax benefit on exercise
of options
    
    
    
    
    
    
    
    
    
    
    675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    675Purchases of treasury stock
    
    
    
    
    
    
    (2,160,400
    )
    
    
    
    
    
    
    (52,043
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,043
    )Return of SS&S escrow shares
    
    
    
    
    
    
    (650
    )
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )Contributed capital
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195Balance, August 31, 2002
    
    
    43,002,677
    
    
    
    (2,161,050
    )
    
    
    494,581
    
    
    
    (52,076
    )
    
    
    
    
    
    
    (16,193
    )
    
    
    265,945
    
    
    
    692,257Comprehensive income:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,866
    
    
    
    20,866Other comprehensive income:Foreign translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,546
    
    
    
    
    
    
    
    2,546Unrealized net losses
on hedging activities,
net of tax benefit
of $2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Unrealized net gains on
securities available
for sale, net of tax
expense of $241
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    385
    
    
    
    
    
    
    
    385Less: Reclassification
adjustments for losses
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (259
    )
    
    
    
    
    
    
    (259
    )Additional pension
liability not yet
recognized in net
periodic pension
expense, net of
tax benefit of $3,728
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,014
    )
    
    
    
    
    
    
    (7,014
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,519Exercise of options
    
    
    119,194
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Tax benefit on exercise
of options
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,016
    
    
    
    
    
    
    
    (216
    )
    
    
    
    
    
    
    
    
    
    
    800Purchases and retirement of
treasury stock
    
    
    
    
    
    
    (3,170,605
    )
    
    
    
    
    
    
    (47,837
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,837
    )Balance, August 31, 2003
    
    
    43,121,871
    
    
    
    (5,331,655
    )
    
    $
    496,148
    
    
    $
    (99,913
    )
    
    
    (216
    )
    
    $
    (20,540
    )
    
    $
    286,811
    
    
    $
    662,290
 (Continued) 80




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THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Dollars in thousands, except share amounts)
 Unearned
    
    AccumulatedCommon
    
    Treasury
    
    Common
    
    Treasury
    
    Stock-
    
    Other
    
    
    
    
    
    TotalStock
    
    Stock
    
    Stock
    
    Stock
    
    Based
    
    Comprehensive
    
    Retained
    
    ShareholdersShares
    
    Shares
    
    Amount
    
    Amount
    
    Compensation
    
    Income (Loss)
    
    Earnings
    
    EquityNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,975
    )
    
    
    (30,975
    )Other comprehensive income:Foreign translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,938
    
    
    
    
    
    
    
    2,938Unrealized net losses
on hedging activities,
net of tax benefit
of $2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222
    
    
    
    
    
    
    
    222Reduction in pension
Liability, net not yet
recognized in net
periodic pension
expense, net of
tax of $936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,223
    
    
    
    
    
    
    
    2,223Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,592
    )Shares issued in public
equity offerings
    
    
    25,346,000
    
    
    
    
    
    
    
    245,966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245,966Exercise of options
    
    
    38,750
    
    
    
    
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191Tax benefit on exercise
of options
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49Stock-based compensation
    
    
    594,872
    
    
    
    
    
    
    
    7,723
    
    
    
    
    
    
    
    (7,723
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,867
    
    
    
    
    
    
    
    
    
    
    
    1,867Balance, August 31, 2004
    
    
    69,101,493
    
    
    
    (5,331,655
    )
    
    $
    750,077
    
    
    $
    (99,913
    )
    
    $
    (6,072
    )
    
    $
    (15,157
    )
    
    $
    255,836
    
    
    $
    884,771
 The accompanying notes are an integral part of these consolidated statements. 81




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THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended August 31, 2004, 2003 and 2002
(Dollars in thousands) 2004
    
    2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    (30,975
    )
    
    $
    20,866
    
    
    $
    98,367Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    60,767
    
    
    
    44,597
    
    
    
    28,379Loss (income) from discontinued operations, net of taxes
    
    
    4,669
    
    
    
    (247
    )
    
    
    (1,873
    )Provision (benefit) for deferred income taxes
    
    
    (12,869
    )
    
    
    8,951
    
    
    
    48,093Stock-based compensation expense, net of taxes
    
    
    2,138
    
    
    
    553
    
    
    
    396Accretion of interest on discounted long-term debt
    
    
    2,136
    
    
    
    9,508
    
    
    
    11,512Amortization of deferred debt issue costs
    
    
    4,509
    
    
    
    7,522
    
    
    
    9,079Provision for uncollectible accounts receivable
    
    
    9,868
    
    
    
    16,093
    
    
    
    5,875Amortization of contract adjustments
    
    
    (13,409
    )
    
    
    (26,823
    )
    
    
    (31,066
    )(Earnings) losses from unconsolidated entities
    
    
    (2,578
    )
    
    
    2,979
    
    
    
    (1,703
    )Foreign currency transaction (gains) losses, net
    
    
    2,702
    
    
    
    (135
    )
    
    
    1,158Loss (gain) on repurchase of LYONs
    
    
    1,325
    
    
    
    (2,723
    )
    
    
    Write-off of investments in securities available for sale and
accounts and claims receivable from Orion, and other accounts
receivable
    
    
    
    
    
    
    12,395
    
    
    
    3,062Minority interest, net of taxes
    
    
    5,284
    
    
    
    169
    
    
    
    33Other
    
    
    (1,490
    )
    
    
    193
    
    
    
    3,544Changes in assets and liabilities, net of effects of acquisitions:Decrease in receivables
    
    
    (9,007
    )
    
    
    9,697
    
    
    
    30,478(Increase) decrease in cost and estimated earnings in excess
of billings on uncompleted contracts, including claims
    
    
    (147,555
    )
    
    
    17,647
    
    
    
    (54,625
    )(Increase) decrease in inventories
    
    
    12,480
    
    
    
    13,519
    
    
    
    (8,462
    )(Increase) decrease in other current assets
    
    
    2,170
    
    
    
    (25,558
    )
    
    
    1,810(Increase) decrease in prepaid expenses
    
    
    8,515
    
    
    
    (3,728
    )
    
    
    (3,182
    )(Increase) decrease in other assets
    
    
    (16,457
    )
    
    
    (35
    )
    
    
    5,509Increase (decrease) in accounts payable
    
    
    (6,232
    )
    
    
    (88,164
    )
    
    
    70,258Increase (decrease) in accrued liabilities
    
    
    6,685
    
    
    
    (26,413
    )
    
    
    21,304Increase (decrease) in advanced billings and billings in excess
of cost and estimated earnings on uncompleted contracts
    
    
    96,019
    
    
    
    (193,960
    )
    
    
    81,133Increase
(decrease) in deferred revenueprebilled
    
    
    (5,332
    )
    
    
    (718
    )
    
    
    3,527Increase (decrease) in other long-term liabilities
    
    
    1,598
    
    
    
    1,813
    
    
    
    (7,540
    )Net cash provided by (used in) operating activities
    
    
    (25,039
    )
    
    
    (202,002
    )
    
    
    315,066Cash flows from investing activities:Purchases of businesses, net of cash received
    
    
    (23,847
    )
    
    
    (22,512
    )
    
    
    (102,664
    )Purchase of property and equipment
    
    
    (31,507
    )
    
    
    (26,221
    )
    
    
    (73,946
    )Purchase of real estate option
    
    
    
    
    
    
    
    
    
    
    (12,183
    )Investment in and advances to unconsolidated
entities and joint ventures
    
    
    (8,426
    )
    
    
    (3,328
    )
    
    
    (3,096
    )Distributions from unconsolidated entities
    
    
    7,538
    
    
    
    485
    
    
    
    2,208Deposits in escrowed cash for repurchase of LYONs
    
    
    (23,229
    )
    
    
    
    
    
    
    Withdrawal from escrow cash for repurchase of LYONs
    
    
    23,229
    
    
    
    
    
    
    
    Cash received from restricted and escrowed cash
    
    
    168,196
    
    
    
    38,465
    
    
    
    Cash deposited into restricted and escrowed cash
    
    
    (166,734
    )
    
    
    
    
    
    
    (96,500
    )Proceeds from sale of property & equipment
    
    
    2,588
    
    
    
    3,135
    
    
    
    717Proceeds from sale of assets held for sale
    
    
    5,662
    
    
    
    
    
    
    
    Proceeds from the sale of investment in an unconsolidated
entity
    
    
    9,000
    
    
    
    
    
    
    
    Purchases of marketable securities, held to maturity
    
    
    
    
    
    
    (107,270
    )
    
    
    (128,585
    )Maturities of marketable securities, held to maturity
    
    
    5,096
    
    
    
    157,126
    
    
    
    119,263Other
    
    
    
    
    
    
    974
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (32,434
    )
    
    
    40,854
    
    
    
    (294,786
    )
 (Continued) The accompanying notes are an integral part of these consolidated statements. 82




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THE SHAW GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
 2004
    
    2003
    
    2002Cash flows from financing activities:Purchase of treasury stock
    
    
    
    
    
    
    (47,837
    )
    
    
    (52,043
    )Repayment of debt and capital leases
    
    
    (285,796
    )
    
    
    (256,573
    )
    
    
    (9,202
    )Proceeds from issuance of debt
    
    
    7,990
    
    
    
    254,786
    
    
    
    490Deferred
credit costs
    
    
    (2,551
    )
    
    
    (12,241
    )
    
    
    (359
    )Issuance of common stock
    
    
    246,157
    
    
    
    500
    
    
    
    2,262Net proceeds (repayments) from revolving credit agreements
    
    
    1,018
    
    
    
    110
    
    
    
    (2,959
    )Other
    
    
    
    
    
    
    
    
    
    
    (163
    )Net cash used in financing activities
    
    
    (33,182
    )
    
    
    (61,255
    )
    
    
    (61,974
    )Cash from consolidation of variable interest entities
previously unconsolidated
    
    
    879
    
    
    
    
    
    
    
    Effects of foreign exchange rate changes on cash
    
    
    (1,519
    )
    
    
    491
    
    
    
    154Net decrease in cash and cash equivalents
    
    
    (91,295
    )
    
    
    (221,912
    )
    
    
    (41,540
    )Cash and cash equivalentsbeginning of year
    
    
    179,852
    
    
    
    401,764
    
    
    
    443,304Cash and cash equivalentsend of year
    
    $
    88,557
    
    
    $
    179,852
    
    
    $
    401,764Supplemental disclosures:Cash payments for:Interest (net of capitalized interest)
    
    $
    31,325
    
    
    $
    2,577
    
    
    $
    2,373Income taxes
    
    $
    1,220
    
    
    $
    11,743
    
    
    $
    2,226Noncash investing and financing activities:Issuance of restricted stock
    
    $
    7,723
    
    
    $
    
    
    
    $
    Transfer of acquired accounts receivables to seller  EDS
acquisition
    
    $
    4,000
    
    
    $
    
    
    
    $
    Receivable for working capital adjustment  Badger Acquisition
    
    $
    1,800
    
    
    $
    
    
    
    $
    Property and equipment acquired through issuance of debt
    
    $
    603
    
    
    $
    1,706
    
    
    $
    Investment in subsidiaries acquired through
issuance of common stock
    
    $
    
    
    
    $
    
    
    
    $
    54,434Repurchase of debt funded subsequent to balance sheet date
    
    $
    
    
    
    $
    20,648
    
    
    $
    
 The accompanying notes are an integral part of these consolidated statements. 83




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THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1  Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of The Shaw Group
Inc. (a Louisiana corporation), our consolidated subsidiaries, consolidated
variable interest entities, and in some cases the proportionate share of our
investments in joint ventures. All material intercompany accounts and
transactions have been eliminated in these consolidated financial statements.
Effective May 31, 2004, we adopted FASB Interpretation
No. 46(R),
Consolidation of Variable Interest Entities (VIEs), for entities created
prior to January 31, 2003 (see Note 6). During fiscal 2004, we discontinued our hanger engineering and pipe support
businesses in our Fabrication, Manufacturing and Distribution segment. The
consolidated statements of operations have been restated to present comparable
financial information for the years ended August 31, 2004, 2003 and 2002. Use of Estimates In order to prepare financial statements in conformity with accounting
principles generally accepted in the United States, our management is required
to make estimates and assumptions as of the date of the financial statements
which affect the reported values of assets and liabilities and revenues and
expenses and disclosures. Actual results could differ from those estimates.
Areas requiring significant estimates by our management include the following:  
    
    contract revenues, costs and profits and the application of
percentage-of-completion accounting;  
    
    provisions for uncollectible receivables and customer claims
and recoveries of costs from subcontractors, vendors and others;  
    
    recoverability of inventories and application of lower of cost or market accounting;  
    
    provisions for income taxes and related valuation allowances;  
    
    recoverability of goodwill;  
    
    recoverability of other intangibles and long-lived assets and related estimated lives;  
    
    valuation of assets acquired and liabilities assumed in connection with business combinations;  
    
    valuation of defined benefit pension plans; and  
    
    accruals for estimated liabilities, including litigation and insurance reserves. Nature of Operations, Operating Cycle and Types of Contracts We are a global provider of services to the power, process, and environmental
and infrastructure industries. We are a vertically-integrated provider of
comprehensive consulting, engineering, procurement, pipe fabrication,
construction and maintenance services to the power and process industries. We
are also a leader in the environmental, infrastructure and homeland security
markets, providing consulting, engineering, construction, remediation and
facilities management services to governmental and commercial customers. We operate primarily in the United States, with foreign operations worldwide.
Our services and products include consulting, project design, engineering and
procurement, piping system fabrication, industrial construction and
maintenance, facilities management and environmental remediation. Our
operations are conducted primarily through wholly-owned subsidiaries and joint
ventures. 84




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Our work is performed under fixed-price contracts, cost-reimbursable contracts,
and fixed-price and cost-reimbursable contracts modified by incentive and
penalty provisions. Each of our contracts may contain components of more than
one of the above contract types. During the term of a project, the contract or
components of the contract may be renegotiated to a different contract type.
The duration of our significant contracts varies but is generally two to four
years. Assets and liabilities have been classified as current under the
operating cycle concept whereby all contract-related items are regarded as
current regardless of whether cash will be received or paid within a twelve
month period except for certain equipment acquired in settlement of a project
related claim (see Note 5). Our fixed-price contracts include the following:  
    
    Firm fixed-price contract - A contract in which the price is
not subject to adjustment by reason of our cost experience or our
performance under the contract. However, the price may be adjusted
for changes in scope of work, new or changing laws, regulations or
other items.  
    
    Maximum price contract - A contract which provides at the
outset for an initial target cost, an initial target profit, and a
price ceiling. The price is subject to adjustment by reason of our
cost experiences but generally, the adjustment would not exceed the
price ceiling established in the contract. In addition, these
contracts usually include provisions whereby we share costs savings
with our clients.  
    
    Unit-price contract - A contract under which we are paid a
specified amount for every unit of work performed. Our cost-reimbursable contracts include the following:  
    
    Cost-plus contract - A contract under which we are reimbursed
for allowable or otherwise defined costs incurred plus a fee or
mark-up. In addition, our costs are generally subject to review by
our customers and such reviews could result in costs being disputed
as not reimbursable under the terms of the contract.  
    
    Target-price contract - A contract under which we are
reimbursed for costs plus a fee consisting of two parts: (i) a fixed
amount which does not vary with performance and (ii) an award amount
based on the cost-effectiveness of the project. Target-price
contracts also generally provide for sharing of costs in excess of or
below the target. In some contracts, we may agree to share cost
overruns in excess of our fee which could result in a loss on the
project.  On any of the above contract types we could also be assessed actual or
liquidated damages for late delivery or failure to meet performance criteria. Cash and Cash Equivalents and Marketable Securities Held to Maturity Highly liquid investments are classified as cash equivalents if they mature
within three months of the purchase date. Marketable securities held to
maturity are comprised of highly liquid investments that mature between three
to four months of the purchase date. The fair value of marketable securities
held to maturity approximated the carrying value at August 31, 2003. Accounts Receivable and Credit Risk We grant short-term credit to our customers. Our principal customers are major
multi-national industrial corporations, governmental agencies, regulated
utility companies, independent and merchant power producers and equipment
manufacturers. Accounts receivable are based on contracted prices, and we
believe that in most cases our exposure to credit risk is mitigated through
customer prepayments, collaterization and guarantees; however, during fiscal
2003 and 2002, changes in the power generation market created liquidity
problems for certain unregulated, independent power producers (IPPs). As a
result, our exposure to credit risk has increased with respect to those
customers (see Note 20). 85




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Allowance for Doubtful Accounts We estimate the amount of doubtful accounts based on our understanding of the
financial condition of specific customers and for contract adjustments to
reflect the net amount expected to be collected. We establish an allowance for
uncollectible accounts based on the assessment of the customers ability to
pay. Reserves resulting from disputes or other negotiations which are
established to reflect certain project related accounts receivable or claims at
their net realizable values are included in billings in excess of costs and
estimated earnings on uncompleted contracts. Accounts receivable are presented
net of the allowance for doubtful accounts on the accompanying consolidated
balance sheets. Analysis of the change in the allowance for doubtful accounts follows (in
thousands): 2004
    
    2003Beginning balance, September 1
    
    $
    32,661
    
    
    $
    51,602Provision
    
    
    9,868
    
    
    
    16,093Write-offs
    
    
    (13,119
    )
    
    
    (9,681
    )Fair value adjustments and reclassifications related to
acquisitions
    
    
    2,276
    
    
    
    (24,934
    )Other
    
    
    (675
    )
    
    
    (419
    )Ending balance, August 31
    
    $
    31,011
    
    
    $
    32,661
 Inventories Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) or weighted-average cost methods. Property and Equipment Property and equipment are recorded at cost. Additions and improvements
(including interest costs for construction of certain long-lived assets) are
capitalized. Maintenance and repair expenses are charged to income as incurred.
The cost of property and equipment sold or otherwise disposed of and the
accumulated depreciation thereon, are eliminated from the property and related
accumulated depreciation accounts, and any gain or loss is credited or charged
to other income (expense). For financial reporting purposes, depreciation is generally provided over the
following estimated useful service lives: Transportation equipment
    
    
    5
    
    
    YearsFurniture, fixtures and software
    
    
    3-8
    
    
    YearsMachinery and equipment
    
    
    3-18
    
    
    YearsBuildings and improvements
    
    
    8-40
    
    
    Years
 The straight-line depreciation method is used for all assets, except certain
software which is depreciated on a double-declining balance method.
Assets acquired under capital leases are amortized over the shorter of the
respective lease term or the estimated useful lives of the assets. During the years ended August 31, 2004 and 2003, interest costs of
approximately $0.1 million and $0.2 million, respectively, were capitalized. Long-lived assets, such as property and equipment and purchased intangibles
subject to amortization are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Joint Ventures As is common in the engineering, procurement and construction industries, we
execute certain contracts jointly with third parties through joint ventures,
limited partnerships and limited liability companies (or joint ventures). If
a 86




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joint venture is determined to be a variable interest entity (VIE) and we are
subject to a majority of the risk of loss from the VIEs activities or entitled
to receive the majority of the VIEs residual returns or both, the joint
venture is consolidated in accordance with the Financial Accounting Standards
Boards (FASB) Financial Accounting Series Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities (see Note 6). If consolidation
of the joint venture is not required, we generally account for these joint
ventures using the equity method of accounting with our share of the earnings
(losses) from these investments reflected in one line item on the consolidated
statement of operations except for certain joint ventures with construction
activities for which our percentage share of revenues and costs from the joint
ventures are reflected in our consolidated statements of operations
(proportionate consolidation). The investments in these joint ventures are
included in the accompanying consolidated balance sheets as of August 31, 2004
and 2003 at $22.6 million and $23.9 million, respectively. Income Taxes We provide for deferred taxes in accordance with SFAS No. 109, Accounting for
Income Taxes, which requires an asset and liability approach for measuring
deferred tax assets and liabilities due to temporary differences existing at
year-end using currently enacted tax rates. We assess the recoverability of
the deferred tax assets and determine if a valuation allowance is necessary
under a more likely than not approach. We analyze our ability to utilize
carryforwards and other deferred tax assets by considering future expected
taxable income and available tax planning strategies. Goodwill, Other Intangibles and Contract Adjustments and Loss Reserves Goodwill represents the excess of the purchase price of acquisitions over the
fair value of the net assets acquired. We evaluate historical and expected
discounted operating cash flows of our business segments to determine the
future recoverability of goodwill on an annual basis. Recorded goodwill is
re-evaluated on the same basis at the end of each quarterly accounting period
whenever significant permanent changes in business segments or triggering
events occur which might impair recoverability. Included in other assets are intangible assets related to various licenses,
patents, technology and related processes (see Note 4). The costs of these
assets are amortized on a straight-line basis over their estimated lives which
range from three to fifteen years. Also included in other assets are intangible
assets related to customer relationships acquired with the IT Group acquisition
which are amortized over a ten-year period on a straight-line basis. We
periodically assess the recoverability of the unamortized balance of our
intangible assets based on expected future profitability and undiscounted
expected cash flows and their contribution to our overall operations. Should
the review indicate that the carrying value is not fully recoverable, the
excess of the carrying value over the fair value of the other intangible assets
would be recognized as an impairment loss. We have also recorded contract fair value adjustments and contract loss
reserves related to the IT Group and Stone & Webster acquisitions. Contract
asset adjustments related to the IT Group acquisition are recorded in other
current assets, as an intangible asset. Contract liability adjustments and
contract loss reserves are recorded in other current liabilities. Contract liability (asset) adjustments related to the IT Group acquisition are
amortized proportionately based on the projected revenues for the period as a
percentage of the total projected revenues for the acquired contracts. The
projected and total revenue for each period were established at the time of the
acquisition when the contract liability (asset) adjustments were finalized and
are not adjusted for changes, if any, in the revenues, costs or timing of the
related projects. Contract liability adjustments related to the Stone & Webster
acquisition are amortized as a reduction of cost of revenues to achieve the
estimated market profit margin determined at the acquisition date for certain
acquired contracts. The cost of revenues on each contract is reduced to achieve
the estimated market profit margin until the reserves are depleted or the
project is completed. In the period each contract is completed, the remaining
unamortized reserves are reduced to zero (see Notes 4 and 8). The profit
margin recorded in such periods may differ materially from the market profit
margin estimated at the acquisition. Revenues For project management, engineering, procurement, remediation, and construction
services under fixed-price or 87




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target-price contracts, we recognize revenues and gross profit under the
percentage-of-completion method measured primarily by the percentage of
contract costs incurred to date to total estimated contract costs for each
contract, excluding certain costs which, in managements judgment, are not
reasonably indicative of progress toward completion. As these pass-through
costs are incurred, revenues are recorded equal to the costs incurred and no
gross profit is recognized. These costs ordinarily represent costs incurred
upon delivery of major equipment to EPC projects or cost incurred related to
providing financial support on major projects. Revenues from cost-reimbursable
contracts are recognized on the basis of costs incurred
during the period plus the fee earned. Profit incentives are included in
estimated revenues using the percentage-of-completion method when their
realization is reasonably assured. Cancellation fees are recognized when
received. The cumulative effect of changes to estimated gross profit and loss, including
those arising from contract penalty provisions, final contract settlements and
reviews of our costs performed by customers, are recognized in the computation
of gross profit under the percentage-of-completion method in the period in
which the revisions are identified. During the course of our work on a contract, disputes with other parties
involved in the contract can and often do occur. These disputes are generally
the result of one party incurring costs or damages caused by another party
during execution of the project. We may be damaged and we may damage other
parties. The other parties include our customer on the contract,
subcontractors and vendors we have contracted with to execute portions of the
project and others. We may claim damages against others and others may claim
damages against us. Collectively, we refer to disputes related to collection
of these damages as claims. Claims and change orders being negotiated with customers are included in total
estimated revenue to the extent costs attributable to such claims and change
orders have been incurred, and collection is probable and the amount can be
reasonably estimated. Profit from claims and change orders is recorded in the
period such amounts are settled or approved. On certain projects, contract adjustments result from differences between
provisional invoice amounts and final invoice amounts after being subject to
review by the customer. These contract adjustment allowances are based on
managements estimates of the net amounts to be realized from changes disputed
or costs under review by customers (see Note 20). Revenue is recognized from consulting services as the work is performed.
Consulting services work is primarily performed on a reimbursable basis. Revenues related to royalty use of our performance enhancements derived from
our process technologies are recorded in the period earned based on the
performance criteria defined in the related contracts. For running royalty
agreements, we recognize revenues based on customer production volumes at the
contract specified unit rates. Sales of paid-up license agreements are coupled
with the sale of engineering services for the integration of the technology
into the customers processes. For paid-up license agreements, revenue is
recognized using the percentage-of-completion method, measured primarily by the
percentage of costs incurred to date on engineering services to total estimated
engineering costs. Under such agreements, revenue available for recognition on
a percent complete basis is limited to the agreement value less a liability
provision for contractually specified process performance guarantees. The
liability provision is recorded in gross profit when, and if, the related
performance testing is successfully completed. We recognize revenues for pipe fittings, manufacturing operations and other
services at the time of shipment or upon completion of the services. For unit-priced pipe fabrication contracts, we recognize revenues upon
completion of individual spools of production. A spool consists of piping
materials and associated shop labor to form a prefabricated unit according to
contract specifications. Spools are generally shipped to job site locations
when complete. During the fabrication process, all direct and indirect costs
related to the fabrication process are capitalized as work in progress. For
fixed-price fabrication contracts, we recognize revenues based on the
percentage-of-completion method, measured primarily by the cost of materials
for which production is complete to the total estimated material costs of the
contract. 88




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Cost Estimates Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, warranty, direct financing related costs and depreciation costs. Our contract cost estimates are dependent upon the judgments we make with
respect to our expected contract performance and, on certain contracts, our
ability to recover costs from subcontractors and vendors through change orders
and claims for backcharges. We reduce contract cost estimates for backcharges
and claims when estimated recovery of the subject amounts is reasonably
assured. Costs incurred which result in claims for backcharges are treated as
costs of revenue when they are incurred (see Note 20). Provisions for estimated losses on uncompleted contracts are recorded as a
reduction of gross profit in the period in which such losses are identified. Selling, general and administrative expenses are charged to expense as
incurred. Financial Instruments, Forward Contracts  Non-Trading Activities The majority of our transactions are in U.S. dollars; however, certain of our
foreign subsidiaries conduct operations in the local currency. Accordingly,
there are circumstances when we believe it is appropriate to use financial
hedging instruments (generally foreign currency forward contracts) to manage
foreign currency risks when our foreign subsidiaries enter into a transaction
denominated in a currency other than their local currency. We utilize forward foreign exchange contracts to reduce our risk from foreign
currency price fluctuations related to firm or anticipated sales transactions,
commitments to purchase or sell equipment, materials and /or services. The fair
value of our hedges was not material at August 31, 2004 and 2003. At August 31,
2002, we recorded an asset and other income on fair value hedges of $0.7
million ($0.4 million net of taxes) that generally offset transaction losses in
the related hedged accounts receivables. We normally do not use any other type
of derivative instrument or participate in any other hedging activities. Other Comprehensive Income Our foreign subsidiaries maintain their accounting records in their local
currency (primarily British pounds, Australian and Canadian dollars, Venezuelan
Bolivars, the Euro, and prior to January 1, 2002, Dutch guilders). All of the
assets and liabilities of these subsidiaries (including long-term assets, such
as goodwill) are converted to U.S. dollars with the effect of the foreign
currency translation reflected in accumulated other comprehensive income
(loss), a component of shareholders equity, in accordance with SFAS No. 52,
Foreign Currency Translation, and SFAS No. 130, Reporting Comprehensive
Income. Foreign currency transaction gains or losses are credited or charged
to income (see Note 19). Other comprehensive income also includes the net after-tax effect of unrealized
gains and losses on derivative financial instruments and available-for-sale
securities and the minimum liability related to pension plans we sponsor. Self Insurance We are self-insured for workers compensation claims for individual claims or
claim events up to $500,000 and maintain insurance coverage for the excess.
Additionally, we self-insure our employee health coverage up to certain annual
individual and plan limits and maintain insurance coverage for the excess. Our
accruals for our self-insured costs are determined through a combination of
prior experience and specific analysis of larger claims. At August 31, 2004 and
2003, our accruals for our self-insured costs totaled $11.9 million and $9.9
million, respectively. Debt Issuance Costs 89




