**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.   20549**

 

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**FORM 10-K**

 

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**AnnualReport Pursuant to**

**Section13 or 15(d) of the Securities Exchange Act of 1934**

 
| **For the Fiscal Year Ended  December 30, 2005** | ** ** | **Commission File Number  1-12054** |
|--------------------------------------------------|------------|-------------------------------------|

 

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**WASHINGTONGROUP INTERNATIONAL, INC.**

 

**720 PARK BOULEVARD, BOISE, IDAHO 83712**

**208 / 386-5000**

** **

**A Delaware Corporation**

IRS Employer Identification No. **33-0565601**

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12(b) andSECTION 12(g) OF THE ACT**

 

Securities registeredpursuant to Section 12(b) of the Exchange Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Exchange Act:       

 

**Title ofclass**

Common Stock, $.01par value per share

 

**COMPLIANCEWITH REPORTING REQUIREMENTS**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

ý    Yes  o     No

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.

o    Yes  ý     No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “Accelerated filer and largeaccelerated filer,” in Rule 12b-2 of the Exchange Act of 1934. 

ý   Largeaccelerated filer                  oAccelerated Filer                       o Non-acceleratedfiler

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

o    Yes           ý    No

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.      ý    Yes  o     No

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13, or 15(d) of the Exchange Act subsequent to the distributionof securities under a plan confirmed by a court.  ý    Yes     o   No

 

**DISCLOSUREPURSUANT TO ITEM 405 OF REGULATION S-K**

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.   ý

 

**AGGREGATEMARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES**

 

At February 27, 2006, theaggregate market value of the registrant’s common stock held by non-affiliatesof the registrant, based on the closing price on February 27, 2006, as reportedon the NASDAQ National Market®, was approximately $1,686,887,710. At July 1,2005 (the last business day of the registrant’s most recently completed secondfiscal quarter), the aggregate market value of the registrant’s common stockheld by nonaffiliates of the registrant, based on the closing price on July 1,2005, as reported by the NASDAQ National Market®, was approximately $1,343,211,806.

 

The number of shares of common stock outstanding as ofFebruary 27, 2006 was 28,989,647.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of theregistrant’s definitive proxy statement for its annual meeting of stockholdersto be held on May 19, 2006, which is expected to be filed with the Securitiesand Exchange Commission not later than April 14, 2006, are incorporated byreference into Part III of this report on Form 10-K. In the event such proxystatement is not filed by April 14, 2006, the required information will befiled as an amendment to this report on Form 10-K no later than that date.

 

 

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**WASHINGTONGROUP INTERNATIONAL, INC.**

 

**Form 10-K**

**AnnualReport**

**For theFiscal Year Ended December 30, 2005**

 

**TABLE OFCONTENTS**

 

 
| Note  Regarding Forward-Looking Information | I-1                                                                                                                     |
|---------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                                        |                                                                                                                    |   |
|                                        | **PART I**                                                                                                              |   |
|                                        |                                                                                                                    |   |
| Item 1.                                     | Business                                                                                                                | I-2 |
| Item 1A.                                    | Risk Factors                                                                                                            | I-14 |
| Item 1B.                                    | Unresolved  Staff Comments                                                                                              | I-23 |
| Item 2.                                     | Properties                                                                                                              | I-24 |
| Item 3.                                     | Legal Proceedings                                                                                                       | I-25 |
| Item 4.                                     | Submission  of Matters to a Vote of Security Holders                                                                    | I-26 |
|                                        |                                                                                                                    |   |
| ** **                                  | **PART II**                                                                                                             | ** ** |
| ** **                                  | ** **                                                                                                              | ** ** |
| Item 5.                                     | Market for  the Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | II-1 |
| Item 6.                                     | Selected Financial  Data                                                                                                | II-3 |
| Item 7.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | II-4 |
| Item 7A.                                    | Quantitative  and Qualitative Disclosure About Market Risk                                                              | II-32 |
| Item 8.                                     | Financial  Statements and Supplementary Data                                                                            | II-33 |
| Item 9.                                     | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                   | II-75 |
| Item 9A.                                    | Controls and  Procedures                                                                                                | II-75 |
| Item 9B.                                    | Other Information                                                                                                       | II-80 |
|                                        |                                                                                                                    |   |
|                                        | **PART III**                                                                                                            |   |
|                                        |                                                                                                                    |   |
| Item 10.                                    | Directors  and Executive Officers of the Registrant                                                                     | III-1 |
| Item 11.                                    | Executive  Compensation                                                                                                 | III-1 |
| Item 12.                                    | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        | III-1 |
| Item 13.                                    | Certain  Relationships and Related Transactions                                                                         | III-1 |
| Item 14.                                    | Principal  Accountant Fees and Services                                                                                 | III-1 |
|                                        |                                                                                                                    |   |
|                                        | **PART IV**                                                                                                             |   |
|                                        |                                                                                                                    |   |
| Item 15.                                    | Exhibits and  Financial Statement Schedule                                                                              | IV-1 |
|                                        |                                                                                                                    |   |
|                                        | **SIGNATURES**                                                                                                          |   |

 

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**NOTEREGARDING FORWARD-LOOKING INFORMATION**

 

This report containsforward-looking statements. You can identify forward-looking statements by theuse of terminology such as “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,”“future,” “intend,” “plan,” “could,” “should,” “potential” or “continue,” orthe negative or other variations thereof, as well as other statements regardingmatters that are not historical fact. These forward-looking statements include,among others, statements concerning:

 

•                  Our businessstrategy and competitive advantages;

 

•                  Our expectationsas to potential revenue from designated markets or customers;

 

•                  Our expectationsas to operating results, cash flows, return on invested capital and net income;

 

•                  Our expectationsas to new work and backlog;

 

•                  The markets forour services and products; and

 

•                  Our anticipatedcontractual obligations, capital expenditures and funding requirements.