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We defer debt issuance costs which are amortized over the term of the related
debt. Unamortized debt issuance costs are included in non-current other assets
on the consolidated balance sheets and related amortization expense is included
in interest expense in the accompanying consolidated statements of operations. Reclassifications Certain reclassifications have been made to the prior years financial
statements in order to conform to the current years presentation. Stock Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure,
allows companies to account for stock-based compensation by either recognizing
an expense for the fair value of stock-based compensation upon issuance of a
grant as presented in SFAS No. 123 and related interpretations or by the
intrinsic value method prescribed in Accounting Principles Board Opinion APB
No. 25 and related interpretations. Our stock-based compensation consists of
the issuance of stock options and restricted stock. We account for our stock-based compensation under APB No. 25, which provides
that no stock compensation expense is recognized if stock options and grants
are issued at the market value of the underlying stock at the date of grant. In addition, APB No. 25 provides that compensation expense related to
restricted stock grants be measured at the market price of the stock on the
date the restricted stock is granted, with no discount provided for the
restrictions. The compensation expense is recognized over the periods
benefited from the employees services which we believe is the period over
which the restrictions lapse. However, if we had adopted the fair value method of accounting for stock-based
compensation and had determined our stock-based compensation cost based on the
fair value at the grant date consistent with the provisions of SFAS No. 123,
our net income (loss) and net income (loss) per common share would have
approximated the pro forma amounts below (in thousands, except per share
amounts): For the Year Ended August 31,2004
    
    2003
    
    2002Net income (loss):As reported
    
    $
    (30,975
    )
    
    $
    20,866
    
    
    $
    98,367Add: Stock-based employee compensation reported in
net income (loss), net of income taxes
    
    
    1,539
    
    
    
    359
    
    
    
    254Deduct: Stock-based employee compensation
under the fair value method for all awards,
net of income taxes
    
    
    (8,399
    )
    
    
    (7,097
    )
    
    
    (5,326
    )Pro forma
    
    $
    (37,835
    )
    
    $
    14,128
    
    
    $
    93,295Basic net income (loss) per share:As reported
    
    $
    (0.53
    )
    
    $
    0.55
    
    
    $
    2.41Add: Stock-based employee compensation reported in
net income (loss), net of income taxes
    
    
    0.03
    
    
    
    0.01
    
    
    
    0.01Deduct: Stock-based employee compensation under
the fair value method for all awards, net of income
taxes
    
    
    (0.15
    )
    
    
    (0.19
    )
    
    
    (0.14
    )Pro forma
    
    $
    (0.65
    )
    
    $
    0.37
    
    
    $
    2.28Diluted net income (loss) per share:As reported
    
    $
    (0.53
    )
    
    $
    0.54
    
    
    $
    2.26Add: Stock-based employee compensation reported in
net income (loss), net of income taxes
    
    
    0.03
    
    
    
    0.01
    
    
    
    0.01Deduct: Stock-based employee compensation under
the fair value method for all awards, net of income
taxes
    
    
    (0.15
    )
    
    
    (0.18
    )
    
    
    (0.11
    )Pro forma
    
    $
    (0.65
    )
    
    $
    0.37
    
    
    $
    2.16
 90




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The weighted average fair value at date of grant for options granted during the
years ended August 31, 2004, 2003 and 2002, was $6.45, $8.30, and $15.61 per
share, respectively. The fair value of options granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for the years ended August 31, 2004, 2003, and
2002, respectively: (a) dividend yield of 0.00%, 0.00% and 0.00%; (b) expected
volatility of 66%, 67%, and 65%; (c) risk-free interest rate of 3.4%, 2.9% and
4.1%; and (d) expected life of five years, five years and five years. It is our general practice to issue stock options at the market value of the
underlying stock, and therefore, no compensation expense is recorded for these
stock options (see Note 17). The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options. The Black-Scholes model requires the use of
highly subjective assumptions including the expected volatility of the
underlying stock price. Changes in these subjective assumptions can materially
affect the fair value estimates of our stock options. In addition, the
Black-Scholes model does not consider specific vesting restrictions of the
stock options and assumes that the stock options are fully transferable. The
characteristics of traded options under the Black-Scholes model differ from the
characteristics of stock options issued under our stock option plans. In
addition, SFAS No. 123 provides no discount for the restriction placed on
restricted stock grants and stock options. We believe that existing option pricing models do not provide a reliable single
measure of the fair value of our stock options and that the above pro forma
disclosures under SFAS No. 123 do not necessarily reflect the effects on
reported earnings for future years as options vest over several years and new
awards are typically made. Additionally, on March 31, 2004, the FASB published an Exposure Draft,
Share-Based Payment, an Amendment of FASB Statement No. 123 and APB No. 25.
The Exposure Draft would replace the existing requirements under FAS No. 123
and APB No. 25. Under the proposal, all forms of share-based payments to
employees, including employee stock options and employee stock purchase plans,
would be treated the same as other forms of compensation by recognizing the
related cost in the statement of income. This proposed Statement would
eliminate the ability to account for stock-based compensation transactions
using the intrinsic value method of APB No. 25 and generally would require that
such transactions be accounted for using a fair-value based method, with a
binomial or lattice model preferred to the Black-Scholes valuation model. The
comment period for the exposure draft ended June 30, 2004. We are currently
analyzing what impact, if any, the adoption of the exposure draft, if issued as
a final standard, will have on our financial position and results of
operations in fiscal 2005. Note 2  Public Capital Stock Transactions In September 2001, our Board of Directors authorized the repurchase of shares
of our common stock, depending on market conditions, up to a limit of $100
million. As of October 11, 2002, we completed our purchases under this program,
having purchased 5,331,005 shares at a cost of approximately $99.9 million. We
purchased 3,170,605 shares at a cost of approximately $47.8 million in fiscal
2003 and 2,160,400 shares at a cost of approximately $52.0 million in fiscal
2002. On October 29, 2003, we issued 23 million shares of common stock at $10 per
share with related transaction costs of approximately $12.5 million, generating
net proceeds of $217.5 million. Approximately $194.7 million of the net
proceeds were used to repurchase a portion of our outstanding Liquid Yield
Option Notes or LYONs (see Note 9). The remaining net proceeds of $22.8
million plus interest earned were held in escrow and used to repurchase
additional LYONs in May 2004. On April 20, 2004, we issued 2,346,000 shares of common stock at $12.35 per
share with related transaction costs of approximately $0.4 million, generating
net proceeds of approximately $28.6 million. The net proceeds of this equity
offering along with the remaining net proceeds from our October 2003 offering
and available cash on hand were used to repurchase approximately $57.2 million
of our outstanding LYONs pursuant to a tender offer on May 4, 2004 (see Note
9). 91




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Note 3  Restricted and Escrowed Cash In connection with a performance bond on a foreign project, we agreed to
deposit in escrow with the issuer of the bond primarily advance payments
received from our customer. During the year ended August 31, 2002, we deposited
approximately $96.5 million into escrow pursuant to this agreement. This
deposit was recorded as escrowed cash. As a result of the performance bond, our
customer agreed not to withhold retentions on our billings. The initial deposit
was retained in escrow until the fourth quarter of 2003, at which time escrow
funds began to be released incrementally to us as we completed certain contract
milestones. As of August 31, 2004, $1.2 million remained in escrow pursuant to
this agreement as the majority of the escrowed cash was replaced with
an additional letter of credit of $38 million at August 31, 2004. In connection with the EPC project to build a combined-cycle power plant in
Astoria, New York, we established a cash account with which we have joint
authority with another party to the contract. All payments received from the
project owner are deposited directly into a separate account (the Project
Account) to be used for certain permitted withdrawals. Permitted withdrawals,
as defined by the contract, include the payment of third-party vendor costs,
the guaranty fee, labor costs and out-of-pocket expenses incurred by us on a
monthly basis, as well as a percentage of the expected total gross margin on
the EPC project to be determined on a monthly basis subject to limitations
under the contract. The Project Account is subject to a first lien security
agreement between a third-party, who has guaranteed our performance on the
project (the Guarantor), and us where the Guarantor has upon certain triggering
events, sole control over the Project Account. Any withdrawals from this
Project Account require the approval of both the Guarantor and us. As of
August 31, 2004, restricted cash related to this EPC contract was $55.4
million. The project is scheduled to be completed in calendar 2006. Restricted cash is invested in short-term, low-risk investments and investment
income is remitted to us on a periodic basis. Note 4  Acquisitions SFAS No. 141, Business Combinations, requires that all acquisitions be
recorded utilizing the purchase method of accounting which requires the cost of
an acquired operation to be allocated to the assets acquired and liabilities
assumed based on their estimated fair values. These estimates are revised
during an allocation period as necessary when, and if, information becomes
available to further define and quantify the value of the assets acquired and
liabilities assumed. The allocation period generally does not exceed beyond one
year from the date of the acquisition. To the extent additional information to
refine the original allocation becomes available during the allocation period,
the allocation of the purchase price is adjusted. Likewise, to the extent such
information becomes available after the allocation period, such items are
generally included in our operating results in the period that the settlement
occurs or information is available to adjust the original allocation to a
better estimate. These future adjustments, if any, may materially favorably or
unfavorably impact our future consolidated financial position or results of
operations. In connection with potential acquisitions, we incur and capitalize certain
transaction costs, which include legal, accounting, consulting and other direct
costs. When an acquisition is completed, these costs are capitalized as part of
the acquisition price. We routinely evaluate capitalized transaction costs and
expense those costs related to acquisitions that are not likely to occur.
Indirect acquisition costs, such as salaries, corporate overhead and other
corporate services are expensed as incurred. The operating results of the acquisitions accounted for as a purchase are
included in our consolidated financial statements from the applicable date of
the transaction. IT Group Acquisition During fiscal year 2002, we acquired substantially all of the operating assets
and assumed certain liabilities of The IT Group, Inc. and its subsidiaries. The
IT Group and one of its wholly-owned subsidiaries, Beneco, were subject to
separate Chapter 11 bankruptcy reorganization proceedings and the acquisitions
were completed pursuant to the bankruptcy proceedings. The acquisition of the
IT Group assets was completed on May 3, 2002, and the acquisition 92




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of Benecos assets was completed on June 15, 2002. The IT Group was a leading provider of diversified environmental consulting,
engineering, construction, remediation and facilities management services. The
primary reasons for the acquisition were to diversify and expand our revenue
base and to pursue additional opportunities in the environmental,
infrastructure, and homeland security markets. We formed a new wholly-owned
subsidiary, Shaw Environmental & Infrastructure, Inc., or Shaw E&I, into which
we combined the acquired IT Group operations and our existing environmental and
infrastructure operations. The final purchase price included the following components (in thousands): Cash, net of $13,694 of cash received at closing
    
    $
    39,7561,671,336 shares of our common stock
    
    
    52,463Assumption of the outstanding balances of
debtor-in-possession financing we provided IT
Group & Beneco
    
    
    51,789Transaction costs
    
    
    9,519$
    153,527
 We believe, pursuant to the terms of the acquisition agreements, that we have
assumed only certain liabilities (assumed liabilities) of the IT Group and
Beneco as specified in the acquisition agreements. Further, the acquisition
agreements also provide that certain other liabilities of the IT Group,
including but not limited to, outstanding borrowings, leases, contracts in
progress, completed contracts, claims or litigation that relate to acts or
events occurring prior to the acquisition date, and certain employee benefit
obligations or excluded liabilities, are specifically excluded from our
transactions. We, however, cannot provide assurance that we do not have any
exposure to the excluded liabilities because, among other matters, the
bankruptcy courts have not finalized their validation of the claims filed with
the courts. Additionally, we have not completed our review of liabilities that
have been submitted to us for payment as we believe that, pursuant to the terms
of the acquisition agreement, we assumed only certain specified liabilities
associated with certain contracts in progress, completed contracts, claims or
litigation occurring prior to the acquisition date. Accordingly, our estimate
of the value of the assumed liabilities may change as a result of the
validation of the claims by the bankruptcy courts or other factors which may be
identified during our review or processing of liabilities; however, we believe
based on our review of claims filed that any such adjustment to the assumed
liabilities will not be material. The purchase price was subject to various adjustments, and the final allocation
was completed on May 3, 2003. The final purchase price allocation is as follows
(in thousands): Accounts receivable and costs and earnings in excess of billings on
uncompleted contracts
    
    $
    248,281Contract asset adjustments
    
    
    9,413Property, plant and equipment
    
    
    21,633Deferred income taxes
    
    
    65,293Other assets
    
    
    57,195Goodwill
    
    
    113,213Customer relationship intangible
    
    
    2,016Accounts payable and accrued expenses
    
    
    (198,303
    )Billings in excess of cost and estimated earnings on uncompleted contracts
    
    
    (83,658
    )Contract liability adjustments
    
    
    (52,842
    )Accrued contract loss reserves
    
    
    (21,250
    )Debt and bank loans
    
    
    (7,464
    )Purchase price (net of cash received of $13,694)
    
    $
    153,527
 The tax deductible portion of the goodwill recorded in the IT Group acquisition
is approximately $36.0 million. The final purchase price allocation for the IT Group acquisition differs from
our preliminary purchase price allocation as we were able to obtain information
on acquired contracts subsequent to the acquisition date and preliminary
purchase price allocation that enabled us to perform a detailed contract review
of those contracts and 93




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each contract position as of the acquisition date. Significant adjustments to
our preliminary purchase price allocation include a $23.1 million increase in
accounts receivable and costs and earnings in excess of billings on uncompleted
contracts, a $4.4 million decrease in contract asset adjustments, a $5.3
million decrease in contract liability adjustments and a $13.8 million increase
in accrued contract losses. Prior to the acquisitions of the IT Group and Beneco, we entered into
agreements with two surety companies. In exchange for our agreeing to complete
certain of the IT Groups and Benecos bonded contracts (i) the sureties paid
us $13.5 million in cash and (ii) the sureties assigned to us their rights to
Debtor-in-Possession financing of approximately $20.0 million that the sureties
had provided to Beneco. The total value received from the sureties, including a
net working capital position on these contracts of approximately $19.1 million,
was recorded as deferred revenue as of August 31, 2002 (included in billings in
excess of cost and estimated earnings on uncompleted contracts on the
accompanying consolidated balance sheet). We recognized revenue of
$15.0 million, $22.8 million and $5.9 million for the years ended August 31, 2004,
2003 and 2002, respectively, with the remaining $8.9 million recorded as
deferred revenue as of August 31, 2004. We acquired a large number of contracts in progress and contract backlog for
which the work had not commenced at the acquisition date. Under SFAS No. 141,
construction contracts are defined as intangibles that meet the criteria for
recognition apart from goodwill. These intangibles, like the acquired assets
and liabilities, are required to be recorded at their fair value at the date of
acquisition. We recorded these contracts at fair value using a market-based
discounted cash flow approach. Related assets of $9.4 million and liabilities
of $52.8 million, as adjusted by allocation period adjustments as of May 3,
2003, have been established and are being amortized to contract costs over the
estimated lives of the underlying contracts and related production backlog. The
net amortization recognized in the years ended August 31, 2004, 2003 and 2002
was approximately $8.2 million, $19.3 million and $2.8 million, respectively,
and has been reflected as a reduction in the cost of revenues, which resulted
in a corresponding increase in gross profit. The activity related to these
contract assets and liabilities is included in the table of Note 8. The following summarized pro forma income statement data reflects the impact
the acquisition of the IT Group would have had on our operating results for the
year ended August 31, 2002, as if the acquisition had taken place at the
beginning of the applicable fiscal year (in thousands, except per share
amounts): (Unaudited)For the Year EndedAugust 31, 2002Revenues
    
    $
    3,765,242Net loss
    
    $
    (313,495
    )Basic net loss from continuing operations per common share
    
    $
    (7.47
    )Diluted net loss from continuing operations per common share
    
    $
    (7.47
    )
 The unaudited pro forma results for the year ended August 31, 2002 have been
prepared for comparative purposes only and do not purport to be indicative of
the amounts that actually would have resulted had the acquisition occurred on
September 1, 2001 or that may be realized in the future. Further, pro forma
diluted net loss per share for the year ended August 31, 2002 excludes
approximately 6,556,000 shares related to the LYONs and stock options because
they were antidilutive. The pro forma results for the year ended August 31, 2002 include charges of
$217.4 million recorded by the IT Group. The charges generally related to the
reduction of accounts receivable to estimated net realizable value ($167.0
million), various employee accruals and write-off of assets ($22.5 million),
legal and consulting expenses related to the IT Groups bankruptcy ($12.5
million) and write-off of notes receivable from employees ($5.0 million). Energy Delivery Services, Inc. Effective December 31, 2003, we acquired all of the common stock of Energy
Delivery Services, Inc. (EDS) from Duke Energy Global Markets, Inc. for a total
purchase price, including direct acquisition costs, of approximately $22.4
million of which $18.4 million was paid in cash and $4.0 million was paid
through a transfer of the ownership 94




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of a portion of EDSs receivables to the seller. In connection with this
acquisition, we also acquired equipment under capital leases of approximately
$5.4 million which is reflected as a purchase price adjustment during the third
quarter of fiscal 2004. EDS, renamed Shaw EDS, provides a full line of vertical
services to utility companies seeking to upgrade, install and maintain their
power grids and is included in our Engineering, Construction & Maintenance
(ECM) segment. Our preliminary purchase price allocation includes approximately
$12.6 million of goodwill, $11.9 million in accounts receivables, $9.6 million
of equipment, $0.5 million in other assets, $0.5 million in cash, $5.4 million
in capital lease obligations and $7.3 million of other liabilities. Coastal Engineering and Environmental Consultants, Inc. In October 2003, we acquired certain assets and the workforce of Coastal
Engineering and Environmental Consultants, Inc. (Coastal) for a cost of $1.2
million in cash. Coastal specializes in engineering and consulting for Coastal
Erosion and Wetlands Restoration projects. Coastal has been integrated into our
Environmental & Infrastructure (E&I) segment. Approximately $1.1 million of
goodwill was recorded related to this transaction. Badger Technologies On April 17, 2003, we acquired substantially all of the assets of Badger
Technologies from Washington Group International, Inc. for a total purchase
price, including direct acquisition costs, of $16.2 million. We finalized the
purchase price of Badger in April 2004, and recorded a reduction in the
purchase price of $1.9 million as a result of final settlement of the minimum
working capital terms of the agreement which was subsequently received prior to
August 31, 2004. Badger Technologies develops, commercializes and licenses
proprietary petrochemical and petroleum refining-related technologies. Badger
Technologies was integrated into our ECM segment. Based on our final purchase
price allocation, we recorded $4.0 million in goodwill, $10.5 million in
patents related to certain process technologies acquired in the acquisition,
$1.2 million in tradenames, $5.5 million in accounts receivable, $1.0 million
in other assets and $6.0 million in liabilities. Envirogen, Inc. On March 26, 2003, we acquired all of the common stock of Envirogen, Inc. for a
cash purchase price of approximately $4.0 million, including direct acquisition
costs. Envirogen, previously a publicly traded company, specializes in
remediation of complex contaminants in soil and groundwater and has been
integrated into our E&I segment. Based on our final purchase price allocation,
$1.9 million of goodwill, $2.0 million in technology patents, $2.4 million in
accounts receivable, $2.0 million in costs in excess of billings, $1.9 million
in other assets, $0.3 million in cash and $6.5 million in liabilities was
recorded related to this transaction. LFG&E Acquisition On November 14, 2002, our E&I segment acquired certain assets of LFG&E
International, Inc. (LFG&E) for cash of approximately $1.2 million.
Approximately $0.4 million of goodwill was recorded related to this
transaction. LFG&E provides gas well-drilling services to landfill owners and
operators. On September 30, 2003, we acquired certain additional assets and
assumed certain liabilities of LFG&E for cash of approximately $2.2 million. As
of August 31, 2004, an additional $2.5 million in goodwill has been recorded in
our preliminary allocation of the purchase price. PsyCor International, Inc. In December 2001, we acquired certain assets of PsyCor International, Inc. for
$2.0 million. Acquisition costs were not material. The purchase method was used
to account for the acquisition and substantially the entire purchase price was
allocated to goodwill. PsyCors primary business is developing information
management systems. Note 5  Inventories and Other Assets The major components of inventories consist of the following (in thousands): 95




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August 31,2004
    
    2003Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    FIFO
    
    Total
    
    Average
    
    FIFO
    
    TotalFinished Goods
    
    $
    25,670
    
    
    $
    
    
    
    $
    25,670
    
    
    $
    29,660
    
    
    $
    
    
    
    $
    29,660Raw Materials
    
    
    3,974
    
    
    
    45,861
    
    
    
    49,835
    
    
    
    7,976
    
    
    
    38,950
    
    
    
    46,926Work In Process
    
    
    722
    
    
    
    3,846
    
    
    
    4,568
    
    
    
    468
    
    
    
    9,192
    
    
    
    9,660$
    30,366
    
    
    $
    49,707
    
    
    $
    80,073
    
    
    $
    38,104
    
    
    $
    48,142
    
    
    $
    86,246
 Included in non-current other assets is $23.9 million and $30.0 million at
August 31, 2004 and 2003, respectively, representing the value of the Pike
project site, land and materials and equipment which we obtained in settlement
of our claim in the bankruptcy proceeding of our customer in November 2003 (see
Note 20). During fiscal 2004, we finalized the valuation of the materials and
equipment. We recorded identifiable items at their estimated fair values,
which were less than cost. The site and land is recorded at a nominal value
which is offset by a reserve representing our estimated liability for site
restoration activities that will commence in fiscal 2005. Materials and
equipment which are transferred to projects to which Shaw is a party to the
contract are generally recorded at the previously established fair value. Any
gains resulting from these transfers are recognized currently in cost of
revenues. As equipment is sold to third parties, we recognize increases to or
reductions in cost of revenues for the difference between the proceeds on the
sales and the book values of the materials and equipment using the specific
identification method of cost recognition for these components. Note 6 Unconsolidated Entities, Joint Ventures and Limited Partnerships Variable Interest Entities In January 2003, the FASB issued Financial Accounting Series Interpretation No.
(FIN) 46, Consolidation of Variable Interest Entities which was revised in
December 2003 to address certain FIN 46 implementation issues (FIN 46(R)). This
interpretation requires a VIE to be consolidated by a company if that company
is subject to a majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of the entitys residual
returns or both. In general, a variable interest entity is a corporation,
partnership, limited liability company (LLC), trust, or any other legal
structure used for business purposes that either (1) has insufficient financial
support, (2) has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive returns generated
by its operations. The interpretation also requires disclosures about variable
interest entities that we are not required to consolidate but in which we have
a significant variable interest. The consolidation requirements of FIN 46(R)
apply to variable interest entities created after January 31, 2003 and is
effective for existing variable interest entities for the period ending May 31,
2004. Common in the engineering, procurement and construction industries, we enter
into joint venture arrangements and create entities such as limited liability
companies (LLCs) and limited partnerships to conduct operating activities on
our behalf as well as other third parties. The ownership interest and terms of
each joint venture arrangement and the LLC and limited partnership agreements
are different but may include financing from third party lenders and committed
funding level requirements. In addition, we may be the managing partner for
some of these entities where we may have the ability to exercise significant
influence over operating and financial policies. FIN 46(R) requires the
consolidation of entities in which a company absorbs a majority of another
entitys expected losses, receives a majority of the other entitys expected
residual returns, or both, as a result of ownership, contractual, or other
financial interests in the other entity. A variable interest holder that
consolidates the variable interest entity is called the primary beneficiary.
Upon consolidation, the primary beneficiary generally must record all of the
VIEs assets, liabilities and non-controlling interests as if it were
consolidated based on a majority voting interest. Effective May 31, 2004, we adopted the provisions of FIN 46(R). Prior to
adopting FIN 46(R), we generally consolidated entities based on a controlling
financial interest through ownership of a majority voting interest in the
entity. We have analyzed our joint ventures, LLCs and limited partnerships and
have identified VIEs of which we are the primary beneficiary and other VIEs of
which we are not the primary beneficiary. We account for our investments in
material VIEs of which we are the primary beneficiary in accordance with FIN
46(R). 96




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As of August 31, 2004, the total assets and liabilities before intercompany
eliminations of those VIEs of which we are the primary beneficiary, and
therefore consolidated, were approximately $47.6 million and
$35.2 million, respectively. The total assets and liabilities of those VIEs for which we are
not the primary beneficiary were approximately $37.2 million and
$13.7 million, respectively. The major captions of assets and liabilities, revenues, expenses and net income
included in the consolidated financial statements for the year ended August 31,
2004 are as follows (in thousands): Assets:Cash
    
    $
    4,854Accounts receivable
    
    
    22,681Cost and
estimated earnings in excess
of billings on uncompleted contracts
    
    
    500Inventories
    
    
    6,119Property and equipment
    
    
    12,076Other assets
    
    
    6Total assets
    
    $
    46,236Liabilities:Accounts payables and accrued liabilities
    
    $
    8,041Billings in excess of cost and estimated earnings
    
    
    12,513Short-term line of credit
    
    
    3,487Long-term debt
    
    
    4,970Other liabilities
    
    
    Total liabilities
    
    $
    29,011Minority interest
    
    $
    8,497Revenues
    
    $
    23,498Expenses
    
    $
    (17,928
    )Net income (loss)
    
    $
    5,570
 The following is a summary of our significant variable interest entities at
August 31, 2004: Consolidated VIEs  
    
    In November 1993, Shaw-Nass Middle East, W.L.L. (Shaw-Nass) was
created to support the fabrication and distribution of pipe in the
Middle East and is located in Bahrain. We initially invested $0.3
million to acquire a 49% equity interest in the joint venture. Since
November 1993, we have made advances to the entity and have issued
interest bearing loans to fund working capital and to finance certain
equipment purchases. We have concluded that this entity does not have
sufficient equity, and we are the primary beneficiary of this VIE as we
are obligated to absorb the majority of the expected losses, if any, and
have the right to the majority of the residual returns. Effective May
31, 2004, we have consolidated this entity which is included in our
Fabrication, Manufacturing and Distribution segment. This entity had
total assets of approximately $16.6 million and total liabilities of
$12.7 million as of August 31, 2004. The creditors of Shaw-Nass, which
are currently limited to vendors and suppliers, do not have recourse to
our general credit. Our maximum exposure to loss is limited to our
equity interest and outstanding advances and loans to Shaw-Nass for a
total of $8.4 million as of August 31, 2004. Included in the statement
of operations for fiscal 2004 is revenue of $5.1 million.  
    
    In May 2002, we invested approximately $3.1 million to acquire a 49%
equity interest in Shaw YPC Piping (Nanjing) Co. LTD a limited
partnership to construct and operate a new pipe fabrication facility in
China. During fiscal year 2003, both partners issued interest bearing
loans to the partnership to finance working capital and certain
equipment purchases. We have concluded that this entity does not have
sufficient equity, and we are the primary beneficiary of this VIE as we
are obligated to absorb the majority of the expected losses, if any, and
have the right to the majority of residual returns. As of May 31, 2004,
we 97




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consolidated this entity which is included in our Fabrication,
Manufacturing and Distribution segment. On August 27, 2004, the terms of
the interest bearing loan were modified and as a result, we are no longer
the primary beneficiary of the VIE. Therefore, as of August 31, 2004,
this entity is no longer consolidated and is accounted for under the
equity method.  
    
    In April 2003, our subsidiary, Badger Technologies Holdings L.L.C.
contributed the right to license certain technology to acquire a 50%
equity interest in a joint venture, Badger Licensing LLC. We have
concluded that this entity is a VIE and we are the primary beneficiary
as we are obligated to absorb the majority of the expected losses, if
any. This entity had total assets and liabilities of $23.1 million and
$10.8 million as of August 31, 2004 and is included in our ECM segment.
The creditors of the entity, which are currently limited to vendors and
suppliers, do not have recourse to our general credit. Our exposure to
losses is limited to our equity interest of $3.3 million as of
August 31, 2004 and certain costs incurred on behalf of the joint ventures
operations we have agreed to absorb estimated to be approximately
$4 million annually. Included in the statement of operations for fiscal
2004 is revenue of $10.6 million. Unconsolidated VIEs (Equity Method Accounting)  
    
    In June 2003, we contributed $3.2 million of cash to PFH Management
L.L.C., for a 30% equity interest. This entity was established to
undertake the privatization of military housing for Air Force personnel
and their families under a design, build and rental housing contract at
Patrick Air Force Base, Florida. PFH Management L.L.C. has an 80% equity
interest in Patrick Family Housing, L.L.C. and is the general managing
member for Patrick Family Housing, L.L.C. We have concluded that both
PFH Management L.L.C. and Patrick Family Housing, L.L.C. are variable
interest entities. Under the arrangement, PFH Management L.L.C. is
obligated to absorb the majority of the expected losses from Patrick
Family Housing L.L.C.; however, we are not the primary beneficiary of
PFH Management L.L.C. We account for PFH Management L.L.C. under the
equity method. As of August 31, 2004, our maximum exposure to loss
consisted of our equity interest of $4.7 million. As of August 31, 2004,
Patrick Family Housing, L.L.C. was in the process of obtaining financing
from third-party lenders which is expected to be secured by first liens
on the rental properties without recourse to the general credit of the
owners. As of September 30, 2004, the most recent financial
information for the entity had total assets and liabilities of approximately $25.5 million and $2.1 million, respectively.  
    
    In August 2004, we contributed cash of $3.8 million to Little Rock
Family Housing, LLC for a 50% equity interest. This entity was
established to undertake the privatization of military housing for Air
Force personnel and their families under a design, build and rental
housing contract in Little Rock, Arkansas. We have concluded that
Little Rock Family Housing, LLC is a variable interest entity. Under the
arrangement, Little Rock Family Housing, L.L.C. is obligated to absorb
the majority of the expected losses from the project; however, we are
not the primary beneficiary. We account for Little Rock Family Housing,
L.L.C. under the equity method. As of August 31, 2004, our maximum
exposure to loss consisted of our equity interest of $4.1 million. As of
August 31, 2004, Little Rock Family Housing, L.L.C. was in the process
of obtaining financing from third-party lenders which is expected to be
secured by first liens on the rental properties without recourse to the
general credit of the partners. As of August 31, 2004, total assets of
the entity were approximately $7.6 million which approximates the
initial capital contributions to date as this project is not yet
operational. In connection with the IT Group acquisition, we acquired an interest in a joint
venture, Space Gateway LLC, that provides facilities management services. At
the time of the acquisition, the joint venture partners disputed our
acquisition of this investment due to the bankruptcy filing by the IT Group and
refused to provide us with financial and other information related to the joint
venture. Since our acquisition of the investment, we have had no involvement in
the management or operations of this joint venture. Therefore, we were unable
to review the entitys financial information in order to apply the provisions
of FIN 46(R) to this entity effective May 31, 2004. In August, 2004 we sold
our interest in this entity for cash proceeds of $9 million and recognized a
gain of $0.8 million. From time to time, we enter into joint ventures to bid and propose on specific
contracts. If the contract is ultimately awarded to the joint venture entity,
certain modifications to the operating agreements are often made and initial
working capital investments are then made by each joint venture partner. If a
contract is not awarded, the joint venture is dissolved. Typically, the
activity in these joint ventures is limited to bid and proposal costs initially
and 98




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are not material. We will continue to monitor these joint ventures, but will
generally defer the decision as to whether these entities require consolidation
under FIN 46(R) until contracts are awarded. Some of our unconsolidated entities have operating agreements that allow for
changes in ownership interests and allocation of profits and losses if certain
events should occur. These changes, should they occur, would require us to
reconsider whether these entities meet the definition of a VIE as well as the
determination of the primary beneficiary, if any, in accordance with
FIN 46(R). Unconsolidated Entities, Joint Ventures and Limited Partnerships The following is a summary of our investments in and advances to unconsolidated
entities which are accounted for under the equity method. Upon adoption of FIN
46(R), some of our unconsolidated entities, including Shaw-Nass Middle East,
W.L.L. and Shaw YPC Piping (Nanjing) Co. LTD, were determined to be VIEs for
which we are the primary beneficiary. These entities were consolidated as of
May 31, 2004 and the results of their operations are consolidated for the three
months ended August 31, 2004. Prior to consolidation, their operating results
were reflected in earnings (losses) for unconsolidated entities. Effective
August 27, 2004, Shaw YPC Piping (Nanjing) Co. LTD was deconsolidated. August 31,2004
    
    2003Investments in unconsolidated entities, joint ventures and limited partnerships
(in thousands):Shaw-Nass Middle East, W.L.L.
    
    $
    
    
    
    $
    2,644EntergyShaw L.L.C.
    
    
    (2,311
    )
    
    
    (2,231
    )Shaw YPC Piping (Nanjing) Co. LTD
    
    
    1,447
    
    
    
    2,556Stennis joint venture
    
    
    3,928
    
    
    
    3,650PFH Management, L.L.C.
    
    
    4,733
    
    
    
    3,200Little Rock Family Housing, LLC
    
    
    4,054
    
    
    
    Nordic
    
    
    1,930
    
    
    
    1,930Other
    
    
    8,796
    
    
    
    12,12622,577
    
    
    
    23,875Long-term advances to and receivables from unconsolidated entities (in thousands):Shaw-Nass Middle East, W.L.L.
    
    
    
    
    
    
    6,217Shaw YPC Piping (Nanjing) Co. LTD
    
    
    3,081
    
    
    
    3,081Other
    
    
    31
    
    
    
    3,112
    
    
    
    9,298Total investments in and advances to unconsolidated entities, joint ventures and
limited partnerships
    
    $
    25,689
    
    
    $
    33,173Accounts payable to unconsolidated entities (in thousands):Shaw-Nass Middle East, W.L.L.
    
    $
    
    
    
    $
    198
 Earnings (losses) from unconsolidated entities, net of taxes, are summarized as
follows (in thousands): For the Year Ended August 31,2004
    
    2003
    
    2002Shaw-Nass Middle East, W.L.L.
    
    $
    (758
    )
    
    $
    (2,294
    )
    
    $
    (1,152
    )EntergyShaw L.L.C.
    
    
    (80
    )
    
    
    (3,436
    )
    
    
    2,855Shaw YPC Piping (Nanjing) Co. LTD
    
    
    (737
    )
    
    
    (250
    )
    
    
    Stennis joint venture
    
    
    1,178
    
    
    
    1,180
    
    
    
    925PFH Management, L.L.C.
    
    
    1,533
    
    
    
    
    
    
    
    Little Rock Family Housing LLC
    
    
    256
    
    
    
    
    
    
    
    
 99




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For the Year Ended August 31,2004
    
    2003
    
    2002Nordic
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    1,186
    
    
    
    1,821
    
    
    
    (925
    )$
    2,578
    
    
    $
    (2,979
    )
    
    $
    1,703
 Shaw-Nass and Shaw YPC Piping (Nanjing) Co. LTD were consolidated effective
May 31, 2004. Undistributed earnings of $1.3 million was included in our consolidated retained earnings as of August 31,
2002. There were no contributions for the years ended August 31, 2004, 2003 and 2002
and distributions were not material for the years ended August 31, 2004, 2003
and 2002 for both of these entities. Our EntergyShaw L.L.C. (EntergyShaw) joint venture was created in fiscal 2001
to focus on the construction of power plants in North America and Europe. As
of August 31, 2004, the EntergyShaw joint venture has no active projects. We
have a negative investment balance of ($2.3 million) as of August 31, 2004
which we will fund to the extent necessary to close out the operations of the
joint venture which is expected to occur in fiscal 2005. We received
distributions from EntergyShaw of $0.5 million and $2.0 million for the years
ended August 31, 2003 and 2002, respectively. There were no distributions for
the year ended August 31, 2004. In connection with the IT Group acquisition, we acquired an investment in the
Stennis joint venture in our E&I segment. We have a 45% equity interest in this
joint venture which provides facility management services to the Stennis Space
Center in Mississippi. Distributions for the years ended August 31, 2004 and 2003
were $0.9 million and $1.6 million, respectively. There were no distributions in fiscal 2002. We acquired a 19% equity interest in Nordic for an investment of $1.9 million
in fiscal 2000. As our equity interest is less than 20%, and we do not exercise
any significant influence over the management of the operations, we do not
recognize any income from this operation other than cash distributions in
accordance with the cost method of accounting. No such distributions have been
made since our initial investment. In connection with certain housing privatization joint ventures, we made equity
contributions of approximately $6.9 million during fiscal 2004. As of August
31, 2004, we are also scheduled to make additional equity contributions of
approximately $20 million in fiscal 2005; however, the exact timing of these
equity contributions is uncertain, as they are dependent on the progress of the
underlying projects. The following tables include
summary financial information for two
unconsolidated entities accounted for under the equity method and one
unconsolidated entity accounted for under the proportionate
consolidation method which are
significant in the aggregate (in thousands): (Unaudited)At August 31,2004
    
    2003Current assets
    
    $
    39,446
    
    
    $
    27,983Current liabilities
    
    
    20,414
    
    
    
    15,382Working capital
    
    $
    19,032
    
    
    $
    12,601Noncurrent assets
    
    $
    10,161
    
    
    $
    610Noncurrent liabilities
    
    $
    12,047
    
    
    $
    8,908
 (Unaudited)For The Year Ended August 31,2004
    
    2003
    
    2002Revenues
    
    $
    191,760
    
    
    $
    125,913
    
    
    $
    50,582Gross profit (loss)
    
    $
    9,360
    
    
    $
    5,670
    
    
    $
    2,550Net income (loss)
    
    $
    8,219
    
    
    $
    5,350
    
    
    $
    2,046
 The following table summarizes related party transactions with these
unconsolidated entities included in our consolidated financial statements as of
and for the years ended August 31, 2004 and 2003 and for the year ended 100




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August 31, 2002 (in thousands): Shaw YPCPipingEntergy/
    
    (Nanjing)Shaw-Nass
    
    Shaw
    
    Co. LTD
    
    OtherRevenue from unconsolidated entities:2004
    
    $
    
    
    
    $
    1,154
    
    
    $
    
    
    
    $
    2003
    
    
    632
    
    
    
    43,000
    
    
    
    
    
    
    
    82002
    
    
    66
    
    
    
    124,000
    
    
    
    
    
    
    
    Accounts receivable from unconsolidated
entities as of August 31,2004
    
    
    
    
    
    
    7,048
    
    
    
    397
    
    
    
    52003
    
    
    
    
    
    
    7,763
    
    
    
    171
    
    
    
    8Advances to unconsolidated entities as of
August 31,2004
    
    
    
    
    
    
    
    
    
    
    3,081
    
    
    
    312003
    
    
    6,217
    
    
    
    
    
    
    
    3,081
    
    
    
    
 Related party transactions include the sale of manufactured materials to
Shaw-Nass and Shaw YPC Piping (Nanjing) Co. LTD and engineering, procurement,
and construction services provided to EntergyShaw. Our 49% share of profit on
revenue from sales of manufactured materials to Shaw-Nass is eliminated. In addition to the entities above we have also executed other contracts jointly
with third parties which are included in other above. These other joint
ventures are not material on an individual basis. Note 7  Investment In Securities Available For Sale In December 1998, we participated in the financing of a customer, Orion
Refining Corporation, or Orion, by acquiring $12.5 million of 15% Senior
Secured Notes due December 1, 2003 (the 15% Notes) and preferred stock related
thereto issued by Orion for the face value of the Notes. In November 1999, we exchanged our 15% Notes for (i) $14.3 million
(representing the principal and accrued interest on our 15% Notes) of 10%
Senior Secured Notes due November 15, 2004 (the New Notes), and (ii) shares
of the customers Class A Convertible Preferred Stock and exchanged the related
preferred stock for shares of new Class C Convertible Preferred Stock, the
amount and value of which are not material. During fiscal 2001, we used $7.0 million of the New Notes to satisfy certain
transaction costs related to the acquisition of Stone & Webster. During the year ended August 31, 2002, we determined our investment in the New
Notes had been permanently impaired. As a result, we wrote down our investment
in these notes to their fair value, resulting in a charge to other expenses of
approximately $2.5 million, reversed interest income in the fourth quarter of
2002 of $0.6 million that had been previously recorded during fiscal 2002, and
ceased recognizing interest income from the New Notes. On May 13, 2003, Orion filed for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code. At this time, we carried $5.0 million in claims receivable
from Orion in addition to our investment of approximately $6.6 million. Based
on our understanding of Orions available assets and our security interest in
those assets, we do not believe that we will be able to realize significant
recovery of these amounts. Therefore, we recognized a charge to other expense
of approximately $11.6 million, representing the total carrying amount of both
the investment and the receivables from Orion. In addition, we recognized a
charge to other expense of approximately $0.8 million related to the write-off
of other uncollectible receivables. At August 31, 2002, we also had equity securities available for sale
aggregating $0.6 million. During the year ended August 31, 2002, we recorded
impairment losses of $0.6 million ($0.4 million; net of taxes) with respect to
these securities. At August 31, 2002, we also reflected a $0.2 million
unrealized loss ($0.1 million, net of taxes) on these 101




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securities, as a component of other comprehensive income in shareholders
equity. The unrealized losses recorded in other comprehensive income reflect
our view that there had been a temporary decrease in the value of these
securities from their historical cost. During the year ended August 31, 2003, we sold these securities, recognizing a
pre-tax gain of $0.3 million, reflected in other income. At August 31, 2004, we
had no material equity securities available for sale. Note 8  Goodwill And Other Intangibles Goodwill The following table reflects the changes in the carrying value of goodwill from
September 1, 2002 to August 31, 2004. (see Note 4 for additional information
regarding acquisitions) (in thousands): Balance at September 1, 2002
    
    $
    499,004LFG&E acquisition
    
    
    355Envirogen acquisition
    
    
    4,490Badger acquisition
    
    
    8,000Allocation period adjustments - PsyCor acquisition
    
    
    (500
    )Allocation period adjustments, net  - IT Group acquisition
    
    
    (95
    )Currency translation adjustment
    
    
    122Balance at August 31, 2003
    
    $
    511,376Currency translation adjustment
    
    
    2,741EDS acquisition
    
    
    12,595Coastal acquisition
    
    
    1,094LFG&E acquisition
    
    
    2,493Allocation period adjustments, net  Badger Technologies
    
    
    (4,330
    )Allocation period adjustments, net  Envirogen, Inc.
    
    
    (2,583
    )Impairment  discontinued operations (see Note 21)
    
    
    (28
    )Other
    
    
    (575
    )Balance at August 31, 2004
    
    $
    522,783
 The goodwill associated with the EDS, Coastal and LFG&E acquisitions has been
preliminarily calculated as of August 31, 2004. These purchase price
allocations may change for up to one-year subsequent to the acquisition date,
as we have not obtained all of the appraisals of the property and equipment and
intangible assets purchased, nor have we completed all of our review and
valuation procedures of the assets acquired and the liabilities assumed. We had tax deductible goodwill of approximately $184.4 million and $188.9
million as of August 31, 2004 and August 31, 2003, respectively. We completed our annual impairment test during the third quarter of fiscal 2004
and determined that goodwill was not impaired (see Note 1). Contract Adjustments and Loss Reserves The construction contract adjustments and contract loss reserves established in
purchase accounting (related to the IT Group and Stone & Webster acquisitions)
are recognized periodically as reductions of cost of revenues. The following table presents the additions to and utilization of contract
liability adjustments and accrued contract loss reserves for the periods
indicated (in thousands): 102




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Cost OfSeptember 1,
    
    (Asset) Or
    
    Revenues
    
    August 31,2003
    
    Liability
    
    Increase/
    
    2004Year Ended August 31, 2004
    
    Balance
    
    Increase
    
    (Decrease)
    
    BalanceContract (asset) adjustments
    
    $
    (3,210
    )
    
    $
    
    
    
    $
    1,795
    
    
    $
    (1,415
    )Contract liability adjustments
    
    
    32,551
    
    
    
    
    
    
    
    (15,204
    )
    
    
    17,347Accrued contract loss reserves
    
    
    9,858
    
    
    
    
    
    
    
    (3,980
    )
    
    
    5,878Total
    
    $
    39,199
    
    
    $
    
    
    
    $
    (17,389
    )
    
    $
    21,810
 Cost OfSeptember 1,
    
    (Asset) Or
    
    Revenues
    
    August 31,2002
    
    Liability
    
    Increase/
    
    2003Year Ended August 31, 2003
    
    Balance
    
    Increase
    
    (Decrease)
    
    BalanceContract (asset) adjustments
    
    $
    (12,150
    )
    
    $
    4,426
    
    
    $
    4,514
    
    
    $
    (3,210
    )Contract liability adjustments
    
    
    69,140
    
    
    
    (5,252
    )
    
    
    (31,337
    )
    
    
    32,551Accrued contract loss reserves
    
    
    11,402
    
    
    
    13,790
    
    
    
    (15,334
    )
    
    
    9,858Total
    
    $
    68,392
    
    
    $
    12,964
    
    
    $
    (42,157
    )
    
    $
    39,199
 Cost OfSeptember 1,
    
    (Asset) Or
    
    Revenues
    
    August 31,2001
    
    Liability
    
    Increase/
    
    2002Year Ended August 31, 2002
    
    Balance
    
    Increase
    
    (Decrease)
    
    BalanceContract (asset) adjustments
    
    $
    
    
    
    $
    (13,839
    )
    
    $
    1,689
    
    
    $
    (12,150
    )Contract liability adjustments
    
    
    43,801
    
    
    
    58,094
    
    
    
    (32,755
    )
    
    
    69,140Accrued contract loss reserves
    
    
    6,906
    
    
    
    8,240
    
    
    
    (3,744
    )
    
    
    11,402Total
    
    $
    50,707
    
    
    $
    52,495
    
    
    $
    (34,810
    )
    
    $
    68,392
 The decreases in the contract liability adjustments and accrued contract loss
reserves relate to reductions of these amounts for acquired contracts from both
the Stone & Webster and IT Group acquisitions. The decrease in cost of
revenues related to accrued contract loss reserves in fiscal 2004 is offset by
a $5.6 million increase related to an acquired Stone & Webster contract. The
reserves for this contract were recorded in accrued contract losses in our
allocation of purchase price. Subsequent reductions in the accrued contract
losses balance related to this contract were inadvertently recorded in Advanced Billings and
Billings in Excess of Earnings on Uncompleted Contracts rather than as a
decrease in cost of revenues. The remaining reserves related to this contract
will decrease cost of revenues for the remainder of the contract. All increases and decreases in the contract adjustments and accrued contract
loss reserves in the year ended August 31, 2003 relate to allocation period
adjustments related to the IT Group acquisition. For the year ended August 31,
2002, all increases in contract adjustments and accrued contract loss reserves
relate to the initial purchase price allocation for the IT Group acquisition,
with the exception of a $0.8 million contract loss reserve increase, which
reduced earnings in 2002, for a contract assumed in the Stone & Webster
acquisition. The contract (asset) adjustments are included in other current assets in the
accompanying consolidated balance sheets. Accrued losses on contracts not
acquired in a business combination are included in billings in excess of cost
and estimated earnings on uncompleted contracts on the accompanying
consolidated balance sheets. Other Intangible Assets At August 31, 2004 and 2003, identifiable intangible assets, other than
contract (asset) adjustments, consisted of proprietary ethylene technology
acquired in the Stone & Webster acquisition in fiscal 2000, certain
petro-chemical process technologies, patents and trade names acquired in the
Badger Technologies acquisition in fiscal 2003 (both of which are being
amortized over fifteen years on a straight-line basis) and patents acquired in
the IT Group acquisition in fiscal 2002 (which are being amortized over ten
years on a straight-line basis). Additionally, we recorded a customer
relationship intangible related to the IT Group acquisition, which is being
amortized over ten years on a straight-line basis and technology patents in the
Envirogen acquisition which are being amortized over three to seven years on a
straight-line basis. 103




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Proprietary Technologies,Patents and Tradenames
    
    Customer RelationshipsGross Carrying
    
    Accumulated
    
    Gross-Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationSeptember 1, 2002 balance
    
    $
    28,600
    
    
    $
    (3,812
    )
    
    $
    
    
    
    $
    Allocation period
adjustments, net
    
    
    7,561
    
    
    
    
    
    
    
    2,016
    
    
    
    Annual amortization
    
    
    
    
    
    
    (1,906
    )
    
    
    
    
    
    
    (202
    )August 31, 2003 balance
    
    $
    36,161
    
    
    $
    (5,718
    )
    
    $
    2,016
    
    
    $
    (202
    )Allocation period
adjustments, net
    
    
    6,387
    
    
    
    
    
    
    
    
    
    
    
    Annual amortization
    
    
    
    
    
    
    (3,223
    )
    
    
    
    
    
    
    (268
    )August 31, 2004 balance
    
    $
    42,548
    
    
    $
    (8,941
    )
    
    $
    2,016
    
    
    $
    (470
    )
 The annual amortization for our other intangible assets not associated with
contract acquisition adjustments is $2.9 million through fiscal 2008 and $2.8
million in fiscal 2009 related to the proprietary technology, patents and
tradenames, and $0.2 million related to customer relationships through fiscal 2009. During
fiscal 2004, in connection with the completion of our valuation of intangibles
related to our acquisitions of Badger Technologies and Envirogen, Inc., we
increased other intangible assets and recognized additional amortization of
intangibles to reflect accumulated amortization as if the intangibles had been
valued at the final purchase price allocation amounts as of the acquisition
date. Other Long Lived Assets During the first quarter of fiscal 2004, we recorded accelerated amortization
of $29.4 million on certain software assets as a result of a successful
implementation of new software systems, including the conversion of historical
financial and operating data, which had not previously been contemplated. In
August 2002, we had developed a preliminary plan to convert certain of our
operating units to new software systems. As a result, at that time, we
accelerated the amortization of certain software assets that would be replaced
based on the projected implementation plan and anticipated future use of the
assets. Our conversion to the new software systems, including the development
of certain new software packages, was completed earlier and was more
substantial than originally planned. Because implementation was substantially
complete by November 30, 2003, we concluded that we should completely abandon
our previous software platforms. As a result, we accelerated the amortization
of certain software assets that were replaced and recorded the aforementioned
amortization expense of $29.4 million to general and administrative expenses in
the consolidated statements of operations in the first quarter of fiscal 2004.
As of August 31, 2004 we recorded the retirement of these assets and eliminated
the total cost and accumulated depreciation from our books. In December 2001, we purchased a $12.2 million option to purchase certain real
estate properties in Baton Rouge, Louisiana to support the future growth and
operations of the company. This real
estate option is included in non-current other assets on the consolidated
balance sheets as of August 31, 2004 and 2003. The option expires on January 3, 2012. The real
estate properties subject to the option include three fully developed
commercial office buildings and two undeveloped parcels of land. The option
agreement provides that we may purchase these properties in bulk for the appraised
value of the properties at the time the option agreement was entered into less
the price paid for the option. The combined total purchase price for these
properties is approximately $130.9 million at August 31, 2004. Note 9  Long-Term Debt Long-term debt consisted of (in thousands): August 31,2004
    
    2003Senior Notes, unsecured, 10.75% interest, due March 15, 2010, issued at
98.803% of face value, with early repurchase options for us
    
    $
    250,459
    
    
    $
    250,136Convertible
Liquid Yield Option (TM) Notes, unsecured, zero coupon, 2.25%
interest, due May 1, 2021, with early repurchase options by the holder,
on May 1, 2005
    
    
    864
    
    
    
    251,489Note payable of a VIE secured by real estate with a book value of $4.9
million as of August 31, 2004; interest payable monthly at LIBOR plus 3%
(4.67% at August 31, 2004) monthly payments of $0.1, through November
2007
    
    
    4,067
    
    
    
    Other notes
payable; various interest rates ranging from 0% to 8.28%; various payment terms; maturing through 2009
    
    
    5,684
    
    
    
    7,994
 104




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August 31,2004
    
    2003Total debt
    
    
    261,074
    
    
    
    509,619Less: current maturities
    
    
    (4,637
    )
    
    
    (258,758
    )Total long-term portion of debt
    
    $
    256,437
    
    
    $
    250,861
 Annual maturities of long-term debt during each year ending August 31 are as
follows (in thousands): TOTAL2005
    
    $
    4,6372006
    
    
    1,0852007
    
    
    1772008
    
    
    3,7952009
    
    
    13Thereafter
    
    
    251,367Total
    
    $
    261,074
 Senior Notes On March 17, 2003, we issued and sold $253 million aggregate principal amount
at maturity of 10.75% Senior Notes due 2010, or Senior Notes, which mature on
March 15, 2010. The Senior Notes were issued at an original discount price of
$988.03 per $1,000 maturity value and have a yield to maturity of 11.00%. The
notes have a call (repurchase) feature that allows us to repurchase all or a
portion of the notes at the following prices (as a percentage of maturity
value) and dates: Call
    
    Price as Percentage of(Repurchase) Dates
    
    Maturity ValueMarch 15, 2007
    
    
    105.375
    %March 15, 2008
    
    
    102.688
    %March 15, 2009 until maturity
    
    
    100.000
    %
 Additionally, prior to March 15, 2006, we may, at our option, utilize the net
cash proceeds from one or more equity offerings, within ninety days of our
receipt of the equity funds, to repurchase up to 35% of the then outstanding
amount of Senior Notes at a price of 110.75% of the maturity value of the
Senior Notes. Prior to March 15, 2007, we may, at our option, repurchase all of
the then outstanding Senior Notes at a price equal to the principal amount of
the notes plus a specified applicable premium. The Senior Notes are unsecured
but are guaranteed by all of our material domestic subsidiaries. Upon the sale
of assets exceeding $10 million, we may use the proceeds to either reduce
senior debt, borrowings drawn under our Credit Facility, or acquire additional
assets within a one year period. To the extent any proceeds remain after one
year, we are required to offer to purchase the Senior Notes at their full
accreted value. In connection with the issuance of the Senior Notes, we recorded approximately
$8.8 million of deferred debt issuance costs net of amortization to date is
included in other assets. LYONs Convertible Securities Effective May 1, 2001, we issued and sold $790 million (including $200 million
to cover over-allotments) of 20-year, zero-coupon, unsecured, convertible debt,
Liquid Yield Option(TM) Notes, or LYONs. The debt was issued at an original
discount price of $639.23 per $1,000 maturity value and has a yield to maturity
of 2.25%. The securities are a senior unsecured obligation and are convertible
into our common stock at a fixed ratio of 8.2988 shares per $1,000 maturity
value or an effective conversion price of $77.03 at the date of issuance. On March 31, 2003, pursuant to a tender offer which commenced on February 26,
2003, we completed the purchase of LYONs with an amortized value of
approximately $256.7 million and an aggregate principal value of approximately
$384.6 million for a cost of approximately $248.1 million. The purchase, after
expenses and the write-off of unamortized debt issuance costs of approximately
$6.6 million, resulted in a net gain of approximately $2.0 million. We used the
total net proceeds, after fees, from the sale of the Senior Notes of
approximately $241.0 million and internal funds of approximately $6.7 million
to affect this repurchase. 105




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During the fourth quarter of fiscal 2003, we repurchased additional LYONs with
an amortized value of approximately $21.5 million and an aggregate principal
value of $32.0 million for a cost of approximately $20.6 million. The purchase,
after the write-off of unamortized debt issuance costs of approximately $0.2
million, resulted in a net gain of approximately $0.8 million. In November 2003, pursuant to a tender offer which commenced on October 20,
2003, we completed the purchase of LYONs with an amortized value of $189.8
million and aggregate principal value of $280.4 million for a total cost of
$189.3 million. Pursuant to a private purchase of LYONs completed on November
26, 2003, we purchased additional LYONs with an amortized value of $5.4 million
and aggregate principal value of $8.0 million for a total cost of $5.4 million.
The two LYONs purchases, after expenses and the write-off of unamortized debt
issuance costs of $1.8 million, resulted in a loss of $1.2 million reflected in
the (loss) gain on LYONs repurchase line item of the consolidated statement of
operations for fiscal 2004. These repurchases were funded with cash raised from
our offering of 23 million shares of common stock, which closed on October 29,
2003 and generated net proceeds of $217.5 million (see Note 3). The remaining
proceeds of $22.8 million were held in escrowed cash until such funds were used
to repurchase additional LYONs in May 2004, as described below. On May 3, 2004, we completed a tender offer to purchase any or all of the
outstanding LYONs submitted to us for purchase by the holders at the then
accreted value. At the time of the tender offer, there was $85.0 million
aggregate principal amount at maturity of LYONs outstanding, with an aggregate
accreted value as of that date of approximately $58.1 million. As a result of
the tender offer, we were able to purchase $57.2 million in accreted value. The holders of the remaining LYONs, $0.9 million of accreted value as of May
31, 2004, have the right to require us to repurchase the LYONs on May 1, 2006,
May 1, 2011 and May 1, 2016 at the then accreted value ($1.1 million at May 1,
2016). We have the right to fund such repurchases with shares of our common
stock at the current market value, cash, or a combination of common stock and
cash. The estimated fair value of long-term debt, excluding capital leases, as of
August 31, 2004 and 2003 was approximately $246.9 million and $466.3 million,
respectively, based on recent sales of such debt. For the years ended August 31, 2004, 2003 and 2002, we recognized, $4.5
million, $8.4 million and $9.1 million, respectively, of interest expense
associated with the amortization of financing fees that were incurred with
respect to issuance of our LYONs, Senior Notes, and the Credit Facility. As of
August 31, 2004 and 2003, unamortized deferred financing fees related to the
LYONs, Senior Notes and Credit Facility were approximately $11.3 million and
$14.1 million, respectively. As of August 31, 2004, the LYONs costs were fully
amortized as they were amortized to the first repurchase date of the debt or
May 1, 2004. Note 10  Revolving Lines Of Credit Our primary Credit Facility, dated July 2000, was amended and restated on March
17, 2003 and extended for a three year term from that date. On October 17,
2003, we amended our Credit Facility to increase the credit limit from $250
million to $300 million and to amend certain of the covenants contained
therein. The Credit Facility provides for both revolving credit loans and letters of
credit within the $300 million limit. We have previously used the Credit
Facility to provide working capital and to fund fixed asset purchases and
acquisitions. Under the Credit Facility, interest is computed, at our option, using either
the defined base rate or the defined LIBOR rate, plus an applicable margin. The
terms base rate and LIBOR rate have meanings customary for financings of
this type. The applicable margin is adjusted pursuant to a pricing grid based
on ratings by Standard and Poors Rating Services and Moodys Investor Services
for the Credit Facility or, if the Credit Facility is not rated, the ratings
from these services applicable to our senior, unsecured long-term indebtedness.
The margins for the Credit Facility loans may be in a range of (i) 1.00% to
3.00% over LIBOR or (ii) 0% to 1.50% over the base rate. On August 31, 2004,
the interest rate on the Credit Facility would have been either 5.5% (if the
base rate index had been chosen) or 4.2% (if the LIBOR rate index had been
chosen). On August 31, 2004, we did not have outstanding borrowings under the
Credit Facility but had outstanding letters of credit of approximately $215.6
million. 106




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We are required, with certain exceptions, to prepay loans outstanding under the
Credit Facility with (i) the proceeds of new indebtedness; (ii) net cash
proceeds from equity sales to third parties (if not used for acquisitions or
other general corporate purposes within 90 days after receipt); and (iii)
insurance proceeds or condemnation awards in excess of $5 million that are not
used to purchase a similar asset or for a like business purpose within 90 days
of the receipt thereof. As of August 31, 2004, we do not have outstanding
borrowings under our Credit Facility. Further, we are required to obtain the
consent of the lenders to prepay or amend the terms of the 10.75% Senior Notes
due 2010. The Credit Facility is secured by, among other things, (i) guarantees by our
domestic subsidiaries; (ii) a pledge of all of the capital stock of our
domestic subsidiaries and 66% of the capital stock in certain of our foreign
subsidiaries; and (iii) a security interest in all of our property and the
property of our domestic subsidiaries (including equipment and real estate). Effective August 31,
2004, we received approval from our bank lenders for a fourth amendment to our
Credit Facility (Fourth Amendment) to amend various financial covenants and
certain other terms in our Credit Facility. In particular, the Fourth
Amendment (i) maintained the maximum leverage ratio at 3.5x, (ii) expanded the
definition of EBITDA, as defined by the Credit Facility, to exclude charges
related to certain potential divestiture and restructuring charges in fiscal
2005, (iii) provided for the ability to offset proceeds from the sale of assets
against capital expenditures in calculating the fixed charge coverage ratio and
maximum capital expenditure covenant and (iv) clarified the treatment
of restricted cash in calculating the minimum working capital covenant. The Credit Facility provides for a first lien on certain property, including
equipment and real estate as collateral. We also have the ability to obtain
unsecured performance letters of credit outside of the Credit Facility of up to
$150 million. The Fourth Amendment did not otherwise change the interest rates
or the total capacity to borrow or obtain letters of credit under the Credit
Facility. The Credit Facility, as amended, contains certain financial covenants,
including:  
    
    A maximum leverage ratio of 3.5x through May 31, 2005 and 3.0x
thereafter;  
    
    a minimum fixed charge coverage ratio of 2.0x;  
    
    a minimum net worth as defined by the Credit Facility;  
    
    a defined minimum earnings before interest expense, income taxes,
depreciation and amortization (EBITDA). EBITDA, as defined in the Credit
Facility, is adjusted for certain non-cash items and for the pro forma
impact of acquisitions and dispositions of operations (Adjusted EBITDA).
The minimum Adjusted EBITDA covenant requires a trailing twelve months
of EBITDA of $75 million for the three fiscal quarters ended August 31,
2004 and $110 million thereafter on a rolling twelve month basis; and  
    
    a minimum working capital ratio requirement, as defined by the Credit
Facility, of 1.0 to 1.0. The Credit Facility also imposes restrictions on annual capital
expenditures to 25% of annual EBITDA, as defined, among other
restrictions. As of August 31, 2004, we were in compliance with the covenants contained in
the Credit Facility as amended. However, we would not have been in compliance
with the maximum capital expenditure covenant without the amendment. We would
not have complied with this capital expenditure covenant due to higher than
expected capital expenditures associated with consolidated variable interest
entities and a lower than expected trailing twelve months EBITDA in fiscal 2004
(which is used to determine the threshold for allowable capital expenditures).
As of August 31, 2004, we were in compliance with the other Credit Facility
covenants prior to the amendment. The leverage ratio limits the amount of cash that can be
borrowed. As of August 31, 2004, after applying the terms of the Fourth
Amendment, the maximum amount that could be borrowed under the
leverage ratio is approximately $115 million, subject to the overall availability under the
Credit Facility which was $84.4 million as of August 31, 2004,
after consideration for outstanding letters of credit. 107




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As of August 31, 2004 and 2003, our foreign subsidiaries had short-term
revolving lines of credit permitting borrowings totaling approximately $16.1
million and $17.3 million, respectively. These subsidiaries had outstanding
borrowings under these lines of approximately $2.5 million and $1.3 million,
respectively, at a weighted average interest rate of approximately 4.25% at August 31, 2004 and 2003. These subsidiaries also had
outstanding letters of credit under these lines of $3.5 million and $4.2
million, at August 31, 2004 and 2003, respectively, leaving $10.1 million of
availability under these lines at August 31, 2004. As of August 31, 2004, one of our consolidated joint ventures had a committed
short-term revolving line of credit of $4.0 million with borrowings of $3.5
million at a weighted average interest rate of 5.75% and we guarantee the debt. Note 11  Income Taxes The significant components of deferred tax assets and liabilities are as
follows (in thousands): August 31,2004
    
    2003Assets:Contract adjustments and accrued contract loss reserves
    
    $
    9,742
    
    
    $
    22,136Deferred revenue
    
    
    5,397
    
    
    
    11,217Receivables
    
    
    8,201
    
    
    
    8,619Net operating loss and tax credit carryforwards
    
    
    85,848
    
    
    
    49,360Other expenses not currently deductible
    
    
    5,370
    
    
    
    6,930Accrued severance
    
    
    179
    
    
    
    875Tax basis of inventory in excess of book basis
    
    
    485
    
    
    
    210Less: valuation allowance
    
    
    (9,813
    )
    
    
    (3,418
    )Total assets
    
    
    105,409
    
    
    
    95,929Liabilities:Goodwill
    
    
    (22,988
    )
    
    
    (16,131
    )Property, plant and equipment
    
    
    (12,310
    )
    
    
    (20,134
    )Employee benefits and other expenses
    
    
    (588
    )
    
    
    (3,338
    )Total liabilities
    
    
    (35,886
    )
    
    
    (39,603
    )Net deferred tax assets
    
    $
    69,523
    
    
    $
    56,326
 Income (loss) before provision (benefit) for income taxes for the years ended
August 31 was as follows (in thousands): 2004
    
    2003
    
    2002Domestic
    
    $
    (47,796
    )
    
    $
    15,972
    
    
    $
    140,456Foreign
    
    
    12,572
    
    
    
    19,375
    
    
    
    7,467Total
    
    $
    (35,224
    )
    
    $
    35,347
    
    
    $
    147,923
 The provision (benefit) for income taxes for the years ended August 31 was as
follows (in thousands): 2004
    
    2003
    
    2002Current - foreign
    
    $
    220
    
    
    $
    1,195
    
    
    $
    Deferred
    
    
    (12,869
    )
    
    
    8,806
    
    
    
    47,000Current
    
    
    1,025
    
    
    
    1,579
    
    
    
    6,099Total
    
    $
    (11,624
    )
    
    $
    11,580
    
    
    $
    53,099
 The provision (benefit) for income taxes relates to the following statement of
operations captions (in thousands): 108




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For the Year Ended August 31,2004
    
    2003
    
    2002Provision (benefit) for income taxes
    
    $
    (11,624
    )
    
    $
    11,580
    
    
    $
    53,099Minority interest
    
    
    (3,599
    )
    
    
    (113
    )
    
    
    (22
    )Earnings (losses) from unconsolidated subsidiaries
    
    
    2,880
    
    
    
    (732
    )
    
    
    1,605(Loss) income from discontinued operations
    
    
    (3,113
    )
    
    
    165
    
    
    
    1,249Total provision (benefit) for income taxes
    
    $
    (15,456
    )
    
    $
    10,900
    
    
    $
    55,931
 We paid no federal income taxes in the years ended August 31, 2004, 2003 and
2002 primarily due to taxable losses for the years ended August 31, 2004 and
2003 and the utilization of operating losses resulting from the Stone & Webster
acquisition in 2001 and the IT Group acquisition in 2002. A reconciliation of federal statutory and effective income tax rates for the
years ended August 31 was as follows: 2004
    
    2003
    
    2002Statutory rate
    
    
    (35
    )%
    
    
    35
    %
    
    
    35
    %State taxes provided
    
    
    (4
    )
    
    
    
    
    
    
    4Foreign income taxed at different rates
    
    
    (13
    )
    
    
    (7
    )
    
    
    (2
    )R&D and foreign tax credits
    
    
    (1
    )
    
    
    (5
    )
    
    
    (2
    )Valuation allowance
    
    
    18
    
    
    
    7
    
    
    
    Other
    
    
    2
    
    
    
    3
    
    
    
    1(33
    )%
    
    
    33
    %
    
    
    36
    %
 As of August 31, 2004, for federal income tax return purposes, we had
approximately $161 million of U.S. net operating loss carryforwards available
to offset future taxable income and approximately $7.2 million of research and
development credits available to offset future federal income tax. The loss
carryforwards expire beginning in 2022 through 2025 and the credits expire
beginning in 2022 through 2025. As of August 31, 2004, certain foreign
operations had net operating loss carryforwards of approximately $30 million,
which can be used to reduce future taxable income in those countries until they expire beginning in 2005 while others
have indefinite lives. SFAS No.
109 specifies that deferred tax assets are to be reduced by a valuation
allowance if it is more likely than not that some portion of the deferred tax
assets will not be realized. Management believes that future reversals of
existing taxable differences and future taxable income should be sufficient to
realize all of our deferred tax assets, with the exception of certain foreign
net operating loss carryforwards. Therefore, valuation allowances of $6.4
million, $2.4 million, and $1.0 million were established during fiscal 2004,
2003 and 2002, respectively, against the related deferred tax benefit for the
foreign net operating losses that we believe will probably not be realized
including a portion of the United Kingdom and Canadian net operating loss carryforwards and
the entire Venezuela and Australian net operating loss carryforwards. Unremitted foreign earnings reinvested abroad upon which deferred income taxes
have not been provided aggregated approximately $42.1 million at August 31,
2004. Currently, we do not expect these unremitted earnings to reverse and
become taxable to us in the future. Due to the timing and circumstances of
repatriation of such earnings, if any, it is not practicable to determine the
unrecognized deferred tax liability relating to such amounts. Withholding
taxes, if any, upon repatriation are not expected to be significant. Note 12  Common Stock We have one class of common stock. Each outstanding share of common stock which
has been held for four consecutive years without an intervening change in
beneficial ownership entitles its holder to five votes on each matter properly
submitted to our shareholders for their vote, waiver, release or other action.
Each outstanding share of common stock that has been held for less than four
consecutive years entitles its holder to only one vote. On July 31, 2001, we distributed a dividend of one Preferred Share Purchase
Right, or Right, for each outstanding share of our common stock outstanding on
that date. The Rights, which expire on July 9, 2011, will not prevent a
takeover, but are designed to deter coercive or unfair takeover tactics, and
are, therefore, intended to enable all of our shareholders to realize the
long-term value of their investment. We anticipate that the Rights will
encourage anyone seeking to acquire our company to negotiate with the Board of
Directors prior to attempting a takeover. 109




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The Rights, which are governed by a Rights Agreement dated July 9, 2001 between
us and First Union National Bank, as Rights Agent, should not interfere with a
merger or other business combination approved by our Board of Directors. The Rights are attached to the our common stock and are exercisable only if a
person or group (an Acquiring Person) either (i) acquires 15% or more of our
common stock or (ii) commences a tender offer, the consummation of which would
result in ownership by the Acquiring Person of 15% or more of the common stock.
The Board of Directors is authorized to reduce the 15% threshold to not less
than 10% of the common stock. In the event the Rights become exercisable, each Right will entitle
shareholders (other than the Acquiring Person) to buy one one-hundredth of a
share of a new series of junior participating preferred stock (Preferred
Shares) at an exercise price of $170.00 (the Exercise Price). The Exercise
Price is subject to certain anti-dilution adjustments. Each one one-hundredth
of a Preferred Share will give the stockholder approximately the same dividend,
voting and liquidation rights as would one share of common stock. In lieu of Preferred Shares, each Right holder (other than the Acquiring
Person) will be entitled to purchase from us at the Rights then-current
Exercise Price, shares of our common stock having a market value of twice such
Exercise Price. In addition, if we are acquired in a merger or other business
combination transaction after a person has acquired 15% or more of our
outstanding common stock, each Right will entitle its holder to purchase at the
Rights then-current Exercise Price, a number of the acquiring companys common
shares having a market value of twice such Exercise Price, in lieu of acquiring
Preferred Shares. Further, after a group or person becomes an Acquiring Person, but prior to
acquisition by such person of 50% or more of the common stock, the Board of
Directors may exchange all or part of the Rights (other than the Rights held by
the Acquiring Person) for shares of common stock at an exchange ratio of one
share of common stock for each Right. Prior to the acquisition by an Acquiring Person of 15% or more of our common
stock, the Rights are redeemable for $0.01 per Right at the option of the Board
of Directors. Note 13  Leases Capital leases The following is a summary of future obligations under capital leases (in
thousands): MinimumLease PaymentsFor the year ending August 31:2005
    
    $
    2,5362006
    
    
    2,1092007
    
    
    1,3772008
    
    
    1,0982009 and thereafter
    
    
    780Total payments
    
    
    7,900Less: amount representing interest
    
    
    (1,051
    )Total debt
    
    
    6,849Less: current portion
    
    
    (2,113
    )Total long-term portion of debt
    
    $
    4,736
 We lease furniture and fixtures (which include computer hardware and software)
under various non-cancelable lease agreements. Minimum lease rentals have been
capitalized and the related assets and obligations recorded utilizing various
interest rates. The assets are depreciated using the straight-line method,
except for certain software that was depreciated using the double declining
balance method in fiscal 2003, over either the estimated useful lives of the
assets or the lease terms, and interest expense is accrued on the basis of the
outstanding lease obligations. Assets acquired under capital
leases, net of accumulated amortization, are $4.7 million and $3.5 million at August 31, 2004 and 2003, respectively, and relate
to leased furniture and fixtures. Accumulated amortization as of August 110




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31, 2004 and 2003 was $1.2 million and $1.8 million, respectively. Operating Leases We lease certain office buildings, fabrication shops, warehouse facilities,
office equipment and machinery under non-cancelable operating lease agreements
which expire at various times and which require various minimum rentals. The
non-cancelable operating leases that were in effect as of August 31, 2004
require us to make the following estimated future minimum lease payments: For the year ending August 31 (in thousands):2005
    
    $
    58,9042006
    
    
    49,1262007
    
    
    39,2042008
    
    
    32,5322009
    
    
    29,2672010 and thereafter
    
    
    74,101Total future minimum lease payments
    
    $
    283,134
 We also enter into short-term lease agreements for equipment needed to fulfill
the requirements of specific jobs. Any payments owed or committed under these
lease arrangements as of August 31, 2004 are not included as part of total
minimum lease payments. The total rental expense for the fiscal years ended August 31, 2004, 2003, and
2002 was approximately $67.1 million, $67.0 million and $56.0 million,
respectively. Note 14  Contingencies Liabilities Related to Contracts Our contracts often contain provisions relating to the following matters:  
    
    warranty, 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 typically attempt to limit our exposure under these penalty provisions or
liquidated damage claims to the contractual fee related to the work; however,
in certain instances we can be exposed to more than the fee or profit earned
under the terms of the contract.  We also have claims from customers
as well as vendors, subcontractors and others which are considered in
determining the gross margin on certain contracts subject to negotiation with
these parties and/or subject to litigation (see Note 20). We also assumed two contracts in the Stone & Webster acquisition under which we
were contractually obligated to pay a significant amount of liquidated damages
or for which the scheduled project completion date was beyond the completion
date agreed to with the customer. During the year ended
August 31, 2002, based on the timing of estimated completion of one of the
projects and the status of negotiations with the customer, we reduced total
estimated costs for liquidated damages by approximately
$10.2 million. During the year ended August 31, 2004, as a
result of final settlement of claims on the other of these projects,
we reduced estimated liquidated damages to zero. We
believe we will settle our estimated remaining exposure for liquidated damages
on the one remaining project for the $12.5 million we have
reflected in total
estimated costs to complete this project. Contingencies Related to the Stone & Webster Acquisition On July 14, 2000, we purchased substantially all of the operating assets of
Stone & Webster, a global provider of engineering, procurement, construction,
consulting and environmental services to the power, process, environmental 111




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and infrastructure markets. We also assumed approximately $740 million of
liabilities in connection with this acquisition. We believe that, pursuant to the terms of the acquisition agreement, we assumed
only certain specified liabilities. We believe that liabilities excluded from
this acquisition include liabilities associated with certain contracts in
progress, completed contracts, claims or litigation that relate to acts or
events occurring prior to the acquisition date, and certain employee benefit
obligations, including Stone & Websters U.S. defined benefit plan
(collectively, the excluded items). We, however, cannot provide assurance that
we have no exposure with respect to the excluded items because, among other
things, the bankruptcy court has not finalized its validation of claims filed
with the court. The final amount of assumed liabilities may change as a result
of the validation of the claims process; however, we believe, based on our
review of claims filed, that any such adjustment to the assumed liabilities
will not be material. NRG - Pike During the fourth quarter of 2002, one of our customers, LSP-Pike Energy, LLC
(Pike), notified us that it would not pay a scheduled milestone billing on
the required due date of August 4, 2002. Pike is a subsidiary of NRG Energy,
Inc. (NRG), which was at the time owned by Xcel Energy, Inc. (Xcel). On
October 3, 2003, we reached an agreement for the settlement of our claims
related to the cancellation of the Pike project. The value of the consideration we received in the settlement agreement, which included the project site land, materials and equipment, plus
cash previously received from Pike, equaled the costs incurred and profit
recognized on the project; therefore, no gain or loss was recognized on the
settlement. The value of the materials and equipment of approximately $23.9 million at August 31, 2004 is included in non-current other assets on the consolidated balance
sheet. We expect to sell or use the materials and equipment to generate revenue
from other customers over the next several years (see Note 5  Inventories). Guarantees Our lenders issue letters of credit on our behalf to customers 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 which they make pursuant to these
letters of credit. At August 31, 2004 and 2003 the amount of outstanding
letters of credit was approximately $219.0 million and $164.3 million,
respectively. During fiscal 2004, customers who had been issued letters of credit in
connection with certain contracts received payments under outstanding letters
of credit of $47.9 million which we reimbursed our lenders. There were no such
payments in fiscal 2003. Of the amount of outstanding letters of credit at
August 31, 2004, $190.4 million are issued to customers in connection with
contracts. Of the $190.4 million, five customers held $138.5 million or 73%
of the outstanding letters of credit. The largest single
amount of outstanding letters of credit issued to a single customer on a single
project is $48.8 million. We have also provided guarantees to certain of our joint ventures which are
reported under the equity method and are not consolidated on the accompanying
balance sheets. At August 31, 2004 and 2003, we had guaranteed approximately
$0.7 million and $7.4 million of bank debt or letters of credit and $69.9
million and $46.5 million of performance bonds with respect to our
unconsolidated joint ventures, respectively. We would generally be required to
perform under these guarantees in the event of default by the joint venture. No
liabilities were recorded related to these guarantees as of August 31, 2004. Also, see Note 18 for discussion of a guarantee for a Related Party. SEC Inquiry On June 1, 2004, we were notified by the staff of the Securities and Exchange
Commission (SEC) that the staff is conducting an informal inquiry
relating to us. The SEC has not advised us as to either the reason for the
inquiry or its scope. The staffs notice states that it should not be
construed as an indication of any improper or 112




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unlawful conduct by us. We are cooperating fully with the staffs informal
inquiry; however, if the inquiry elevates to a formal investigation, the
resolution could have a material adverse effect on us. Securities Litigation We and certain of our current officers have been named as defendants in
purported shareholder class action lawsuits alleging violations of federal
securities laws. These types of class action lawsuits are not uncommon when
there has been a notification of even an informal inquiry by the SEC. The
first filed lawsuit is styled Earl Thompson v. The Shaw Group Inc. et al and
was filed on June 16, 2004 in the United States District Court for the Eastern
District of Louisiana, Case No. 04-1685. The complaint filed in the Thompson
action alleges claims under Sections 10(b) and Rule 10(b-5) promulgated
thereunder and 20(a) of the Securities Exchange Act of 1934 on behalf of a
class of purchasers of our common stock during the period from October 19, 2000
to June 10, 2004. The complaint alleges, among other things, that (i) certain
of our press releases and SEC filings contained material misstatements and
omissions, (ii) that the manner in which we accounted for certain acquisitions
was improper and (iii) that we improperly recorded revenue on certain projects,
and as a result, our financial statements were materially misstated at all
relevant times. The complaint does not specify the amount of damages sought.
Since the filing of the Thompson lawsuit, ten additional purported shareholder
class action lawsuits have been filed and other actions may also be commenced.
Each of the additional lawsuits includes the same defendants, and essentially
alleges the same statutory violations based on the same or similar alleged
misstatements and omissions. Ten of these actions have been consolidated under
the Thompson caption in the Eastern District of Louisiana. In addition, two shareholder derivative actions, styled as Jonathan Nelson v.
J.M. Bernhard, Jr., et al. and Larry F. Reusche v. Tim Barfield, Jr., et al.,
have been filed based on essentially the same allegations as the purported
class actions. The derivative actions, which the plaintiffs purport to be
bringing on behalf of the Company, name certain of our directors and current
and former officers as defendants, and name the Company as a nominal defendant.
The derivative suits collectively make claims of breach of fiduciary duty,
abuse of control, gross mismanagement, waste of corporate assets and unjust
enrichment based on allegations that the named defendants committed, condoned
or failed to identify and disclose the alleged misconduct alleged in the
purported class actions, and that certain defendants sold company stock while
in possession of knowledge of the alleged misconduct. The complaints do not
specify the amount of damages sought. Both the purported shareholder class action lawsuits and the derivative
lawsuits are in the early stages of litigation. We believe our financial
statements were prepared in accordance with GAAP and that none of our press
releases or public filings contained misrepresentations or omissions.
Accordingly, we intend to defend the Company and our directors and officers
vigorously against each of these actions. Although it is not possible at this
early stage to predict the likely outcome of these actions, an adverse result
in any of these lawsuits could have a material adverse effect on us. Other Matters In the normal course of business activities, we enter into contractual
agreements with customers for certain construction services to be performed
based on agreed upon reimbursable costs and labor rates. In some instances, the
terms of these contracts provide for the customers review of the accounting
and cost control systems to verify the completeness and accuracy of the
reimbursable costs invoiced. These reviews could result in reductions in
reimbursable costs and labor rates previously billed to the customer.
Additionally, we perform work for the U.S. Government that is subject to
continuing financial and operating reviews by governmental agencies. We do not
believe that any such reviews will result in a material change to our financial
position or results of operations. We maintain liability and property insurance against various risks in such
amounts as we consider necessary or adequate in the circumstances. However,
certain risks are either not insurable or insurance is available at rates which
are considered uneconomical. In the normal course of business, we become involved in various litigation
matters including, claims by third parties for alleged property damages,
personal injuries, and other matters. We have estimated our potential exposure,
net of insurance coverage, and have recorded reserves in our financial
statements as appropriate. We do not anticipate that the differences between
our estimated outcome of these claims and future actual settlements could have
a material 113




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effect on our financial position or results of operations. Note 15  Business Segments, Operations By Geographic Region And Major
Customers Business Segments We segregate our business activities into three operating segments:
Engineering, Construction & Maintenance (ECM) segment, Environmental and
Infrastructure (E&I) segment, and Fabrication, Manufacturing and Distribution
segment. The ECM segment provides a range of project-related services, including design,
engineering, construction, procurement, maintenance, technology and consulting
services, primarily to the power generation and process industries. The E&I segment provides environmental consulting, engineering, construction,
remediation and facilities management services (primarily for government and
military facilities). This E&I segment primarily reflects the IT Group
acquisition for which goodwill of $113.2 million was recorded. Additionally,
goodwill of approximately $72.5 million was allocated to the E&I segment from
the ECM segment as certain operations were integrated into the E&I segment in
fiscal 2002. Revenues from environmental and infrastructure operations and
related expense items that had previously been reported in the ECM segment during
fiscal 2002 but were incorporated into the E&I segment have been estimated and
restated to the E&I segment. It was not practical to develop this information
for fixed asset and long-lived asset purchases. The Fabrication, Manufacturing and Distribution segment provides integrated
piping systems and services for new construction, site expansion and retrofit
projects for industrial plants. We operate several pipe fabrication facilities
in the United States and abroad. We also operate a manufacturing facility that
provides products for our pipe fabrication services operations, as well as to
third parties. In addition, we operate several distribution centers in the
United States, which distribute our products to third parties. Business Segment Data The following table presents information about segment profit and assets (in
thousands): Fabrication,ManufacturingandECM
    
    E&I
    
    Distribution
    
    Corporate
    
    TotalFiscal 2004Revenues from
external customers
    
    $
    1,567,236
    
    
    $
    1,329,404
    
    
    $
    180,305
    
    
    $
    
    
    
    $
    3,076,945Intersegment revenues
    
    
    6,207
    
    
    
    877
    
    
    
    10,883
    
    
    
    
    
    
    
    17,967Interest income
    
    
    825
    
    
    
    175
    
    
    
    285
    
    
    
    433
    
    
    
    1,718Interest expense
    
    
    2,341
    
    
    
    526
    
    
    
    142
    
    
    
    35,420
    
    
    
    38,429Depreciation and
amortization
    
    
    8,994
    
    
    
    12,536
    
    
    
    5,035
    
    
    
    34,202
    
    
    
    60,767Income (loss) before
income taxes
    
    
    (38,361
    )
    
    
    85,353
    
    
    
    10,216
    
    
    
    (92,432
    )
    
    
    (35,224
    )Earnings (losses)
from unconsolidated
entities
    
    
    
    
    
    
    4,125
    
    
    
    (1,496
    )
    
    
    (51
    )
    
    
    2,578Goodwill
    
    
    318,745
    
    
    
    189,058
    
    
    
    14,980
    
    
    
    
    
    
    
    522,783Total assets
    
    
    772,831
    
    
    
    582,908
    
    
    
    276,822
    
    
    
    454,792
    
    
    
    2,087,353Investment in and
advances to equity
method investees
(excluding EPC joint
ventures)
    
    
    
    
    
    
    16,501
    
    
    
    4,916
    
    
    
    (2,311
    )
    
    
    19,106
 114




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##### Table of Contents



Fabrication,ManufacturingandECM
    
    E&I
    
    Distribution
    
    Corporate
    
    TotalPurchases of
property and
equipment
    
    
    7,845
    
    
    
    13,744
    
    
    
    1,851
    
    
    
    8,067
    
    
    
    31,507Increases
(decreases) in other
assets, long-term,
net
    
    
    (299
    )
    
    
    14,842
    
    
    
    (242
    )
    
    
    (3,578
    )
    
    
    10,723Fiscal 2003Revenues from
external customers
    
    $
    1,840,291
    
    
    $
    1,203,795
    
    
    $
    248,718
    
    
    $
    
    
    
    $
    3,292,804Intersegment revenues
    
    
    31,561
    
    
    
    4,023
    
    
    
    7,307
    
    
    
    
    
    
    
    42,891Interest income
    
    
    2,523
    
    
    
    263
    
    
    
    79
    
    
    
    2,541
    
    
    
    5,406Interest expense
    
    
    1,212
    
    
    
    276
    
    
    
    17
    
    
    
    30,538
    
    
    
    32,043Depreciation and
amortization
    
    
    22,447
    
    
    
    6,229
    
    
    
    6,626
    
    
    
    9,295
    
    
    
    44,597Income (loss) before
income taxes
    
    
    (1,775
    )
    
    
    88,288
    
    
    
    16,128
    
    
    
    (67,294
    )
    
    
    35,347Earnings (losses)
from unconsolidated
entities
    
    
    
    
    
    
    1,686
    
    
    
    (1,234
    )
    
    
    (3,431
    )
    
    
    (2,979
    )Goodwill
    
    
    298,486
    
    
    
    188,432
    
    
    
    24,458
    
    
    
    
    
    
    
    511,376Total assets
    
    
    739,941
    
    
    
    550,789
    
    
    
    274,512
    
    
    
    465,533
    
    
    
    2,030,775Investment in and
advances to equity
method investees
(excluding EPC joint
ventures)
    
    
    
    
    
    
    1,600
    
    
    
    14,498
    
    
    
    (2,231
    )
    
    
    13,867Purchases of
property and
equipment
    
    
    4,285
    
    
    
    8,145
    
    
    
    4,862
    
    
    
    8,929
    
    
    
    26,221Increases
(decreases) in other
assets, long-term,
net
    
    
    27,431
    
    
    
    (992
    )
    
    
    1,090
    
    
    
    4,456
    
    
    
    31,985Fiscal 2002Revenues from
external customers
    
    $
    2,276,419
    
    
    $
    489,783
    
    
    $
    382,875
    
    
    $
    
    
    
    $
    3,149,077Intersegment revenues
    
    
    9,484
    
    
    
    274
    
    
    
    5,376
    
    
    
    
    
    
    
    15,134Interest income
    
    
    1,849
    
    
    
    132
    
    
    
    112
    
    
    
    9,425
    
    
    
    11,518Interest expense
    
    
    1,269
    
    
    
    272
    
    
    
    19
    
    
    
    21,468
    
    
    
    23,028Depreciation and
amortization
    
    
    9,822
    
    
    
    2,672
    
    
    
    7,325
    
    
    
    8,560
    
    
    
    28,379Income (loss) before
income taxes
    
    
    118,207
    
    
    
    36,502
    
    
    
    51,435
    
    
    
    (58,221
    )
    
    
    147,923Earnings (losses)
from unconsolidated
entities
    
    
    
    
    
    
    
    
    
    
    (1,152
    )
    
    
    2,855
    
    
    
    1,703Goodwill
    
    
    289,347
    
    
    
    185,825
    
    
    
    23,832
    
    
    
    
    
    
    
    499,004Total assets
    
    
    1,002,072
    
    
    
    641,121
    
    
    
    316,097
    
    
    
    458,664
    
    
    
    2,417,954Investment in and
advances to equity
method investees
(excluding EPC joint
ventures)
    
    
    
    
    
    
    
    
    
    
    14,856
    
    
    
    4,618
    
    
    
    19,474Purchases of
property and
equipment
    
    
    10,470
    
    
    
    4,276
    
    
    
    4,509
    
    
    
    54,691
    
    
    
    73,946Increases
(decreases) in other
assets, long-term,
net
    
    
    (3,812
    )
    
    
    31,971
    
    
    
    (746
    )
    
    
    6,050
    
    
    
    33,463
 Segment net income (loss) before taxes does not include any corporate
management fees. Corporate management charges to segments were $52.6 million,
$52.5 million and $52.7 million for the years ended August 31, 2004, 2003, and
2002, respectively. In the year ended August 31, 2003, Corporate began
allocating certain depreciation to its segments; however, such assets remain at
the Corporate level. The total depreciation allocated is as follows (in
thousands): Fabrication,Manufacturing &ECM
    
    E&I
    
    Distribution
    
    Corporate
    
    TotalYear Ended August 31, 2004
    
    $
    4,825
    
    
    $
    1,315
    
    
    $
    258
    
    
    $
    
    
    
    $
    6,398Year Ended August 31, 2003
    
    
    12,208
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    12,252
 115




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A reconciliation of total segment assets to total consolidated assets is as
follows (in thousands): August 31,2004
    
    2003
    
    2002Total segment assets
    
    $
    2,087,353
    
    
    $
    2,030,775
    
    
    $
    2,417,954Elimination of intercompany receivables
    
    
    (10,299
    )
    
    
    (13,385
    )
    
    
    (109,289
    )Income tax entries not allocated to segments
    
    
    (46,947
    )
    
    
    (33,277
    )
    
    
    (7,271
    )Other consolidation adjustments and eliminations
    
    
    (171
    )
    
    
    2,002
    
    
    
    (248
    )Total consolidated assets
    
    $
    2,029,936
    
    
    $
    1,986,115
    
    
    $
    2,301,146
 Operations by Geographic Region The following tables present geographic revenues and long-lived assets (in
thousands): For The Year Ended August 31,2004
    
    2003
    
    2002Revenues:United States
    
    $
    2,511,629
    
    
    $
    2,800,935
    
    
    $
    2,737,332Canada
    
    
    74,520
    
    
    
    127,684
    
    
    
    108,186China
    
    
    154,435
    
    
    
    162,174
    
    
    
    88,147Other Asia/Pacific Rim countries
    
    
    68,990
    
    
    
    57,708
    
    
    
    57,996United Kingdom
    
    
    80,832
    
    
    
    76,569
    
    
    
    88,758Other European countries
    
    
    15,431
    
    
    
    25,297
    
    
    
    14,930South America and Mexico
    
    
    7,158
    
    
    
    14,677
    
    
    
    27,588Middle East
    
    
    151,315
    
    
    
    11,950
    
    
    
    10,764Other
    
    
    12,635
    
    
    
    15,810
    
    
    
    15,376$
    3,076,945
    
    
    $
    3,292,804
    
    
    $
    3,149,077
 August 31,2004
    
    2003
    
    2002Long-Lived Assets:United States
    
    $
    320,297
    
    
    $
    324,575
    
    
    $
    293,503United Kingdom
    
    
    6,981
    
    
    
    6,854
    
    
    
    14,078Other foreign countries
    
    
    21,487
    
    
    
    28,947
    
    
    
    46,459$
    348,765
    
    
    $
    360,376
    
    
    $
    354,040
 Revenues are attributed to geographic regions based on location of the project
or the ultimate destination of the product sold. Long-lived assets
include all
long-term assets, except those specifically excluded under SFAS No. 131, such
as deferred income taxes and securities available for sale. Information about Major Customers Our customers are principally major multi-national industrial corporations,
independent and merchant power producers, governmental agencies and equipment
manufacturers. For the years ended August 31, 2003 and 2002, revenues from two
customers owned or controlled by the same company totaled approximately $436.0
million or 13% and $676.0 million or 21%, respectively, of our revenues. For
the year ended August 31, 2004, one U.S. Government customer had revenues of $393.0
million (13% of our revenues). For the years ended August 31, 2004, 2003 and
2002, revenues from U.S. Government agencies or entities owned by the U.S.
Government totaled approximately $1,170.0 million (38% of revenues), $948.9
million (29% of revenues) and $363.0 million (11% of revenues), respectively. Export Revenues For the years ended
August 31, 2004, 2003 and 2002, we have included as part of
our international revenues approximately $180.7 million, $280.7 million and
$215.0 million, respectively, of exports from our domestic facilities. 116




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Note 16  Earnings Per Common Share The computation of basic and diluted earnings per share (in thousands, except
per share data) is set forth below. For The Year Ended August 31,2004
    
    2003
    
    2002Basic:Income (loss) from continuing operations
    
    $
    (26,306
    )
    
    $
    20,619
    
    
    $
    96,494(Loss) income from discontinued operations, net of taxes
    
    
    (4,669
    )
    
    
    247
    
    
    
    1,873Net income (loss)
    
    $
    (30,975
    )
    
    $
    20,866
    
    
    $
    98,367Weighted average common shares
    
    
    58,005
    
    
    
    37,914
    
    
    
    40,834Income (loss) from continuing operations, per common share
    
    $
    (0.45
    )
    
    $
    0.54
    
    
    $
    2.36(Loss) income  from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    0.01
    
    
    
    0.05Basic net income (loss) per common share
    
    $
    (0.53
    )
    
    $
    0.55
    
    
    $
    2.41Dilutive:Income (loss) from continuing operations
    
    $
    (26,306
    )
    
    $
    20,619
    
    
    $
    96,494Interest on convertible debt, net of taxes
    
    
    
    
    
    
    
    
    
    
    10,697Income (loss) from continuing operations for diluted
computation
    
    
    (26,306
    )
    
    
    20,619
    
    
    
    107,191(Loss) income from discontinued operations, net of taxes
    
    
    (4,669
    )
    
    
    247
    
    
    
    1,873Net income (loss) for diluted computation
    
    $
    (30,975
    )
    
    $
    20,866
    
    
    $
    109,064Weighted average common shares (basic)
    
    
    58,005
    
    
    
    37,914
    
    
    
    40,834Effect of dilutive securities:Convertible debt
    
    
    
    
    
    
    
    
    
    
    6,556Stock options
    
    
    
    
    
    
    441
    
    
    
    848Restricted stock
    
    
    
    
    
    
    
    
    
    
    Adjusted weighted average common shares and assumed
conversions
    
    
    58,005
    
    
    
    38,355
    
    
    
    48,238Diluted income (loss) from continuing operations per
common share
    
    $
    (0.45
    )
    
    $
    0.53
    
    
    $
    2.22(Loss) income from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    0.01
    
    
    
    0.04Diluted net income (loss) per common share
    
    $
    (0.53
    )
    
    $
    0.54
    
    
    $
    2.26
 Weighted-average incremental shares that were excluded from the calculation of
diluted income (loss) per share because they were antidilutive were as follows (in thousands): For The Year Ended August 31,2004
    
    2003
    
    2002Weighted-average incremental shares:Stock options
    
    
    5,148
    
    
    
    1,706
    
    
    
    142Restricted stock
    
    
    467
    
    
    
    
    
    
    
    LYONs convertible debt
    
    
    994
    
    
    
    5,154
    
    
    
   
 For the year ended August 31, 2002, we reported diluted earnings per share to
reflect approximately 6,556,000 additional shares on the basis that the LYONs
would be converted into common stock at a rate of 8.2988 shares per $1,000
maturity value. Note 17  Employee Benefit Plans We have a 1993 Employee Stock Option Plan, or the 1993 Plan, under which both
qualified and non-qualified 117




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options and restricted stock may be granted. As of
August 31, 2004, approximately 3,844,000 shares of common
stock were authorized for issuance under the 1993 Plan. The 1993 Plan is
administered by a committee of the Board of Directors, which selects persons
eligible to receive options and determines the number of shares subject to each
option, the vesting schedule, the exercise price, and the duration of the
option. Generally, the exercise price of any option granted under the 1993 Plan
cannot be less than 100% of the fair market value of our common stock on the
date of grant and its duration cannot exceed 10 years. Both qualified options
and non-qualified options have been granted under the 1993 Plan. The options
awarded vest in 25% annual increments beginning one year from the date of
award. Shares of restricted stock are subject to risk of forfeiture during the vesting
period. Restrictions related to these shares and the restriction terms are
determined by the committee. Holders of restricted stock have the right to vote
the shares. In conjunction with the Stone & Webster acquisition, we established the Stone &
Webster Acquisition Stock Option Plan, or the Stone & Webster Plan. The purpose
of this plan was to award options to our employees who were not officers of our
company, as defined in the plan documents, and who were either (a) employed by
our company as a result of the Stone & Webster acquisition or (b) instrumental
to the Stone & Webster acquisition. At August 31, 2004, 1,071,000 shares of
common stock were authorized for issuance under this plan. The Stone & Webster
Plan is administered by a committee of our Board of Directors, which selects
persons eligible to receive options and determines the number of shares subject
to each option, the vesting schedule, the exercise price, and the duration of
the option. The exercise price of any option granted under the Stone & Webster
Plan cannot be less than 100% of the fair market value of our common stock on
the date of grant and its duration cannot exceed 10 years. Only non-qualified
options have been granted under the Stone & Webster Plan. The options awarded
vest in 25% annual increments beginning one year from the date of award. All options and other grants issued under the Stone & Webster Plan and the 2001
Plan become fully exercisable upon a change in control of our company. During fiscal 2001, we established the 2001 Employee Incentive Compensation
Plan, or the 2001 Plan, under which both qualified and non-qualified stock
options, stock appreciation rights, performance shares and restricted stock may
be granted. As of August 31, 2004, approximately 5,000,000 shares of common
stock were authorized for issuance under the 2001 Plan as the Board of
Directors authorized 1,500,000 shares of common stock during fiscal 2004 and
1,500,000 shares of common stock during fiscal 2003 in addition to the
2,000,000 shares of common stock authorized upon adoption of the 2001 Plan. The
2001 Plan is administered by a committee of the Board of Directors, which
selects persons eligible to receive awards and determines the number of shares
subject to each award, and terms, conditions, performance measures, and other
provisions of the award. The exercise price of any option granted under the
2001 Plan cannot be less than 100% of the fair market value of our common stock
on the date of grant and its duration cannot exceed ten years. Both qualified
options and non-qualified options have been granted under the 2001 Plan. The
options awarded under the 2001 Plan vest in 25% annual increments beginning one
year from the date of award. Our 1993 Employee Stock Option Plan and 2001 Employee Incentive Compensation
Plan allow for the issuance of restricted stock awards that may not be sold or
otherwise transferred until certain restrictions have lapsed. If termination of
employment occurs prior to the lapse of these restrictions, the shares must be
returned to us. During fiscal 2004, we granted 594,872 shares of restricted
stock to certain employees including our Chief Executive Officer, Chief
Financial Officer and our President and Chief Operating Officer. In addition,
we have agreed to issue future restricted stock awards under these employee
stock plans totaling 98,000 shares to our Chief Executive Officer and our
President and Chief Operating Officer. During fiscal 2004, we have recorded
unearned stock-based compensation as a component of shareholders equity of
$7.7 million, related to these restricted stock grants which is being amortized
to compensation expense over the period the restrictions lapse (generally 2 to
4 years). For the year ended August 31, 2004, $1.5 million and $0.2 million of stock-based
compensation expense is included in general and administrative expenses and costs of sales, respectively, on the
accompanying statement of operations related to these restricted stock grants. In fiscal 1997, we adopted a Non-Employee Director Stock Option Plan, or the
Directors Plan. Members of the Board of Directors who are not or were not an
officer or employee of our company during the one year period preceding the
date the director is first elected to the Board of Directors are eligible to
participate in the Directors 118




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##### Table of Contents



Plan. Committees of two or more members of the
Board of Directors who are not eligible to receive grants under the
Directors Plan administer this plan. Upon adoption, options to acquire an
aggregate of 40,000 shares of common stock were issued. These options vested in
25% annual increments beginning one year from the date of award. Additionally,
each eligible director is granted an option to acquire 1,500 shares of common
stock on an annual basis upon his election or re-election to the Board of
Directors. These options vest one year after the date of award. A total of
300,000 shares of common stock have been authorized for issuance under the
Directors Plan. The following table summarizes the activity in our stock option plans: WeightedAverageShares
    
    Exercise PriceOutstanding at September 1, 2001
    
    
    3,211,373
    
    
    $
    15.50Granted
    
    
    845,000
    
    
    
    26.28Exercised
    
    
    (235,190
    )
    
    
    9.61Canceled
    
    
    (21,750
    )
    
    
    21.82Outstanding at August 31, 2002
    
    
    3,799,433
    
    
    
    18.21Granted
    
    
    1,298,100
    
    
    
    14.38Exercised
    
    
    (119,194
    )
    
    
    4.20Canceled
    
    
    (309,500
    )
    
    
    24.72Outstanding at August 31, 2003
    
    
    4,668,839
    
    
    
    17.30Granted
    
    
    1,070,311
    
    
    
    11.19Exercised
    
    
    (38,750
    )
    
    
    4.92Canceled
    
    
    (258,250
    )
    
    
    20.27Outstanding at August 31, 2004
    
    
    5,442,150
    
    
    $
    16.05Exercisable at August 31, 2004
    
    
    3,193,955
    
    
    $
    16.85
 The following table summarizes information about stock options outstanding as
of August 31, 2004: Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    WeightedAverage
    
    Average
    
    AverageRange Of
    
    Number
    
    Remaining
    
    Exercise
    
    Number
    
    ExerciseExercise Price
    
    Outstanding
    
    Contract Life
    
    Price
    
    Exercisable
    
    Price$  3.38 -
    
    $
    8.25
    
    
    
    813,489
    
    
    
    4.10
    

    Yrs
    
    
    $
    4.36
    
    
    
    811,239
    
    
    $
    4.35$  8.71 -
    
    $
    12.94
    
    
    
    1,225,311
    
    
    
    8.98
    
       Yrs
    
    
    $
    10.98
    
    
    
    91,250
    
    
    $
    10.42$13.33 -
    
    $
    16.98
    
    
    
    1,034,350
    
    
    
    8.16
    
       Yrs
    
    
    $
    15.00
    
    
    
    275,842
    
    
    $
    14.96$20.00 -
    
    $
    21.00
    
    
    
    1,612,750
    
    
    
    5.73
    
       Yrs
    
    
    $
    20.95
    
    
    
    1,612,750
    
    
    $
    20.95$23.84 -
    
    $
    27.00
    
    
    
    603,750
    
    
    
    7.25
    
       Yrs
    
    
    $
    25.91
    
    
    
    305,999
    
    
    $
    25.90$28.46 -
    
    $
    31.75
    
    
    
    72,500
    
    
    
    7.70
    
       Yrs
    
    
    $
    30.14
    
    
    
    36,250
    
    
    $
    30.14$33.75 -
    
    $
    34.35
    
    
    
    25,000
    
    
    
    6.29
    
       Yrs
    
    
    $
    33.87
    
    
    
    17,500
    
    
    $
    33.84$41.50 -
    
    $
    41.50
    
    
    
    47,500
    
    
    
    6.37
    
       Yrs
    
    
    $
    41.50
    
    
    
    37,500
    
    
    $
    41.50$44.29 -
    
    $
    44.29
    
    
    
    2,500
    
    
    
    6.41
    
       Yrs
    
    
    $
    44.29
    
    
    
    1,875
    
    
    $
    44.29$51.51 -
    
    $
    51.51
    
    
    
    5,000
    
    
    
    6.54
    
       Yrs
    
    
    $
    51.51
    
    
    
    3,750
    
    
    $
    51.515,442,150
    
    
    
    6.89
    
       Yrs
    
    
    $
    16.05
    
    
    
    3,193,955
    
    
    $
    16.85
 We sponsor a voluntary 401(k) profit sharing plan for substantially all
employees who are not subject to collective bargaining agreements. The plan
provides for the eligible employee to contribute a percentage of annual
compensation, subject to an annual limit as determined under federal law, with
us matching 50% of the employees eligible contribution up to 6% of the
employees annual compensation. Our expense for this plan for the years ended
August 31, 2004, 2003, 2002, was approximately $11.0 million, $10.8
million and $8.0 million, respectively. Our 401(k) profit sharing plans offer
the employees a number of investment choices, including investments in our
common stock. The plan purchases these shares on the open market. At August 31,
2004 and 2003, our 401(k) plan owned 1,135,943 shares and 860,343 shares,
respectively, of our common stock. The fair value of the common stock owned by
the 401(k) plan was $11.7 million as of August 31, 2004. We have other defined contribution plans at certain of our domestic and foreign
locations. These plans allow the employees to contribute a portion of their
earnings with us matching a percentage of the employees contributions. The
amounts contributed by the employee and by us vary by plan. Our expense for
these plans was approximately 119




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$0.9 million, $0.8 million and $1.2 million, for the
years ended August 31, 2004, 2003, and 2002, respectively. Our subsidiaries in the U.K. and Canada have defined benefit plans covering
their employees. The first U.K. plan is a salary-related plan for certain
employees and admittance to this plan is now closed. The employees in this plan
contribute 7% of their salary. Our contribution depends on length of service,
the employees salary at retirement, and the earnings of the plans
investments. If the plans earnings are sufficient, we make no contributions.
The Canadian plan is noncontributory, and the benefits are based primarily on
years of service and employees career average pay; admittance to this plan is
now closed. Our policy is to make contributions equal to the current year
cost-reimbursable amortization of prior service cost. The second U.K. plan is
contributory and the benefits are based primarily on years of service and
employees average pay during their last ten years of service. For the years
ended August 31, 2004, 2003, and 2002, we recognized expense of approximately,
$4.8 million, $3.9 million and $1.0 million, respectively, related to these
plans. At August 31, 2004 and 2003, we had minimum pension plan liabilities of $20.9
million and $20.9 million, respectively, for our three defined benefit
retirement plans. This liability is required to be recognized on the plan
sponsors balance sheet when the accumulated benefit obligations of the plan
exceed the fair value of the plans assets. In accordance with SFAS No.
87,Employers Accounting for Pensions, the increase in the minimum liability
is recorded through a direct charge to stockholders equity and is, therefore,
reflected, net of tax, as a component of comprehensive income in the Statement
of Changes in Shareholders Equity. The following table sets forth the pension cost for the defined benefit plans
we have sponsored and the plans funded status as of August 31, 2004, 2003, and
2002 in accordance with the provisions of SFAS No. 132, Employers Disclosure
about Pensions and Other Postretirement Benefits (in thousands): For The Year Ended August 31,2004
    
    2003
    
    2002Change In Projected Benefit ObligationProjected benefit obligation at the start of the year
    
    $
    99,890
    
    
    $
    90,123
    
    
    $
    78,526Service cost
    
    
    2,499
    
    
    
    2,248
    
    
    
    1,818Interest cost
    
    
    6,048
    
    
    
    5,186
    
    
    
    4,676Members contributions
    
    
    1,013
    
    
    
    811
    
    
    
    714Actuarial loss/ (gain)
    
    
    (1,222
    )
    
    
    3,337
    
    
    
    3,532Benefits paid
    
    
    (5,241
    )
    
    
    (4,584
    )
    
    
    (3,740
    )Foreign currency exchange rate changes
    
    
    12,139
    
    
    
    2,769
    
    
    
    4,597Projected benefit obligation at the end of the year
    
    
    115,126
    
    
    
    99,890
    
    
    
    90,123Change In Plan AssetsFair value of the assets at the start of the year
    
    
    73,977
    
    
    
    68,764
    
    
    
    73,554Actual return on plan assets
    
    
    4,794
    
    
    
    4,357
    
    
    
    (6,953
    )Employer contributions
    
    
    3,469
    
    
    
    2,366
    
    
    
    1,752Employee contributions
    
    
    1,013
    
    
    
    811
    
    
    
    714Benefits paid
    
    
    (5,241
    )
    
    
    (4,584
    )
    
    
    (3,740
    )Foreign currency exchange rate changes
    
    
    9,262
    
    
    
    2,263
    
    
    
    3,437Fair value of the assets at the end of the year
    
    
    87,274
    
    
    
    73,977
    
    
    
    68,764Funded status
    
    
    (27,852
    )
    
    
    (25,913
    )
    
    
    (21,359
    )Unrecognized net loss/ (gain)
    
    
    33,687
    
    
    
    31,934
    
    
    
    28,396Adjustment to recognize minimum liability
    
    
    (20,887
    )
    
    
    (20,922
    )
    
    
    (10,180
    )Prepaid (accrued) benefit cost
    
    $
    (15,052
    )
    
    $
    (14,901
    )
    
    $
    (3,143
    )Components of Net Periodic Benefit Cost and Increase
in Minimum Pension LiabilityService cost
    
    $
    2,499
    
    
    $
    2,248
    
    
    $
    1,818Interest cost
    
    
    6,048
    
    
    
    5,186
    
    
    
    4,676Expected return on plan assets
    
    
    (5,956
    )
    
    
    (5,349
    )
    
    
    (6,291
    )Amortization of net (gain) loss
    
    
    1,998
    
    
    
    1,492
    
    
    
    811Other
    
    
    227
    
    
    
    344
    
    
    
    (9
    )Total net periodic benefit cost
    
    $
    4,816
    
    
    $
    3,921
    
    
    $
    1,005
 120




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##### Table of Contents



For The Year Ended August 31,2004
    
    2003
    
    2002Increase (decrease) in minimum pension liability
included in other comprehensive income
    
    $
    (2,223
    )
    
    $
    7,014
    
    
    $
    7,126
 Assumptions For The Year Ended August 31,2004
    
    2003
    
    2002Weighted-Average Assumptions Used to Determine
Benefit Obligations at August 31:Discount rate
    
    
    5.60-6.00
    %
    
    
    5.50-6.00
    %
    
    
    5.50-6.50
    %Rate of compensation increase
    
    
    4.00-4.90
    %
    
    
    4.00-5.00
    %
    
    
    4.00-5.00
    %Weighted-Average Assumptions Used to Determine
Net Periodic Benefit Cost for Years Ended
August 31:Discount rate at end of the year
    
    
    5.50-6.00
    %
    
    
    5.50-6.50
    %
    
    
    5.50-6.50
    %Expected return on plan assets for the year
    
    
    7.00-7.75
    %
    
    
    7.00-8.25
    %
    
    
    7.75-8.00
    %Rate of compensation increase at end of the year
    
    
    4.25-5.00
    %
    
    
    4.00-5.00
    %
    
    
    4.40-5.00
    %
 The accumulated benefit obligations for all pension plans exceeded plan assets
and was $102.3 million and $89.3 million for the years ended August 31, 2004 and
2003, respectively. Plan Assets, Investment Policies and Strategies and Expected Long-Term Rate of
Return on Plan Assets Pension plan weighted-average asset allocations at August 31, 2004 and 2003, by
asset category are as follows: At August 31,Asset Category
    
    2004
    
    2003Equity Securities
    
    
    64.6
    %
    
    
    64.6
    %Debt Securities
    
    
    30.9
    %
    
    
    30.0
    %Other
    
    
    4.5
    %
    
    
    5.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 The Company and Trustees of the plans are responsible for ensuring that the
investments of the pension plan are managed in a prudent and effective manner,
and at a reasonable cost, so that there will be sufficient amounts to meet the
defined benefits as they come due. To this end, the investment objective is to
strike a balance between maximizing return and minimizing the various funding
risks. Each plan has a target asset allocation that varies investments among equity,
debt and other investments. On a combined basis, target asset allocations range
from 20% - 80% for equity securities, 15% - 75% for debt securities, and 0% -
20% in other investments. Depending on market conditions, the broad asset
class targets may vary from the stated allocations. In estimating the expected return on plan assets, the Company considers past
performance and future expectations for the types of investments held by the
plan as well as the expected mix of the types of investments held by the plan. Contributions and Benefit Payments We expect to contribute $4.4 million in total to the plans in fiscal 2005. The following benefit
payments are expected to be paid from the Plans (in thousands): 121




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Fiscal Year
    
    Pension Benefits
    
    Other Benefits2005
    
    $
    5,407
    
    
    $
    2006
    
    
    5,440
    
    
    
    12007
    
    
    5,582
    
    
    
    22008
    
    
    5,790
    
    
    
    42009
    
    
    5,991
    
    
    
    62010  2014
    
    
    33,388
    
    
    
    51
 In addition to the pension plans disclosed above, we have a defined benefit
pension plan for certain employees of our Connex subsidiary. Effective January
1, 1994, no new participants were admitted to the plan. The pension plans
benefit formulas generally base payments to retired employees upon their length
of service. The pension plans assets are invested in fixed income assets,
equity based mutual funds, and money market funds. At August 31, 2004 and 2003,
the fair market value of the plan assets was $1.3 million and $1.2 million,
respectively, which exceeded the estimated projected benefit obligation. Note 18  Related Party Transactions We have entered into employment agreements with our Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, and Executive Vice-President
and Chairman of the Executive Committee. Under the terms of the agreements, the
executives are entitled to receive their base salaries, bonuses and other
employee benefits for the periods of time specified therein. In the event of
termination of employment as a result of certain reasons (including a change in
control of our company), the executives will be entitled to receive their base
salaries and certain other benefits for the remaining term of their agreement
and all options and similar awards shall become fully vested. Additionally, in
the event of an executives death, his estate is entitled to certain payments
and benefits. In 2001, our employment agreement with our Chief Executive Officer was amended
to provide a non-compete clause upon the Chief Executive Officers separation
from our company. The amount of the non-compete payment will be $15.0 million
and was based upon an outside study of the fair value of non-compete
provisions. We also agreed to set aside $5.0 million per year of our funds in
fiscal 2001 through 2003 in order to fund this obligation, and, therefore, as
of August 31, 2004 and 2003, $15.0 million is invested in a separate fund and
is included in other long-term assets in the accompanying consolidated balance
sheets. The $15.0 million payment is due upon the Chief Executive Officers
separation for any reason from our company, or upon change in control. Upon
separation from our company, we will amortize the payment over the non-compete
period. Upon hiring certain senior managers, we paid signing bonuses that are repayable
should the employee voluntarily terminate prior to a prescribed time. These
repayment obligations are evidenced by non-interest bearing loan agreements
that are forgiven over time. The impact of discounting such loans to record
interest income is not significant. The balance of the senior management loan
receivables as of August 31, 2004, 2003, and 2002 was approximately $1.2
million, $1.9 million, and $3.5 million, respectively. There are no loans
outstanding to the Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer or General Counsel. In the ordinary course of business, we
have also made other loans to other employees. All of these loan balances are
included in other assets. During fiscal 1996, we entered into a non-competition agreement with a key
employee of an acquired business with a related asset of $2.0 million, which
was amortized over eight years using the straight-line method and is fully
amortized at August 31, 2004. During fiscal 2002, one of our directors was the majority owner of a
construction company that was used by us as a subcontractor on one of our
projects. During fiscal 2002, we made total payments of
approximately $20.8 million to these two companies and owed one of the
companies approximately $7.8 million as of August 31, 2002. The contract with
this construction company was terminated as a result of a project cancellation
and no payments were made pursuant to it for the years ended August 31, 2004
and 2003. He also had a minority interest in the construction company that
built one of our leased buildings; the director divested himself of this
interest in fiscal 2002. Effective August 1, 2002, we entered into a five-year watercraft lease with a
corporation owned by an executive officer of one of our operating divisions.
The lease payments are $10,000 per month. 122




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In January 2003, our subsidiary, Stone & Webster, Inc., was awarded a
subcontract to perform engineering services for a company (the Related
Company) for whom an executive officer and a significant owner is the brother
to our Chief Executive Officer for total consideration of approximately $2
million. In connection with the services agreement, we entered into a guaranty
agreement with the Related Company under which we agreed, under certain
circumstances, to guarantee the payment of certain sums which may be owed by
the Related Company to its client under a performance-based services and
equipment contract. That guaranty, by its terms, may be assigned by the Related
Company to its client. We also entered into an indemnification and fee
agreement between us and the Related Company pursuant to which, among other
things, the Related Company must pay us an annual fee in consideration for our
entering into the guaranty agreement. The amount of the annual fee varies, but
totals approximately $0.8 million over the 20-year term. Although we believe
the probability we will have to make any payments under the guaranty agreement
is remote, we have recorded the guarantee at its fair value of approximately
$0.3 million. We have the right, but not the obligation, to take over all of
the Related Companys rights and obligations under its contract with the
customer, if a demand by the customer under the contract with the Related
Company ever occurs and remains unsatisfied. We expect that we will not be
required to make any payments under the guaranty agreement, but the maximum
potential amount of future payments (undiscounted) we could be required to make
would be approximately $13 million over the 20-year term of the contract. Note 19  Foreign Currency Translation and Transactions As of August 31, 2004, all of our significant foreign subsidiaries maintained
their accounting records in their local currency (primarily British pounds,
Venezuelan Bolivars, Australian and Canadian dollars, and the Euro). The
currencies are converted to U.S. dollars with the effect of the foreign
currency translation reflected in accumulated other comprehensive income
(loss), a component of shareholders equity, in accordance with SFAS No. 52,
Foreign Currency Translation, and SFAS No. 130, Reporting Comprehensive
Income. Foreign currency transaction gains or losses are credited or charged
to income. At August 31, 2004 and 2003, cumulative foreign currency translation
adjustments related to these subsidiaries reflected as a reduction to
shareholders equity amounted to $3.5 million and $6.4 million,
respectively; transaction gains and losses reflected in income were a loss of
$2.7 million during fiscal 2004, a gain of $0.1 million during fiscal 2003
and a loss of $1.2 million during fiscal 2002, respectively. Note 20  Claims On Major Contracts General Discussion of Claims on Contracts Claims are amounts in excess of the original contract price (or original
contract price adjusted for approved change orders) that we seek to collect
from our customers for delays, errors in specifications and designs, contract
terminations, change orders in dispute or unapproved as to both scope and
price, or other causes of unanticipated additional costs. Backcharges and
claims against vendors, subcontractors and others are included in our cost
estimates as a reduction in total estimated costs when recovery of the amounts
is probable and the costs can be reasonably estimated. We refer to these claims from customers and backcharges and claims against
vendors, subcontractors and others as claims. As a result, the recording of
claims increases gross margin or reduces gross loss on the related projects in
the periods the claims are reported. When calculating the amount of total gross margin or loss on a contract, we
include claims against our customers as revenue and claims from vendors,
subcontractors and others as reductions in cost of revenues when the collection
is deemed probable and the amounts can be reliably estimated. Including claims
in this calculation increases the gross margin (or reduces the loss) that would
otherwise be recorded without consideration of the claims. Claims are recorded
to the extent of costs incurred and include no profit element. In most cases,
the claims included in determining contract gross margin are less than the
actual claim that will be or has been presented. When recording the revenue and the associated receivable for claims, we accrue
an amount equal to the costs incurred related to claims. Claims receivable are
included in costs and estimated earnings in excess of billings on the
consolidated balance sheet. Claims also include expected relief from liquidated
damages, which are excluded from recorded costs. 123




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A summary of our significant claims related to our major projects for the years
ended August 31, 2004 and 2003 is discussed below. Significant claims at August
31, 2004 and 2003 relate primarily to three contracts, most of which are
complete or substantially complete. We are actively engaged in claims
negotiation with these customers or have commenced legal proceedings. The
amounts include claims from customers, subcontractors, and vendors as well as
relief from liquidated damages. The Covert & Harquahala Projects Early in fiscal 2002, we entered into two target-price contracts with a
customer, PG&E National Energy Group, Inc. (NEG), and its project entities, to
provide EPC services for two gas-fired combined-cycle power plants in Covert,
Michigan and Harquahala Valley, Arizona. In October 2002, the parent company of
NEG, PG&E Corp. (PG&E) announced that NEG had notified its lenders that it did
not intend to make further equity contributions required under the credit
facility to fund the Covert and Harquahala projects. We believed this notice
raised doubt about whether we would continue to be paid for the work we
performed under these target-price contracts. In May 2003, after extensive negotiations with NEGs project entities, NEG, and
their lenders, we reached a definitive settlement agreement for settlement of claims existing as of that date related to the Covert and Harquahala projects. The
settlement provided for fixed-price EPC contracts which increased the original
target-price for both projects by a total of $65.0 million; termination of the
target-priced components of the original agreements which provided for recovery
of costs in excess of the fixed-price contracts; dismissal of pending legal
proceedings, our release of claims based on existing change orders and the
incurrence of additional costs, and the extension of the schedule for
completion of the projects. The revised schedule provided for us to complete
the Harquahala project in September 2003 and the Covert project in December
2003. NEG paid us $32.5 million in May 2003 as a result of this settlement
agreement and required us to post a letter of credit in its favor for the same
amount which was assigned by them to its lenders. During fiscal 2003, we recognized a loss of $42.8 million (which includes a
$30.0 million loss recorded in the second quarter of 2003) on these two
projects, $33.1 million of which was reversal of profit recognized prior to
fiscal 2003. During the first quarter of fiscal 2004, we recorded an additional loss on
these two projects of $39.3 million ($4.8 million of which was reversal of
profit recognized prior to fiscal 2004). Approximately $34.5 million represents
actual and estimated increased costs to complete the Covert project primarily
due to the failure of installed equipment, required rework and vendor and
subcontractor delays. The $39.3 million loss was net of additional expected
claims of approximately $1.2 million. During the third quarter of 2004, we
recorded a reduction in the gross profit on the Harquahala project resulting
from a $2.2 million reduction in our estimated claims recovery and an increase
of $2.2 million in estimated cost of completion related primarily to the
duration of our involvement in start-up and warranty related activities. During the first quarter of fiscal 2004, we notified the owner of substantial
completion on two of the three power island units on Covert and communicated
that the remaining unit would achieve substantial completion in January 2004.
We also communicated that the total facility would achieve substantial
completion in February 2004. We notified the owner of substantial completion on
the Harquahala facility on December 24, 2003. While we previously demonstrated substantial completion on all six units at the two plants, the
owners did not accept our various unit and facility completion dates and
continued to assess liquidated damages. The owners accepted substantial
completion of the Covert units in January 2004 and the Harquahala units in
March 2004. The owners have not accepted facility completion on either project,
in part because they believe we must post letters of credit on two projects totaling
$43.0 million as security for warranty work in order to achieve facility
completion. We firmly disagree with this position, and until all outstanding
disputes are resolved, we do not intend to post additional letters of credit.
In the meantime, we intend to comply with our warranty obligations. As of August 31, 2004, the owners have withheld $55.4 million from milestone
payments due us as an offset to liquidated damages they have claimed.  In
addition, in August 2004, the owners drew $18.8 million under an outstanding
letter of credit for liquidated damages they have claimed due.  As of August
31, 2004, the owners have indicated that they may claim as much as $89 million
in liquidated damages.  The ultimate assessment could be higher as the owners
are claiming that they can assess daily liquidated damages until facility
completion is accepted ($70,000 per day at Covert and $63,000 per day at
Harquahala) up to a maximum of approximately $130 million for both projects. 124




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On March 29, 2004, we filed liens
against both projects and have initiated binding arbitration regarding our
claims. Arbitration with the owners is not expected to occur until the
summer of calendar year 2005 at the earliest. On February 20, 2004, we were notified by the lenders of the Harquahala project
of their intention to draw $18.7 million under the existing $32.5 million
letter of credit for assessed liquidated damages. We sought an injunction in
the Supreme Court of the State of New York to preclude the lenders from drawing
under the letter of credit until arbitration with the owners on the underlying
claims is resolved. A temporary restraining order was granted prohibiting the
lenders from drawing under the $32.5 million letter of credit, but was lifted in
August 2004 at which time the lenders drew $18.8 million under the outstanding
letter of credit. As of August 31, 2004, a $13.7 million letter of credit
remains outstanding for these projects. Based on our evaluation and advice of legal counsel, we believe we have
defenses to the owners claims of liquidated damages. We intend to vigorously
contest the assessment. Additionally, we believe a substantial portion of the
delays were caused by our vendors, subcontractors and equipment manufacturers
from whom we may collect delay and related damages, and we are pursuing these
actions. For these reasons, our revenue and cost estimates reflect our
expectation that we will not incur liquidated damages in excess of amounts we
believe would be recoverable from others. However, there can be no absolute
assurance that delay damages will not have to be paid. If we are required to
pay the owners delay damages that we cannot recover from subcontractors,
vendors, or equipment manufacturers, that amount will be recorded as a loss. Unrelated to the claims for delay damages discussed above, we have recorded
approximately $26.5 million in claims receivable from the owners, vendors,
subcontractors, equipment manufacturers, and insurance. Based on our evaluation
of the contractual terms, our claims documentation, and the advice of legal
counsel, we believe we have a strong basis for these claims (including claims
against vendors based on their delivery of incomplete and/or defective
equipment and claims against various subcontractors for their delays in
providing services) in excess of the recorded amounts; but we have only
recorded a claim receivable for the portion that we estimate will ultimately be
collected. Recovery of the claims is dependent upon our negotiations,
arbitration and litigation with the owners and their lenders, several
subcontractors, vendors and equipment manufacturers. Due to the uncertainties
surrounding litigation or arbitration of this nature, we cannot provide
absolute assurance to you as to the outcome of these claims or their
collectibility. If we collect amounts different than the amounts that we have recorded as
claims receivable of $26.5 million, that difference will be recognized as
income or loss. Timing of collection is uncertain at this time, but is not
expected in the next twelve months unless a settlement occurs or the disputes
are resolved through the dispute resolution process pursuant to the contract. The following table summarizes contract amounts due from the owners and claims
recorded on these projects, excluding claims related to liquidated damages as
of August 31, 2004 (in millions): Amounts due from the owners:Amounts remaining to be paid under the original contract terms:Billed milestones receivable
    
    $
    55.4Milestones unbilled at August 31, 2004 (to be billed upon final acceptance)
    
    
    1.7Reimbursement of letter of credit draws
    
    
    18.8Claims for additional costs incurred
    
    
    7.7Total amounts receivable from the owners
    
    
    83.6Claims receivable from subcontractors and others, excluding amounts related to liquidated damages
    
    
    18.8Less: Amounts collected by drawing letters of credit posted by
the turbine manufacturer on the Covert project(1)
    
    
    (25.6
    )Total amounts receivable, excluding amounts related to
liquidated damages
    
    $
    76.8
   125




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(1)
    
    Amounts collected under this letter of credit draw are for both
liquidated damages and for other claims against the turbine
manufacturer. The above amounts are recorded in costs and estimated earnings in excess of
billings on uncompleted contracts including claims on the consolidated balance
sheet at August 31, 2004. In March 2004, we drew the entire amount available under a letter of credit
posted by the turbine manufacturer on the Covert project for $25.6 million. The
turbine manufacturer disputes the draw under the letter of credit and
arbitration is currently scheduled for March 2005. We believe we will prevail
in this matter and believe the draw under the letter of credit is in accordance
with the terms of the letter of credit. The turbine manufacturer has also filed
a demand for arbitration against us for approximately $3.6 million in alleged
unpaid technical assistance services which has been considered in our
overall claims position with the turbine manufacturer. Although NEG, the parent of the project entities, filed for Chapter 11
bankruptcy in July 2003, the project entities that own these two projects are
not included in the bankruptcy proceedings, and we do not believe NEGs current
financial position will negatively impact future payments to us related to
these projects. Based on our evaluation and the advice of legal counsel, we believe it is
probable we will recover at least the recorded amount of claims in the
arbitration process. We believe we have a strong basis for claims and
backcharges in excess of the recorded amounts; however, recovery of the claims
and other amounts is dependent upon negotiations with the applicable parties,
which are ongoing, and the results of arbitration. We cannot provide absolute
assurance to you as to the timing or outcome of these negotiations or results
of arbitration. In addition, we hold liens against the projects in connection
with our claims under the contract. We cannot provide assurances to you of the
value of such liens or our ability to execute on such liens in a timely manner. The Wolf Hollow Project On March 8, 2002, AES Frontier, L.P. and AES Wolf Hollow, L.P. (collectively
AES) entered into a series of contracts (collectively the EPC contract)
with us to complete the engineering, design, procurement, and construction of a
gas-fired, combined-cycle power plant in Texas for an aggregate contract amount
of $99.0 million. AES represented and warranted at the time of contracting with
us that the project was 67% complete and that engineering was 99.8% complete,
and we relied upon this stage of completion in contracting with AES. At the time we entered into the EPC contract, the projects provisional
acceptance was scheduled for October 15, 2002; however, acceptance of this
project was delayed. We believe the delay from October 15, 2002 was primarily
due to (i) the significant overstatement of the percentage completion by AES
and Parsons (the engineers on the project) at the time we entered into the
contract; (ii) a fire that occurred in June of 2002 at the project site; and
(iii) failure of a turbine during start-up testing in May 2003. We believe the
project reached provisional acceptance on July 24, 2003, although AES did not
agree to provisional acceptance until August 8, 2003. The contract terms
include liquidated damages in the event of late completion of $120,000 per day
from October 15, 2002 through June 1, 2003 and $185,000 per day thereafter
until provisional acceptance occurs, for which AES has billed us $40.0 million
in aggregate. We were unable to resolve our claims with AES through the dispute resolution
process called for in the contract with respect to a force majeure claim we
made resulting from the fire and other change orders. On November 5, 2002, we
filed suit against AES in the District Court of Hood County, Texas for breach
of contract. On May 9, 2003, we added Parsons as a defendant and expanded the
complaint to include claims related to misrepresentation. In June 2003, the AES
Corporation was also added as a defendant. In addition, we initiated an arbitration action in September 2003 against the
heavy equipment supplier to recover $38 million in costs and liquidated damages
incurred as a result of defects in their equipment. Discovery is underway in
that proceeding, and a hearing is set to begin on January 31, 2005. Discovery is currently underway in the AES litigation, and the case is
scheduled for a jury trial in March 2005. Unless we reach a settlement prior to
the trial date, we would not expect recovery of disputed amounts due from AES
before 2005. As of August 31, 2004, there have been no significant changes with
regard to this project and 126




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related disputes when compared to August 31, 2003. During fiscal 2004, we have
continued to incur additional project costs related to punch list and warranty
items which have been considered in our total estimate of claims against the
owners, subcontractors and vendors due. In excess of the original $99.0 million contract price, we have recorded claims
receivable from AES of $17.9 million for additional costs incurred due to the
fire, misrepresentation of the percentage-of-completion, disputed change orders
and other claims. In addition, we have claims of approximately $7.3 million
that we expect to recover from insurance proceeds related to the fire and
backcharges from subcontractors and vendors. Of the $7.3 million, we have
collected $1.5 million through a draw on a letter of credit posted by Parsons.
Parsons disputes our claims and has filed a counterclaim alleging payments due
of $1.9 million and the return of the $1.5 million letter of credit draw. Of the original $99.0 million contract price, AES has not paid $22.0 million of
billed milestones and $7.1 million of retention. In addition,
$3.0 million of
milestones remain unbilled related to final completion and acceptance, which we
expect to occur in early fiscal 2005. Under the terms of the EPC contract, AES,
at its option, may pay up to $27.7 million of the contract price in
subordinated notes or cash. The subordinated notes, $24.8 million of which we
consider issued as of August 31, 2004 for payment of billed milestones, bear
interest at prime plus 4% and mature in October 2009. If any amounts under the
notes are unpaid eight months following final acceptance of the project, the
unpaid notes, plus a cash payment of the amounts, if any, paid on the notes
through the conversion date, is convertible, at our option, into a 49.9% equity
interest in the project. Further, at the initiation of the project, we secured our obligations under the
contract by providing letters of credit totaling $28.0 million. In August and
September 2003, AES drew the full amount of the letters of credit in two draws
of $13.9 million and $14.1 million, respectively. We have recorded an
additional receivable of $28.0 million from AES for reimbursement of these
draws which remained outstanding as of August 31, 2004. We recorded revenue of
$43.1 million and a loss of $2.3 million from this contract for the year ended
August 31, 2003. For the year ended August 31, 2004, no gross margin has been
recorded on this contract. The following table summarizes contract amounts due from AES and claims
recorded on the project (in millions): Amounts due from AES:Amounts remaining to be paid under the original contract terms:Billed milestones receivable
    
    $
    22.0Subordinated notes receivable from AES
    
    
    24.8Retention receivable
    
    
    7.1Milestones unbilled at August 31, 2004 (to be billed upon
completion of final testing and final acceptance)(1)
    
    
    3.0Total contractual amounts due from AES
    
    
    56.9Reimbursement of letter of credit draws
    
    
    28.0Claims for additional costs incurred
    
    
    17.9Less: Amount of liquidated damages that have been included in costs
    
    
    (6.6
    )Total receivables from AES recorded as of August 31, 2004
    
    
    96.2Claims receivable from subcontractors and others
    
    
    7.3Less: Amount collected by drawing letter of credit posted by Parsons
    
    
    (1.5
    )Less: Amounts collected by drawing letters of credit posted by the
turbine manufacturer (2)
    
    
    (15.0
    )Total receivables recorded as of August 31, 2004
    
    $
    87.0
  (1)
    
    Of the total milestones unbilled at August 31, 2004, $2.9 million
could be paid by AES in Subordinated Notes. 127




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(2)
    
    Amounts collected under this letter of credit draw are for both
liquidated damages and for other claims against the turbine
manufacturer. The above amounts are recorded in costs and estimated earnings in excess of
billings on uncompleted contracts including claims on the consolidated balance
sheet at August 31, 2004. If we collect amounts different than the amounts that we have recorded as
receivables from AES of $96.2 million or if we collect amounts different than
the amounts receivable from subcontractors and others of $8.0 million, the
difference would be recognized as income or loss. AES has assessed and billed us approximately $40.0 million in liquidated
damages due to the late completion of the project. While we dispute or expect
to recover the liquidated damages because late delivery was primarily due to
the fire, misrepresentation of the percentage-of-completion and other delays
caused by AES, subcontractors and vendors, we recognized a reduction of revenue
of approximately $6.6 million of liquidated damages. Of the remaining $34.8
million of liquidated damages, we have excluded $15.4 million from our cost
estimates and we have recorded recoveries of approximately $18.0 million from
subcontractors and vendors, including the turbine manufacturer. In the first
quarter of fiscal 2004, we drew down $15.0 million from a letter of credit
posted by the turbine manufacturer. The turbine manufacturer disputes the
letter of credit draw and has initiated arbitration through a counterclaim for
the return of the $15.0 million letter of credit draw and has asserted
additional claims of $12.7 million for equipment, parts and services allegedly
provided. The following table summarizes how we have accounted for the liquidated damages
that AES has assessed on the project (in millions): Amount of liquidated damages that have been included in costs
    
    $
    6.6Amounts related to liquidated damages that have been excluded from our
recorded costs:Liquidated damages relief from AES
    
    
    15.4Liquidated damages to be reimbursed by subcontractors and vendors
    
    
    18.033.4Total liquidated damages assessed by AES
    
    $
    40.0
 If we are required to pay
liquidated damages to AES of more than the $6.6 million and are unable to recover that excess amount from our subcontractors or
vendors, then that difference would be recognized as a loss. Based on our evaluation and the advice of legal counsel, we believe it is
probable we will recover at least the recorded amount of claims and that we
will not pay AES any liquidated damages in excess of the amounts recorded. We
believe we have a strong basis for claims and backcharges in excess of the
recorded amounts. However, recovery of the claims and other amounts is
dependent upon negotiations with the applicable parties, which are ongoing, and
the results of litigation. We cannot provide absolute assurance to you as to
the timing or outcome of these negotiations or results of litigation. We hold a
mortgage on the project assets, second to the lenders, to secure AES
obligations under the subordinated notes. We also filed a lien against the
project in connection with our claims under the contract. We cannot provide
absolute assurance to you of the value of such mortgage or lien or our ability to execute
on either in a timely manner. The Marcus Hook Project Our EPC project with FPL-Energy (FPLE) for a combined-cycle cogeneration plan
and auxiliary boiler facility in Marcus Hook, Pennsylvania, has been delayed
for various reasons. Each party commenced legal proceedings against the other for
various claims. Shortly thereafter, the
parties withdrew their lawsuits. The parties are continuing attempts to resolve these issues. Additionally, two of our subcontractors on the project have filed claims
against us alleging total damages of approximately $20 million related to
claims for extra costs incurred. We have asserted a counterclaim of
approximately $8.3 million for costs associated with us obtaining another
subcontractor to perform the work after one initial subcontractor failed to
complete the project. Mediation with these subcontractors has not been
successful to date. We believe any amounts that we incur related to this
project, including legal costs to pursue these issues with subcontractors, are
recoverable from FPLE under the terms of the EPC contract. However, FPLE has
disputed whether these costs are fully reimbursable. We cannot provide absolute assurance as to the timing or outcome of the
mediation or results of the litigation, or disputes with FPLE, or with the
subcontractors. 128




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Other We have substantially completed a major project to construct a chemical
processing facility in Freeport, Texas. We have submitted a request for adjustment
to the contract for amounts in excess of $18.9 million. We have recognized no
gross profit on the cost incurred to date on this project. A mediation was held
with the customer on August 16, 2004 in an effort to resolve all disputes with
the customer; however, the mediation did not result in a settlement and the
parties have continued settlement discussions. On October 26, 2004, we filed a demand for arbitration
in accordance with the contract, although we continue to conduct settlement discussions with
the customer. If our proceeds upon final
settlement of our disputes with the customer are more than or less than the
cost we have recorded at the completion of the project, we will record a gain
or loss for the difference in the period the settlement amount is known. Additionally, 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 and other matters. These are typically actions that arise in the
normal course of business, including employment-related claims, contractual
disputes and claims for personal injury or property damage that occur in
connection with our business. Such contractual disputes normally involve claims
against us relating to the performance of equipment, design or other
engineering services and project construction services. Although the outcome of
lawsuits cannot be predicted and no assurances can be provided, we believe
that, based upon information currently available, none of the now pending
lawsuits, if adversely determined, would have a material adverse effect on our
financial position or results of operations. However, we cannot guarantee such
a result. Note 21  Assets Held for Sale and Discontinued Operations Discontinued Operations During the third quarter of fiscal 2004, we committed to pursue the disposition
of our hanger engineering and pipe support businesses within a one year
timeframe. These businesses are accounted for as discontinued operations in
accordance with FAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets and, accordingly, amounts in the consolidated financial
statements for all periods shown, reflect discontinued operations accounting.
Revenue from these discontinued businesses was $7.9 million, $14.0 million and
$21.6 million for years ended August 31, 2004, 2003 and 2002, respectively.
Income (loss) from discontinued operations, net of taxes was ($4.7 million),
$0.2 million and $1.9 million for the years ended August 31, 2004, 2003 and
2002, respectively. For fiscal 2004, the loss from discontinued operations
includes a $5.0 million ($3.0 million, net of tax) charge to reduce the
carrying value of these assets and liabilities to their estimated fair market
value less costs to sell. Fair value is determined by using quoted market
prices, when available, or other accepted valuation techniques. Any corporate
expenses previously allocated to the discontinued operations have been absorbed
by the remaining continuing operations, resulting in a restatement of operating
income for the Fabrication, Manufacturing and Distribution segment. On August 31, 2004, the assets of these discontinued operations consisting
primarily of inventory, machinery and equipment were sold for $1.3 million in
cash proceeds. As of August 31, 2003 and 2002, the assets and
liabilities of these discontinued operations were $14.6 million and
$8.3 million, and $12.4 million and $5.1 million, respectively. Assets Held For Sale Beginning in the second quarter of fiscal 2004, we actively began marketing for
sale two fabrication facilities in an effort to consolidate operations and
reduce costs within our Fabrication, Manufacturing and Distribution segment.
The operations of these two facilities were absorbed by other fabrication
facilities with no significant impact to revenue or gross margin. In addition,
we also began actively marketing for sale certain investment real estate
property which was sold in late fiscal 2004 for net proceeds of $4.2 million
(net of selling costs of 0.3 million) and recognized a gain of $0.2 million on
the sale. During fiscal 2004, we accepted an offer to lease one of the fabrication
facilities for a five year term and have reclassified the asset as an asset
held for use as of August 31, 2004. The impact to our consolidated statements
of operations for fiscal 2004 was not material. The total carrying value of the assets held for sale as of August 31, 2004 is
approximately $1.8 million and is included in current assets. Note 22  Unbilled Receivables, Retainage Receivables, Advance Billings and
Disputed Accounts Receivable 129




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In accordance with normal practice in the construction industry, we include in
current assets and current liabilities amounts related to construction
contracts realizable and payable over a period in excess of one year. Costs and
estimated earnings in excess of billings on uncompleted contracts of $384.0
million and $233.9 million as of August 31, 2004 and 2003, respectively,
represents the excess of contract costs and profits recognized to date using
the percentage-of-completion accounting method over billings to date on certain
contracts. Billings in excess of costs and estimated earnings on uncompleted
contracts of $351.3 million and $247.1 million as of August 31, 2004 and 2003,
respectively, represents the excess of billings to date over the amount of
contract costs and profits recognized to date using the
percentage-of-completion accounting method on the remaining contracts. Advanced billings on contracts
as of August 31, 2004 and 2003 were $6.2 million and $12.2 million,
respectively. Included in accounts receivable is $10.5 million and $25.5 million at August
31, 2004 and 2003, respectively, related to unbilled receivables. Balances
under retainage provisions totaled $59.1 million and $40.3 million at August
31, 2004 and 2003, respectively, and are also included in accounts receivable
in the accompanying consolidated balance sheets. Unbilled accounts receivables become billable according to the contract terms
which vary significantly but usually consider the passage of time, achievement
of certain milestones or completion of the project. We believe that
substantially all such unbilled amounts will be billed and collected over the
next twelve months. Retainage represents amounts that are typically withheld
from progress billings by our customers until the completion of a project and,
in some instances, for even longer periods. Retainage may also be subject to
specific restrictive conditions such as performance or fulfillment guarantees. Note 23  Quarterly Financial Data (Unaudited) (In thousands, except per share data) First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterFiscal 2004Revenues
    
    $
    646,940
    
    
    $
    689,061
    
    
    $
    917,772
    
    
    $
    823,172Gross profit
    
    $
    11,611
    
    
    $
    60,183
    
    
    $
    72,496
    
    
    $
    75,493Net income (loss)
    
    $
    (49,592
    )
    
    $
    2,197
    
    
    $
    6,399
    
    
    $
    10,021Basic net income (loss) per common share
    
    $
    (1.07
    )
    
    $
    0.04
    
    
    $
    0.10
    
    
    $
    0.16Diluted net income (loss) per common share
    
    $
    (1.07
    )
    
    $
    0.04
    
    
    $
    0.10
    
    
    $
    0.16Fiscal 2003Revenues
    
    $
    991,761
    
    
    $
    716,581
    
    
    $
    819,330
    
    
    $
    765,132Gross profit
    
    $
    80,415
    
    
    $
    40,554
    
    
    $
    74,602
    
    
    $
    74,185Net income (loss)
    
    $
    16,453
    
    
    $
    (7,872
    )
    
    $
    3,083
    
    
    $
    9,202Basic net income (loss) per common share
    
    $
    0.43
    
    
    $
    (0.21
    )
    
    $
    0.08
    
    
    $
    0.24Diluted net income (loss) per common share
    
    $
    0.42
    
    
    $
    (0.21
    )
    
    $
    0.08
    
    
    $
    0.24
 The quarterly financial data
for revenues and gross profit have been restated to reflect
discontinued operations for the first and second quarters of fiscal
2004 and all quarters for fiscal 2003. Revenues were reduced for
discontinued operations of $2.3 million and $2.1 million
for the first and second quarters of fiscal 2004, respectively, and
$5.1 million, $3.9 million, $2.3 million and
$2.6 million, for the first, second, third and fourth quarters
of fiscal 2003. Gross profit was reduced for discontinued operations
for $2.0 million and $2.1 million for the first and second
quarters of fiscal 2004, respectively, and $3.1 million,
$2.6 million, $2.3 million and $2.2 million, for the first, second,
third and fourth quarters of fiscal 2004, respectively. In addition,
for the first quarter fiscal 2004, a reclassification of expenses
from general and administrative expense to direct costs reduced gross
profit by $0.8 million. The first quarter fiscal 2004 gross
profit and net income (loss) reflects a charge on two projects of
$39.3 million (see Note 20) and the
acceleration of amortization related to software of $29.4 million
(see Note 8). Note 24  Audited Condensed Consolidating Financial Information The following presents audited condensed consolidating financial information
with respect to our financial position as of August 31, 2004 and 2003 and the
results of our operations and cash flows for the years ended August 31, 130




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##### Table of Contents



2004, 2003 and 2002. In connection with our sale on March 17, 2003 of our 7 year, 10.75% Senior
Notes due March 15, 2010, our material wholly-owned domestic subsidiaries
issued joint and several guarantees of the Senior Notes. These subsidiaries are
referred to as the Guarantor Subsidiaries in the audited condensed
consolidating financial information which is presented below. Our subsidiaries
which have not issued guarantees for the Senior Notes (primarily foreign
subsidiaries and variable interest entities) are referred to as the
Non-Guarantor Subsidiaries. The audited condensed consolidating financial information has been prepared
pursuant to the rules and regulations for condensed financial information and
does not include all disclosures included in annual financial statements,
although we believe that the disclosures made are adequate to make the
information presented not misleading. Certain reclassifications were made to
conform all of the condensed consolidating financial information to the
presentation of the consolidated financial statements. The principal
eliminating entries eliminate investment in subsidiaries, intercompany balances
and intercompany revenues and expenses. 131




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##### Table of Contents



The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
As of August 31, 2004
(in thousands) EliminationNon-
    
    AndParent
    
    Guarantor
    
    Guarantor
    
    ConsolidationOnly
    
    Subsidiaries
    
    Subsidiaries
    
    Entries
    
    ConsolidatedASSETSCurrent assets
    
    $
    428,061
    
    
    $
    607,182
    
    
    $
    168,912
    
    
    $
    (66,372
    )
    
    $
    1,137,783Intercompany line of credit
    
    
    
    
    
    
    39,611
    
    
    
    
    
    
    
    (39,611
    )
    
    
    Investments in and advances to affiliates
    
    
    713,737
    
    
    
    41,903
    
    
    
    10,725
    
    
    
    (740,676
    )
    
    
    25,689Intercompany balances
    
    
    2,300
    
    
    
    2,562
    
    
    
    
    
    
    
    (4,862
    )
    
    
    Property and equipment
    
    
    34,776
    
    
    
    110,810
    
    
    
    25,221
    
    
    
    (1,319
    )
    
    
    169,488Goodwill
    
    
    
    
    
    
    488,405
    
    
    
    34,378
    
    
    
    
    
    
    
    522,783Other assets
    
    
    50,208
    
    
    
    145,613
    
    
    
    14,374
    
    
    
    (36,002
    )
    
    
    174,193Total Assets
    
    $
    1,229,082
    
    
    $
    1,436,086
    
    
    $
    253,610
    
    
    $
    (888,842
    )
    
    $
    2,029,936LIABILITIES AND
SHAREHOLDERS
EQUITYCurrent liabilities
    
    $
    40,832
    
    
    $
    743,896
    
    
    $
    136,700
    
    
    $
    (67,691
    )
    
    $
    853,737Intercompany line of credit
    
    
    38,277
    
    
    
    
    
    
    
    1,334
    
    
    
    (39,611
    )
    
    
    Long-term debt and capital leases
    
    
    251,865
    
    
    
    3,512
    
    
    
    5,796
    
    
    
    
    
    
    
    261,173Intercompany long-term debt
    
    
    
    
    
    
    
    
    
    
    4,862
    
    
    
    (4,862
    )
    
    
    Other liabilities
    
    
    13,337
    
    
    
    29,003
    
    
    
    13,303
    
    
    
    (36,002
    )
    
    
    19,641Total Liabilities
    
    
    344,311
    
    
    
    776,411
    
    
    
    161,995
    
    
    
    (148,166
    )
    
    
    1,134,551Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,614
    
    
    
    10,614Total Shareholders Equity
    
    
    884,771
    
    
    
    659,675
    
    
    
    91,615
    
    
    
    (751,290
    )
    
    
    884,771Total Liabilities & Shareholders Equity
    
    $
    1,229,082
    
    
    $
    1,436,086
    
    
    $
    253,610
    
    
    $
    (888,842
    )
    
    $
    2,029,936
 132




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The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
As of August 31, 2003
(in thousands) EliminationNon-
    
    AndParent
    
    Guarantor
    
    Guarantor
    
    ConsolidationOnly
    
    Subsidiaries
    
    Subsidiaries
    
    Entries
    
    ConsolidatedASSETSCurrent assets
    
    $
    191,467
    
    
    $
    733,648
    
    
    $
    202,969
    
    
    $
    (13,721
    )
    
    $
    1,114,363Intercompany line of credit
    
    
    166,489
    
    
    
    
    
    
    
    
    
    
    
    (166,489
    )
    
    
    Investments in and advances to affiliates
    
    
    779,872
    
    
    
    38,752
    
    
    
    13,215
    
    
    
    (798,666
    )
    
    
    33,173Intercompany balances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property and equipment
    
    
    60,387
    
    
    
    110,999
    
    
    
    14,266
    
    
    
    (1,322
    )
    
    
    184,330Goodwill
    
    
    
    
    
    
    485,565
    
    
    
    25,811
    
    
    
    
    
    
    
    511,376Other assets
    
    
    45,186
    
    
    
    85,390
    
    
    
    12,297
    
    
    
    
    
    
    
    142,873Total Assets
    
    $
    1,243,401
    
    
    $
    1,454,354
    
    
    $
    268,558
    
    
    $
    (980,198
    )
    
    $
    1,986,115LIABILITIES AND
SHAREHOLDERS
EQUITYCurrent liabilities
    
    $
    316,877
    
    
    $
    577,063
    
    
    $
    148,416
    
    
    $
    (15,043
    )
    
    $
    1,027,313Intercompany line of credit
    
    
    
    
    
    
    153,918
    
    
    
    12,571
    
    
    
    (166,489
    )
    
    
    Long-term debt and capital leases
    
    
    251,019
    
    
    
    628
    
    
    
    98
    
    
    
    
    
    
    
    251,745Intercompany long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    
    13,215
    
    
    
    17,011
    
    
    
    13,739
    
    
    
    
    
    
    
    43,965Total Liabilities
    
    
    581,111
    
    
    
    748,620
    
    
    
    174,824
    
    
    
    (181,532
    )
    
    
    1,323,023Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    802
    
    
    
    802Total Shareholders Equity
    
    
    662,290
    
    
    
    705,734
    
    
    
    93,734
    
    
    
    (799,468
    )
    
    
    662,290Total Liabilities & Shareholders Equity
    
    $
    1,243,401
    
    
    $
    1,454,354
    
    
    $
    268,558
    
    
    $
    (980,198
    )
    
    $
    1,986,115
 133




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##### Table of Contents



The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Statement of Income For the Year Ended August 31, 2004
(in thousands) EliminationNon-
    
    AndParent
    
    Guarantor
    
    Guarantor
    
    ConsolidationOnly
    
    Subsidiaries
    
    Subsidiaries
    
    Entries
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    2,775,156
    
    
    $
    332,120
    
    
    $
    (30,331
    )
    
    $
    3,076,945Cost of revenues
    
    
    
    
    
    
    2,610,191
    
    
    
    277,097
    
    
    
    (30,126
    )
    
    
    2,857,162Gross profit (loss)
    
    
    
    
    
    
    164,965
    
    
    
    55,023
    
    
    
    (205
    )
    
    
    219,783General and administrative
expenses
    
    
    55,856
    
    
    
    131,096
    
    
    
    29,045
    
    
    
    (205
    )
    
    
    215,792Operating income (loss)
    
    
    (55,856
    )
    
    
    33,869
    
    
    
    25,978
    
    
    
    
    
    
    
    3,991Other income (expenses)
    
    
    55,879
    
    
    
    (89,599
    )
    
    
    (3,010
    )
    
    
    (2,485
    )
    
    
    (39,215
    )Equity in earnings (losses) of
subsidiaries
    
    
    (30,975
    )
    
    
    1,929
    
    
    
    
    
    
    
    29,046
    
    
    
    Income (loss) before income
taxes, minority interest,
earnings (losses) from
unconsolidated entities and
loss from
discontinued operations
    
    
    (30,952
    )
    
    
    (53,801
    )
    
    
    22,968
    
    
    
    26,561
    
    
    
    (35,224
    )Provision (benefit) for
income taxes
    
    
    (28
    )
    
    
    (10,341
    )
    
    
    (1,255
    )
    
    
    
    
    
    
    (11,624
    )Income (loss) before minority
interest, earnings (losses)
from unconsolidated entities
and loss from
discontinued operations
    
    
    (30,924
    )
    
    
    (43,460
    )
    
    
    24,223
    
    
    
    26,561
    
    
    
    (23,600
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,284
    )
    
    
    (5,284
    )Earnings (losses) from
unconsolidated entities, net
of taxes
    
    
    (51
    )
    
    
    4,054
    
    
    
    (1,425
    )
    
    
    
    
    
    
    2,578Income (loss) from continuing
operations
    
    
    (30,975
    )
    
    
    (39,406
    )
    
    
    22,798
    
    
    
    21,277
    
    
    
    (26,306
    )Loss from discontinued
operations, net of taxes
    
    
    
    
    
    
    (4,669
    )
    
    
    
    
    
    
    
    
    
    
    (4,669
    )Net income (loss)
    
    $
    (30,975
    )
    
    $
    (44,075
    )
    
    $
    22,798
    
    
    $
    21,277
    
    
    $
    (30,975
    )
 134




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##### Table of Contents



The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Statement of Income For the Year Ended August 31, 2003
(in thousands) EliminationNon-
    
    AndParent
    
    Guarantor
    
    Guarantor
    
    ConsolidationOnly
    
    Subsidiaries
    
    Subsidiaries
    
    Entries
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    2,954,606
    
    
    $
    341,722
    
    
    $
    (3,524
    )
    
    $
    3,292,804Cost of revenues
    
    
    
    
    
    
    2,748,140
    
    
    
    278,432
    
    
    
    (3,524
    )
    
    
    3,023,048Gross profit
    
    
    
    
    
    
    206,466
    
    
    
    63,290
    
    
    
    
    
    
    
    269,756General and administrative
expenses
    
    
    41,200
    
    
    
    118,048
    
    
    
    38,477
    
    
    
    
    
    
    
    197,725Operating income (loss)
    
    
    (41,200
    )
    
    
    88,418
    
    
    
    24,813
    
    
    
    
    
    
    
    72,031Other income (expenses)
    
    
    46,481
    
    
    
    (83,815
    )
    
    
    650
    
    
    
    
    
    
    
    (36,684
    )Equity in earnings (losses) of
subsidiaries
    
    
    20,866
    
    
    
    (3,492
    )
    
    
    
    
    
    
    (17,374
    )
    
    
    Income before income
taxes, minority interest,
earnings (losses) from
unconsolidated entities and
income from
discontinued operations
    
    
    26,147
    
    
    
    1,111
    
    
    
    25,463
    
    
    
    (17,374
    )
    
    
    35,347Provision for income taxes
    
    
    1,850
    
    
    
    2,029
    
    
    
    7,701
    
    
    
    
    
    
    
    11,580Income (loss) before minority
interest, earnings (losses)
from unconsolidated entities
and income from
discontinued operations
    
    
    24,297
    
    
    
    (918
    )
    
    
    17,762
    
    
    
    (17,374
    )
    
    
    23,767Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (169
    )
    
    
    (169
    )Earnings (losses) from
unconsolidated entities, net
of taxes
    
    
    (3,431
    )
    
    
    3,286
    
    
    
    (2,834
    )
    
    
    
    
    
    
    (2,979
    )Income from continuing
operations
    
    
    20,866
    
    
    
    2,368
    
    
    
    14,928
    
    
    
    (17,543
    )
    
    
    20,619Income from discontinued
operations, net of taxes
    
    
    
    
    
    
    247
    
    
    
    
    
    
    
    
    
    
    
    247Net income
    
    $
    20,866
    
    
    $
    2,615
    
    
    $
    14,928
    
    
    $
    (17,543
    )
    
    $
    20,866
 135




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The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Statement of Income For the Year Ended August 31, 2002
(in thousands) EliminationNon-
    
    AndParent
    
    Guarantor
    
    Guarantor
    
    ConsolidationOnly
    
    Subsidiaries
    
    Subsidiaries
    
    Entries
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    2,860,842
    
    
    $
    295,633
    
    
    $
    (7,398
    )
    
    $
    3,149,077Cost of revenues
    
    
    
    
    
    
    2,574,810
    
    
    
    260,624
    
    
    
    (7,398
    )
    
    
    2,828,036Gross profit
    
    
    
    
    
    
    286,032
    
    
    
    35,009
    
    
    
    
    
    
    
    321,041General and administrative
expenses
    
    
    46,195
    
    
    
    82,112
    
    
    
    29,474
    
    
    
    
    
    
    
    157,781Operating income (loss)
    
    
    (46,195
    )
    
    
    203,920
    
    
    
    5,535
    
    
    
    
    
    
    
    163,260Other income (expenses)
    
    
    42,106
    
    
    
    (57,340
    )
    
    
    (103
    )
    
    
    
    
    
    
    (15,337
    )Equity in earnings of
subsidiaries
    
    
    97,995
    
    
    
    
    
    
    
    
    
    
    
    (97,995
    )
    
    
    Income
before income taxes, minority interest,
earnings (losses)
from unconsolidated
entities and income from discontinued operations
    
    
    93,906
    
    
    
    146,580
    
    
    
    5,432
    
    
    
    (97,995
    )
    
    
    147,923Provision (benefit) for income
taxes
    
    
    (1,605
    )
    
    
    55,482
    
    
    
    (778
    )
    
    
    
    
    
    
    53,099Income before minority
interest, earnings (losses)
from unconsolidated entities
and income from discontinued
operations
    
    
    95,511
    
    
    
    91,098
    
    
    
    6,210
    
    
    
    (97,995
    )
    
    
    94,824Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )Earnings (losses) from
unconsolidated entities,
net of taxes
    
    
    2,856
    
    
    
    (584
    )
    
    
    (569
    )
    
    
    
    
    
    
    1,703Income from continuing
operations
    
    
    98,367
    
    
    
    90,514
    
    
    
    5,641
    
    
    
    (98,028
    )
    
    
    96,494Income from discontinued
operations, net of taxes
    
    
    
    
    
    
    1,873
    
    
    
    
    
    
    
    
    
    
    
    1,873Net income
    
    $
    98,367
    
    
    $
    92,387
    
    
    $
    5,641
    
    
    $
    (98,028
    )
    
    $
    98,367
 136




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##### Table of Contents



The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows For the Year Ended August 31, 2004
(in thousands) Non-Parent
    
    Guarantor
    
    GuarantorOnly
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by (used in)
operating activities
    
$    69,770
    
    
    $
    (111,753
    )
    
$    16,944
    
    
$    
    
    
    $
    (25,039
    )Cash flows from investing activities:Purchases of marketable securities
held to maturity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Maturities of marketable
securities held to maturity
    
    
    5,096
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,096Purchases of businesses, net of
cash received
    
    
    
    
    
    
    (23,847
    )
    
    
    
    
    
    
    
    
    
    
    (23,847
    )Purchases of property and
equipment
    
    
    (8,417
    )
    
    
    (15,946
    )
    
    
    (7,144
    )
    
    
    
    
    
    
    (31,507
    )Investment in and advances to
unconsolidated entities and
joint ventures, net of cash
received
    
    
    27
    
    
    
    724
    
    
    
    (1,639
    )
    
    
    
    
    
    
    (888
    )Funds received from project
escrow cash
    
    
    
    
    
    
    168,196
    
    
    
    
    
    
    
    
    
    
    
    168,196Funds deposited to project escrow
cash
    
    
    
    
    
    
    (166,734
    )
    
    
    
    
    
    
    
    
    
    
    (166,734
    )Funds received from escrow  LYONs
    
    
    23,229
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,229Funds deposited to escrow  LYONs
    
    
    (23,229
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,229
    )Proceeds from sale of assets
    
    
    
    
    
    
    17,100
    
    
    
    150
    
    
    
    
    
    
    
    17,250Net cash used in investing activities
    
    
    (3,294
    )
    
    
    (20,507
    )
    
    
    (8,633
    )
    
    
    
    
    
    
    (32,434
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from issuance of debt
    
    
    6,266
    
    
    
    1,724
    
    
    
    
    
    
    
    
    
    
    
    7,990Deferred
credit costs
    
    
    (2,551
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,551
    )(Repayment of) proceeds from loans
and leases
    
    
    (278,691
    )
    
    
    (5,869
    )
    
    
    (1,236
    )
    
    
    
    
    
    
    (285,796
    )Net repayments on revolving credit
agreements
    
    
    
    
    
    
    
    
    
    
    1,018
    
    
    
    
    
    
    
    1,018Changes in intercompany debt,
receivables and payables
    
    
    (78,832
    )
    
    
    120,411
    
    
    
    (41,579
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    246,157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246,157Net cash provided by (used in)
financing activities
    
    
    (107,651
    )
    
    
    116,266
    
    
    
    (41,797
    )
    
    
    
    
    
    
    (33,182
    )Effects of foreign exchange rate
changes on cash
    
    
    
    
    
    
    
    
    
    
    (1,519
    )
    
    
    
    
    
    
    (1,519
    )Net decrease in cash
    
    
    (41,175
    )
    
    
    (15,994
    )
    
    
    (35,005
    )
    
    
    
    
    
    
    (92,174
    )Cash from
variable interest entities
    
    
    
    
    
    
    
    
    
    
    879
    
    
    
    
    
    
    
    879Cash and cash equivalents at the
beginning of the year
    
    
    97,145
    
    
    
    34,603
    
    
    
    48,104
    
    
    
    
    
    
    
    179,852Cash and cash equivalents at the end
of the year
    
    $
    55,970
    
    
    $
    18,609
    
    
    $
    13,978
    
    
    $
    
    
    
    $
    88,557
 137




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The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows For the Year Ended August 31, 2003
(in thousands) Non-Parent
    
    Guarantor
    
    GuarantorOnly
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by (used in)
operating activities
    
    $
    12,453
    
    
    $
    (313,152
    )
    
    $
    98,697
    
    
    $
    
    
    
    $
    (202,002
    )Cash flows from investing activities:Purchases of marketable securities
held to maturity
    
    
    (107,270
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107,270
    )Maturities of marketable
securities held to maturity
    
    
    157,126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,126Cash
received from restricted and escrowed cash
    
    
    
    
    
    
    
    
    
    
    38,465
    
    
    
    
    
    
    
    38,465Investment in subsidiaries, net of
cash received
    
    
    
    
    
    
    (22,633
    )
    
    
    121
    
    
    
    
    
    
    
    (22,512
    )Purchases of property and
equipment
    
    
    (7,206
    )
    
    
    (17,823
    )
    
    
    (1,192
    )
    
    
    
    
    
    
    (26,221
    )Investment in and advances to
unconsolidated entities and
joint ventures, net of cash
received
    
    
    (765
    )
    
    
    (214
    )
    
    
    (1,864
    )
    
    
    
    
    
    
    (2,843
    )Proceeds from sale of assets
    
    
    974
    
    
    
    3,135
    
    
    
    
    
    
    
    
    
    
    
    4,109Net cash provided by (used in)
investing activities
    
    
    42,859
    
    
    
    (37,535
    )
    
    
    35,530
    
    
    
    
    
    
    
    40,854Cash flows from financing activities:Purchase of treasury stock
    
    
    (47,837
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,837
    )(Repayment of) proceeds from loans
and leases
    
    
    (18,172
    )
    
    
    4,144
    
    
    
    
    
    
    
    
    
    
    
    (14,028
    )Net repayments on revolving credit
agreements
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    110Changes in intercompany debt,
receivables and payables
    
    
    (253,871
    )
    
    
    360,007
    
    
    
    (106,136
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Net cash provided by (used in)
financing activities
    
    
    (319,380
    )
    
    
    364,151
    
    
    
    (106,026
    )
    
    
    
    
    
    
    (61,255
    )Effects of foreign exchange rate
changes on cash
    
    
    
    
    
    
    
    
    
    
    491
    
    
    
    
    
    
    
    491Net increase (decrease) in cash
    
    
    (264,068
    )
    
    
    13,464
    
    
    
    28,692
    
    
    
    
    
    
    
    (221,912
    )Cash and cash equivalents at the
beginning of the year
    
    
    361,213
    
    
    
    21,139
    
    
    
    19,412
    
    
    
    
    
    
    
    401,764Cash and cash equivalents at the end
of the year
    
    $
    97,145
    
    
    $
    34,603
    
    
    $
    48,104
    
    
    $
    
    
    
    $
    179,852
 138




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The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows For the Year Ended August 31, 2002
(in thousands) Non-Parent
    
    Guarantor
    
    GuarantorOnly
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by operating
activities
    
    $
    17,647
    
    
    $
    179,277
    
    
    $
    118,142
    
    
    $
    
    
    
    $
    315,066Cash flows from investing activities:Purchases of marketable securities
held to maturity
    
    
    (128,585
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (128,585
    )Maturities of marketable
securities held to maturity
    
    
    119,263
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,263Investment in subsidiaries, net of
cash received
    
    
    (15,132
    )
    
    
    (88,327
    )
    
    
    795
    
    
    
    
    
    
    
    (102,664
    )Cash
deposited into restricted and escrowed cash
    
    
    
    
    
    
    
    
    
    
    (96,500
    )

    
    
    
    

    
    
    (96,500
    )Purchases of property and
equipment
    
    
    (49,383
    )
    
    
    (20,974
    )
    
    
    (3,589
    )
    
    
    
    
    
    
    (73,946
    )Purchase of real estate option
    
    
    (12,183
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,183
    )Investment in and advances to
unconsolidated entities and
joint ventures, net of cash
received
    
    
    2,000
    
    
    
    (200
    )
    
    
    (2,688
    )
    
    
    
    
    
    
    (888
    )Proceeds from sale of assets
    
    
    
    
    
    
    717
    
    
    
    
    
    
    
    
    
    
    
    717Net cash used in investing activities
    
    
    (84,020
    )
    
    
    (108,784
    )
    
    
    (101,982
    )
    
    
    
    
    
    
    (294,786
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (52,043
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,043
    )(Repayment of) proceeds from loans
and leases
    
    
    (4,240
    )
    
    
    553
    
    
    
    (5,384
    )
    
    
    
    
    
    
    (9,071
    )Net repayments on revolving credit
agreements
    
    
    
    
    
    
    
    
    
    
    (2,959
    )
    
    
    
    
    
    
    (2,959
    )Changes in intercompany debt,
receivables and payables
    
    
    66,341
    
    
    
    (61,687
    )
    
    
    (4,654
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    2,262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,262Other
    
    
    (163
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (163
    )Net cash provided by (used in)
financing activities
    
    
    12,157
    
    
    
    (61,134
    )
    
    
    (12,997
    )
    
    
    
    
    
    
    (61,974
    )Effects of foreign exchange rate
changes on cash
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    154Net increase (decrease) in cash
    
    
    (54,216
    )
    
    
    9,359
    
    
    
    3,317
    
    
    
    
    
    
    
    (41,540
    )Cash and cash equivalents at the
beginning of the year
    
    
    415,429
    
    
    
    11,780
    
    
    
    16,095
    
    
    
    
    
    
    
    443,304Cash and cash equivalents at the end
of the year
    
    $
    361,213
    
    
    $
    21,139
    
    
    $
    19,412
    
    
    $
    
    
    
    $
    401,764
 139




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Item 9. Changes In And Disagreements On Accounting And Financial Disclosures None. 
 Item 9a. Controls And Procedures.  a)
    
    Evaluation of disclosure controls and procedures. As of the end of
the period covered by this Annual Report on Form 10-K, our management,
including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer believe that:  
    
    our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports we file
or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified
in the SECs rules and forms; and  
    
    our disclosure controls and procedures operate such that
important information flows to appropriate collection and disclosure
points in a timely manner and are effective to ensure that such
information is accumulated and communicated to our management, and
made known to our Chief Executive Officer and Chief Financial Officer,
particularly during the period when this Annual Report on Form 10-K
was prepared, as appropriate to allow timely decision regarding the
required disclosure.  b)
    
    Changes in internal control over financial reporting. During the
three months ended August 31, 2004 covered by this Annual Report on Form 10-K, there were no
changes in our internal controls over financial reporting or in other
factors that have materially affected or are reasonably likely to
materially affect our internal controls over financial reporting.Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, our
Chief Executive Officer and the Chief Financial Officer have provided certain certifications to the SEC.
These certifications accompanied this report when filed with the SEC,
but are not set forth herein. 
 PART III 
 Item 10. Directors And Executive Officers Of The Registrant Information regarding our directors and executive officers and our audit
committee financial expert is to be included in our definitive proxy statement
prepared in connection with the 2004 Annual Meeting of Shareholders to be held
in January 2005 and is incorporated herein by reference. CORPORATE CODE OF BUSINESS CONDUCT AND ETHICS We have adopted a code of ethics applicable to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer. A copy of this code of ethics is filed as an exhibit to this Annual Report on 10-K, and we intend to disclose any changes to or waivers from this code of ethics through future Form 8-K filing. Shareholders may request a free copy of this code from: The Shaw Group Inc.
Attention: Investor Relations
4171 Essen Lane
Baton Rouge, Louisiana 70809
(225) 932-2500
http://www.shawgrp.com 
 Item 11. Executive Compensation Information regarding executive compensation is to be included in our
definitive proxy statement prepared in connection with the 2004 Annual Meeting
of Shareholders to be held in January 2005 and is incorporated herein by
reference. 
 Item 12. Security Ownership Of Certain Beneficial Owners And Management Information regarding Section 16(a) beneficial ownership reporting compliance is set forth under Common Stock Ownership of Certain Beneficial Owners and Management  Section 16(a) Beneficial Ownership Reporting Compliance in our definitive Proxy Statement, which information is incorporated herein by reference. 
 Item 13. Certain Relationships And Related Transactions Information regarding certain relationships and related transactions is to be
included in our definitive proxy statement prepared in connection with the 2004
Annual Meeting of Shareholders to be held in January 2005 and is incorporated
herein by reference. 
 Item 14. Principal Accountant Fees And Services 140




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##### Table of Contents



Information regarding principal accountant fees and services is to be included
in our definitive proxy statement prepared in connection with the 2004 Annual
Meeting of Shareholders to be held in January 2005 and is incorporated herein
by reference. 
 PART IV 
 Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K  (a)
    
    1. Financial Statements.See Item 8 of Part II of this report.2. Financial Statement Schedules.All schedules have been omitted since the required information is not present
or not present in amounts sufficient to require submission of the schedule,
or because the information required is included in the consolidated financial
statements and notes thereto.3. Exhibits.  3.1.
    
    Composite of the Restatement of the Articles of Incorporation of The
Shaw Group Inc. (the Company), as amended by (i) Articles of Amendment
dated January 22, 2001 and (ii) Articles of Amendment dated July 31,
2001 (incorporated by reference to the designated Exhibit to the
Companys Annual Report on Form 10-K for the fiscal year ended August
31, 2001).3.2
    
    Articles of Amendment of the Restatement of the Articles of
Incorporation of the Company dated January 22, 2001 (incorporated by
reference to the designated Exhibit to the Companys Quarterly Report on
Form 10-Q for the quarter ended February 28, 2001).3.3
    
    Articles of Amendment to Restatement of the Articles of Incorporation
of the Company dated July 31, 2001 (incorporated by reference to the
designated Exhibit to the Companys Registration Statement on Form 8-A
filed on July 30, 2001).3.4
    
    Amended and Restated By-Laws of the Company dated December 8, 1993
(incorporated by reference to the designated Exhibit to the Companys
Annual Report on Form 10-K for the fiscal year ended August 31, 1994, as
amended).3.5
    
    Supplement to Amended and Restated By-laws of the Company dated
October 17, 2003 (incorporated by reference to the designated Exhibit to
the Companys Annual Report on Form 10-K for the fiscal year ended
August 31, 2003, as amended).4.1
    
    Specimen Common Stock Certificate (incorporated by reference to the
designated Exhibit to the Companys Registration Statement on Form S-1
filed on October 22, 1993, as amended (No. 33-70722)).4.2
    
    Indenture dated as of May 1, 2001, between the Company and United
States Trust Company of New York including Form of Liquid Yield
Option Note due 2021 (Zero Coupon-Senior) (Exhibits A-1 and A-2)
(incorporated by reference to the designated Exhibit to the Companys
Current Report on Form 8-K filed on May 11, 2001).4.3
    
    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 (incorporated by reference to the
designated Exhibit to the Companys Registration Statement on Form 8-A
filed on July 30, 2001). 141




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##### Table of Contents



4.4
    
    Indenture dated as of March 17, 2003 by and among the Company, the
Subsidiary Guarantors party thereto, and The Bank of New York, as
trustee, including form of 10 3/4% Senior Note due 2010 (exhibits
thereto) (incorporated by reference to the designated Exhibit to the
Companys Quarterly Report on Form 10-Q for the quarter ended February
28, 2003).4.5
    
    Registration Rights Agreement dated as of March 17, 2003 by and among
the Company and Credit Suisse First Boston LLC, UBS Warburg LLC, BMO
Nesbitt Burns Corp., Credit Lyonnais Securities (USA) Inc., BNP Paribas
Securities Corp. and U.S. Bancorp Piper Jaffray Inc. (incorporated by
reference to the designated Exhibit to the Companys Quarterly Report on
Form 10-Q for the quarter ended February 28, 2003).4.6
    
    Form of 10 3/4% Senior Note Due 2010 (Included as Exhibit I to the
Indenture incorporated by reference as Exhibit 4.4 hereto).4.7
    
    Form of 10 3/4% Senior Note Due 2010 (Included as Exhibit I to the
Indenture incorporated by reference as Exhibit 4.4 hereto).4.8
    
    Registration Rights Agreement dated as of May 1, 2001, among the
Company, Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith,
Incorporated (incorporated by reference to the designated exhibit to the
Companys Current Report on Form 8-K filed on May 11, 2001).10.1
    
    The Shaw Group Inc. 1993 Employee Stock Option Plan, amended and
restated through October 8, 2001 (incorporated by reference to the
designated Exhibit to the Companys Annual Report on Form 10-K for the
fiscal year ended August 31, 2001).10.2
    
    The Shaw Group Inc. 1996 Non-Employee Director Stock Option Plan,
amended and restated through January 30, 2004 (incorporated by reference
to the designated Exhibit to the Companys Quarterly Report on Form 10-Q
for the quarter ended February 29, 2004).10.3
    
    The Shaw Group Inc. 2001 Employee Incentive Compensation Plan, amended
and restated through March 8, 2004 (incorporated by reference to the
designated Exhibit to the Companys Quarterly Report on Form 10-Q for the
quarter ended February 29, 2004).10.4
    
    The Shaw Group Inc. Stone & Webster Acquisition Stock Option Plan
(incorporated by reference to the designated Exhibit to the Companys
Registration Statement on Form S-8 filed on June 12, 2001 (No.
333-62856)).10.5
    
    Informal Agreements to award shares of restricted stock (incorporated
by reference to the designated Exhibit to the Companys Quarterly Report
on Form 10-Q for the quarter ended February 29, 2004).10.6
    
    Form of Incentive Stock Option Agreement under The Shaw Group Inc. 2001
Employee Incentive Compensation Plan (incorporated by reference to the
designated Exhibit to the Companys Current Report on Form 8-K filed on
October 12, 2004).10.7
    
    Form of Non-Qualified Stock Option Agreement under The Shaw Group Inc.
2001 Employee Incentive Compensation Plan (incorporated by reference to
the designated Exhibit to the Companys Current Report on Form 8-K filed
on October 12, 2004).10.8
    
    Form of Restricted Stock Agreement under The Shaw Group Inc. 2001
Employee Incentive Compensation Plan (incorporated by reference to the
designated Exhibit to the Companys Current Report on Form 8-K filed on
October 12, 2004).10.9
    
    Employment Agreement dated as of April 10, 2001, by and between the
Company and J.M. Bernhard, Jr. (incorporated by reference to the
designated Exhibit to the Companys Annual Report on From 10-K 142




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##### Table of Contents



for the fiscal year ended August 31, 2001).10.10
    
    Employment Agreement dated as of May 5, 2000, by and between the
Company and Richard F. Gill and amended January 10, 2001(incorporated by
reference to the designated Exhibit to the Companys Annual Report on
Form 10-K for the fiscal year ended August 31, 2001).10.11
    
    Employment Agreement dated as of May 1, 2000, by and between the
Company and Robert L. Belk (incorporated by reference to the designated
Exhibit to the Companys Annual Report on Form 10-K for the fiscal year
ended August 31, 2000).10.12
    
    Employment Agreement dated as of July 10, 2002, by and between the
Company and T. A. Barfield, Jr. (incorporated by reference to the
designated Exhibit to the Companys Annual Report on Form 10-K for the
fiscal year ended August 31, 2002).10.13
    
    Employment Agreement of David L. Chapman, Sr. Dated April 6, 2002
(incorporated by reference to the designated Exhibit to the Companys
Current Report on Form 8-K filed on December 24, 2003).10.14
    
    Employment Agreement of Nicholas C. Gallinaro dated April 13, 2002, as
amended (incorporated by reference to the designated Exhibit to the
Companys Current Report on Form 8-K filed on December 24, 2003).10.15
    
    Employment Agreement of Dorsey Ron McCall dated July 29, 2002
(incorporated by reference to the designated Exhibit to the Companys
Current Report on Form 8-K filed on December 24, 2003).10.16
    
    Asset Purchase Agreement, dated as of July 14, 2000, among Stone &
Webster, Incorporated, certain subsidiaries of Stone & Webster,
Incorporated and The Shaw Group Inc. (incorporated by reference to the
designated Exhibit to the Companys Current Report on Form 8-K filed on
July 28, 2000).10.17
    
    Composite Asset Purchase Agreement, dated as of January 23, 2002, by
and among The Shaw Group Inc., 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 Shaw Group Inc. (incorporated by reference to
designated Exhibit to the Companys Current Report on Form 8-K filed on
May 16, 2002). Pursuant to Item 601(b) (2) of Regulation S-K, the
exhibits and schedules referred to in the Asset Purchase Agreement are
omitted. The Registrant hereby undertakes to furnish a supplemental copy
of any omitted schedule or exhibit to the Commission upon request.10.18
    
    Amendment No. 3, dated May 2, 2002, to Asset Purchase Agreement by and
among The Shaw Group Inc., The IT Group, Inc. and certain subsidiaries of
The IT Group, Inc. (incorporated by reference to the designated Exhibit
to the Companys Current Report on Form 8-K filed on May 16, 2002).
Pursuant to Item 601(b) (2) of Regulation S-K, the exhibits and schedules
referred to in Amendment No. 3 are omitted. The Registrant hereby
undertakes to furnish a supplemental copy of any omitted schedule or
exhibit to the Commission upon request.10.19
    
    Amendment No. 4, dated May 3, 2002, to Asset Purchase Agreement by and
among The Shaw Group Inc., The IT Group, Inc. and certain subsidiaries of
the IT Group, Inc. (incorporated herein by reference to the designated
Exhibit to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 16, 2002).10.20
    
    Third Amended and Restated Credit Agreement dated March 17, 2003, by
and among the Company, as borrower; Credit Lyonnais New York Branch, as a
lender, swing line lender, an issuer and agent; Credit Lyonnais
Securities, as joint arranger and sole book runner; Credit Suisse First
Boston, as joint arranger; Harris Trust and Savings Bank and BNP Paribas,
as co-syndication agents; U.S. Bank National Association, as
documentation agent; and the other and the other lenders signatory
thereto 143




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##### Table of Contents



(incorporated by reference to the designated Exhibit to the Companys
Current Report on Form 8-K filed on March 19, 2003).10.21
    
    Amendment No. 1 to Third Amended and Restated Credit Agreement dated
as of May 16, 2003 (incorporated by reference to the designated Exhibit
to the Companys Annual Report on Form 10-K for the fiscal year ended
August 31, 2003, as amended).10.22
    
    Amendment No. 2 to Third Amended and Restated Credit Agreement dated
October 17, 2003 (incorporated by reference to the designated Exhibit to
the Companys Annual Report on Form 10-K for the fiscal year ended August
31, 2003, as amended).10.23
    
    Amendment No. 3 to Third Amended and Restated Credit Agreement dated
January 30, 2004 (incorporated by reference to the designated Exhibit to
the Companys Quarterly Report on Form 10-Q for the quarter ended
February 29, 2004).10.24
    
    The Shaw Group Inc. 401(k) Plan (incorporated by reference to the
designated Exhibit to the Companys Annual Report on Form 11-K filed on
June 24, 2004).10.25
    
    Informal Agreements to award shares of restricted stock (incorporated
by reference to the designated Exhibit to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 18,
2004).14.1
    
    The Shaw Group Inc. Code of Corporate Conduct and Insider Trading and
Disclosure Policy dated June 2003 filed herewith.21.1
    
    Subsidiaries of The Shaw Group Inc. (filed herewith).23.1
    
    Consent of Ernst & Young LLP (filed herewith).24.1
    
    Powers of Attorney (filed herewith).31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).  (b)
    
    Reports on Form 8-K  1.
    
    On June 14, 2004, the Company filed a Current Report on Form 8-K to
set forth therein a disclosure under Item 5 of Form 8-K concerning the
Companys announcement of an informal Securities and Exchange Commission
(SEC) inquiry, specifically the Companys related June 10, 2004, press
release attached to the Form 8-K as Exhibit 99.1.2.
    
    On July 15, 2004, the Company furnished a Current Report on Form 8-K
to set forth therein a disclosure under Item 12 of Form 8-K concerning
the financial results of the Company for the third quarter ended May 31,
2004, specifically the Companys related July 15, 2004, press release
attached to Form 8-K as Exhibit 99.1.3.
    
    On July 21, 2004, the Company furnished a Current Report on Form
8-K/A to set forth therein a 144




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disclosure under Item 12 of Form 8-K to amend its Current Report on
Form 8-K furnished on July 15, 2004, to correct disclosure in the Form
8-K concerning the Companys domestic and international backlog
figures and percentages set forth in Item 12 of the previously
furnished Form 8-K. 145




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SIGNATURES AND CERTIFICATIONS 
 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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./s/ J. M. Bernhard, Jr.By: J. M. Bernhard, Jr.Chief Executive
OfficerDate: November 2, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ J. M. Bernhard, Jr.

(J. M. Bernhard, Jr.)
    
    Chairman of the Board
and Chief Executive Officer,
(Principal Executive Officer)
    
    November 2, 2004/s/ Robert L. Belk

(Robert L. Belk)
    
    Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting
Officer)
    
    November 2, 2004/s/ T.A. Barfield

(T.A. Barfield)
    
    President and Chief Operating Officer
(Principal Operating Officer and
Director)
    
    November 2, 2004*

(Albert McAlister)
    
    Director
    
    November 2, 2004*

(L. Lane Grigsby)
    
    Director
    
    November 2, 2004*

(David W. Hoyle)
    
    Director
    
    November 2, 2004*

(John W. Sinders, Jr.)
    
    Director
    
    November 2, 2004*

(James F. Barker)
    
    Director
    
    November 2, 2004*

(Charles E. Roemer, III)
    
    Director
    
    November 2, 2004* By: /s/ Robert L. Belk

     Robert L. Belk
    
    
    
    November 2, 2004Attorney-in-Fact
 146




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Exhibit Index  3.1.
    
    Composite of the Restatement of the Articles of Incorporation of The
Shaw Group Inc. (the Company), as amended by (i) Articles of Amendment
dated January 22, 2001 and (ii) Articles of Amendment dated July 31,
2001 (incorporated by reference to the designated Exhibit to the
Companys Annual Report on Form 10-K for the fiscal year ended August
31, 2001).3.2
    
    Articles of Amendment of the Restatement of the Articles of
Incorporation of the Company dated January 22, 2001 (incorporated by
reference to the designated Exhibit to the Companys Quarterly Report on
Form 10-Q for the quarter ended February 28, 2001).3.3
    
    Articles of Amendment to Restatement of the Articles of Incorporation
of the Company dated July 31, 2001 (incorporated by reference to the
designated Exhibit to the Companys Registration Statement on Form 8-A
filed on July 30, 2001).3.4
    
    Amended and Restated By-Laws of the Company dated December 8, 1993
(incorporated by reference to the designated Exhibit to the Companys
Annual Report on Form 10-K for the fiscal year ended August 31, 1994, as
amended).3.5
    
    Supplement to Amended and Restated By-laws of the Company dated
October 17, 2003 (incorporated by reference to the designated Exhibit to
the Companys Annual Report on Form 10-K for the fiscal year ended
August 31, 2003, as amended).4.1
    
    Specimen Common Stock Certificate (incorporated by reference to the
designated Exhibit to the Companys Registration Statement on Form S-1
filed on October 22, 1993, as amended (No. 33-70722)).4.2
    
    Indenture dated as of May 1, 2001, between the Company and United
States Trust Company of New York including Form of Liquid Yield
Option Note due 2021 (Zero Coupon-Senior) (Exhibits A-1 and A-2)
(incorporated by reference to the designated Exhibit to the Companys
Current Report on Form 8-K filed on May 11, 2001).4.3
    
    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 (incorporated by reference to the
designated Exhibit to the Companys Registration Statement on Form 8-A
filed on July 30, 2001).4.4
    
    Indenture dated as of March 17, 2003 by and among the Company, the
Subsidiary Guarantors party thereto, and The Bank of New York, as
trustee, including form of 10 3/4% Senior Note due 2010 (exhibits
thereto) (incorporated by reference to the designated Exhibit to the
Companys Quarterly Report on Form 10-Q for the quarter ended February
28, 2003).4.5
    
    Registration Rights Agreement dated as of March 17, 2003 by and among
the Company and Credit Suisse First Boston LLC, UBS Warburg LLC, BMO
Nesbitt Burns Corp., Credit Lyonnais Securities (USA) Inc., BNP Paribas
Securities Corp. and U.S. Bancorp Piper Jaffray Inc. (incorporated by
reference to the designated Exhibit to the Companys Quarterly Report on
Form 10-Q for the quarter ended February 28, 2003).4.6
    
    Form of 10 3/4% Senior Note Due 2010 (Included as Exhibit I to the
Indenture incorporated by reference as Exhibit 4.4 hereto).4.7
    
    Form of 10 3/4% Senior Note Due 2010 (Included as Exhibit I to the
Indenture incorporated by reference as Exhibit 4.4 hereto). 147




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4.8
    
    Registration Rights Agreement dated as of May 1, 2001, among the
Company, Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith,
Incorporated (incorporated by reference to the designated exhibit to the
Companys Current Report on Form 8-K filed on May 11, 2001).10.1
    
    The Shaw Group Inc. 1993 Employee Stock Option Plan, amended and
restated through October 8, 2001 (incorporated by reference to the
designated Exhibit to the Companys Annual Report on Form 10-K for the
fiscal year ended August 31, 2001).10.2
    
    The Shaw Group Inc. 1996 Non-Employee Director Stock Option Plan,
amended and restated through January 30, 2004 (incorporated by reference
to the designated Exhibit to the Companys Quarterly Report on Form 10-Q
for the quarter ended February 29, 2004).10.3
    
    The Shaw Group Inc. 2001 Employee Incentive Compensation Plan, amended
and restated through March 8, 2004 (incorporated by reference to the
designated Exhibit to the Companys Quarterly Report on Form 10-Q for the
quarter ended February 29, 2004).10.4
    
    The Shaw Group Inc. Stone & Webster Acquisition Stock Option Plan
(incorporated by reference to the designated Exhibit to the Companys
Registration Statement on Form S-8 filed on June 12, 2001 (No.
333-62856)).10.5
    
    Informal Agreements to award shares of restricted stock (incorporated
by reference to the designated Exhibit to the Companys Quarterly Report
on Form 10-Q for the quarter ended February 29, 2004).10.6
    
    Form of Incentive Stock Option Agreement under The Shaw Group Inc. 2001
Employee Incentive Compensation Plan (incorporated by reference to the
designated Exhibit to the Companys Current Report on Form 8-K filed on
October 12, 2004).10.7
    
    Form of Non-Qualified Stock Option Agreement under The Shaw Group Inc.
2001 Employee Incentive Compensation Plan (incorporated by reference to
the designated Exhibit to the Companys Current Report on Form 8-K filed
on October 12, 2004).10.8
    
    Form of Restricted Stock Agreement under The Shaw Group Inc. 2001
Employee Incentive Compensation Plan (incorporated by reference to the
designated Exhibit to the Companys Current Report on Form 8-K filed on
October 12, 2004).10.9
    
    Employment Agreement dated as of April 10, 2001, by and between the
Company and J.M. Bernhard, Jr. (incorporated by reference to the
designated Exhibit to the Companys Annual Report on From 10-K for the
fiscal year ended August 31, 2001).10.10
    
    Employment Agreement dated as of May 5, 2000, by and between the
Company and Richard F. Gill and amended January 10, 2001(incorporated by
reference to the designated Exhibit to the Companys Annual Report on
Form 10-K for the fiscal year ended August 31, 2001).10.11
    
    Employment Agreement dated as of May 1, 2000, by and between the
Company and Robert L. Belk (incorporated by reference to the designated
Exhibit to the Companys Annual Report on Form 10-K for the fiscal year
ended August 31, 2000).10.12
    
    Employment Agreement dated as of July 10, 2002, by and between the
Company and T. A. Barfield, Jr. (incorporated by reference to the
designated Exhibit to the Companys Annual Report on Form 10-K for the
fiscal year ended August 31, 2002).10.13
    
    Employment Agreement of David L. Chapman, Sr. Dated April 6, 2002
(incorporated by reference to the designated Exhibit to the Companys
Current Report on Form 8-K filed on December 24, 2003).10.14
    
    Employment Agreement of Nicholas C. Gallinaro dated April 13, 2002, as
amended (incorporated by 148




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reference to the designated Exhibit to the Companys Current Report on
Form 8-K filed on December 24, 2003).10.15
    
    Employment Agreement of Dorsey Ron McCall dated July 29, 2002
(incorporated by reference to the designated Exhibit to the Companys
Current Report on Form 8-K filed on December 24, 2003).10.16
    
    Asset Purchase Agreement, dated as of July 14, 2000, among Stone &
Webster, Incorporated, certain subsidiaries of Stone & Webster,
Incorporated and The Shaw Group Inc. (incorporated by reference to the
designated Exhibit to the Companys Current Report on Form 8-K filed on
July 28, 2000).10.17
    
    Composite Asset Purchase Agreement, dated as of January 23, 2002, by
and among The Shaw Group Inc., 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 Shaw Group Inc. (incorporated by reference to
designated Exhibit to the Companys Current Report on Form 8-K filed on
May 16, 2002). Pursuant to Item 601(b) (2) of Regulation S-K, the
exhibits and schedules referred to in the Asset Purchase Agreement are
omitted. The Registrant hereby undertakes to furnish a supplemental copy
of any omitted schedule or exhibit to the Commission upon request.10.18
    
    Amendment No. 3, dated May 2, 2002, to Asset Purchase Agreement by and
among The Shaw Group Inc., The IT Group, Inc. and certain subsidiaries of
The IT Group, Inc. (incorporated by reference to the designated Exhibit
to the Companys Current Report on Form 8-K filed on May 16, 2002).
Pursuant to Item 601(b) (2) of Regulation S-K, the exhibits and schedules
referred to in Amendment No. 3 are omitted. The Registrant hereby
undertakes to furnish a supplemental copy of any omitted schedule or
exhibit to the Commission upon request.10.19
    
    Amendment No. 4, dated May 3, 2002, to Asset Purchase Agreement by and
among The Shaw Group Inc., The IT Group, Inc. and certain subsidiaries of
the IT Group, Inc. (incorporated herein by reference to the designated
Exhibit to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 16, 2002).10.20
    
    Third Amended and Restated Credit Agreement dated March 17, 2003, by
and among the Company, as borrower; Credit Lyonnais New York Branch, as a
lender, swing line lender, an issuer and agent; Credit Lyonnais
Securities, as joint arranger and sole book runner; Credit Suisse First
Boston, as joint arranger; Harris Trust and Savings Bank and BNP Paribas,
as co-syndication agents; U.S. Bank National Association, as
documentation agent; and the other and the other lenders signatory
thereto (incorporated by reference to the designated Exhibit to the
Companys Current Report on Form 8-K filed on March 19, 2003).10.21
    
    Amendment No. 1 to Third Amended and Restated Credit Agreement dated
as of May 16, 2003 (incorporated by reference to the designated Exhibit
to the Companys Annual Report on Form 10-K for the fiscal year ended
August 31, 2003, as amended).10.22
    
    Amendment No. 2 to Third Amended and Restated Credit Agreement dated
October 17, 2003 (incorporated by reference to the designated Exhibit to
the Companys Annual Report on Form 10-K for the fiscal year ended August
31, 2003, as amended).10.23
    
    Amendment No. 3 to Third Amended and Restated Credit Agreement dated
January 30, 2004 (incorporated by reference to the designated Exhibit to
the Companys Quarterly Report on Form 10-Q for the quarter ended
February 29, 2004).10.24
    
    The Shaw Group Inc. 401(k) Plan (incorporated by reference to the
designated Exhibit to the Companys Annual Report on Form 11-K filed on
June 24, 2004). 149




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10.25
    
    Informal Agreements to award shares of restricted stock (incorporated
by reference to the designated Exhibit to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 18,
2004).14.1
    
    The Shaw Group Inc. Code of Corporate Conduct and Insider Trading and
Disclosure Policy dated June 2003 filed herewith.21.1
    
    Subsidiaries of The Shaw Group Inc. (filed herewith).23.1
    
    Consent of Ernst & Young LLP (filed herewith).24.1
    
    Powers of Attorney (filed herewith).31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). 150