 

Forward-lookingstatements are only predictions. The forward-looking statements in this reportare subject to risks and uncertainties, including, among others, the risks anduncertainties identified in this report and other operational, business,industry, market, legal and regulatory developments, which could cause actualevents or results to differ materially from those expressed or implied by theforward-looking statements.

 

Important factors thatcould prevent us from achieving the expectations expressed include, but are notlimited to, our failure to:

 

•                  Manage and avoiddelays or cost overruns on existing and future contracts;

 

•                  Maintainrelationships with key customers, partners and suppliers;

 

•                  Successfully bidfor, and enter into, new contracts on satisfactory terms;

 

•                  Successfullymanage and negotiate change orders and claims with respect to existing andfuture contracts;

 

•                  Manage andmaintain our operations and financial performance and the operations andfinancial performance of our current and future operating subsidiaries andjoint ventures;

 

•                  Respondeffectively to regulatory, legislative and judicial developments, including anylegal or regulatory proceedings, affecting our existing contracts, includingcontracts concerning environmental remediation and restoration;

 

•                  Obtain andmaintain any required governmental authorizations, franchises and permits, allin a timely manner, at reasonable costs and on satisfactory terms andconditions;

 

•                  Satisfy therestrictive covenants imposed by our revolving credit facility and suretyarrangements;

 

•                  Maintain accessto sufficient working capital through our existing revolving credit facility orotherwise; and

 

•                  Maintain accessto sufficient bonding capacity.

 

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Some other factors thatmay affect our businesses, financial position or results of operations include:

 

•                  Accidents andconditions, including industrial accidents, labor disputes, geologicalconditions, environmental hazards, weather and other natural phenomena;

 

•                  Special risks ofinternational operations, including uncertain political and economicenvironments, acts of terrorism or war, potential incompatibilities withforeign joint venture partners, foreign currency fluctuations and controls,civil disturbances and labor issues;

 

•                  Special risks ofcontracts with the government, including the failure of applicable governingauthorities to take necessary actions to secure or maintain funding forparticular projects with us, the unilateral termination of contracts by thegovernment and reimbursement obligations to the government for funds previouslyreceived;

 

•                  The outcome oflegal proceedings;

 

•                  Maintenance ofgovernment-compliant cost systems; and

 

•                  The economicwell-being of our private and public customer base and its ability andintentions to invest capital in engineering and construction activities.

 

In addition to thefactors mentioned above, see “Risk Factors” under Item 1A for a description ofother factors affecting forward-looking statements.

 

**PART I**

 

**ITEM 1.  BUSINESS**

 

Unless otherwiseindicated, the terms “we,” “us” and “our” refer to Washington GroupInternational, Inc. (“Washington Group International”) and its consolidatedsubsidiaries; references to 2005 are references to our fiscal year endedDecember 30, 2005; references to 2004 are references to our fiscal year endedDecember 31, 2004; and references to 2003 are references to our fiscal yearended January 2, 2004.

 

Our common stockcurrently trades on the NASDAQ National Market® under the ticker symbol “WGII.”As of December 30, 2005, we also had outstanding three tranches of warrants topurchase shares of our common stock which traded in the over-the-counter marketon the OTC Bulletin Board®. All of the warrants were either purchased by thecompany, exercised or expired on or before January 25, 2006. The Tranche Awarrants, which had an exercise price of $28.50 per share, traded under theticker symbol WGIIW.OB; the Tranche B warrants, which had an exercise price of$31.74, traded under the ticker symbol WGIIZ.OB; and the Tranche C warrants,which had an exercise price of $33.51 per share, traded under the ticker symbolWGIIL.OB. See additional information on our warrants in the “Issuer Purchasesof Equity Securities” table in Item 5 of this report and Note 14, “CapitalStock, Stock Purchase Warrants and Stock Compensation Plans,” of the Notes toConsolidated Financial Statements in Item 8 of this report.

 

We file annual reports onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and otherinformation with the Securities and Exchange Commission (the “SEC”). The publiccan obtain copies of these materials by visiting the SEC’s Public ReferenceRoom at 100 F Street, NE, Washington DC 20549, or by calling the SEC at1-800-SEC-0330, or by accessing the SEC’s website at http://www.sec.gov. Inaddition, as soon as reasonably practicable after such materials are filed withor furnished to the SEC, we make copies available to the public free of chargeon or through our website at http://www.wgint.com. The information on ourwebsite is not incorporated into, and is not part of, this report.

 

We have adopted a Code ofBusiness Conduct and Ethics (the “Code”) which requires all employees, officersand directors of Washington Group International to act, at all times andplaces, as law-abiding, responsible and responsive citizens. The Code ispublished on our website at http://www.wgint.com under Corporate Information: 

 

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Investor Relations,Company Overview, Corporate Governance. A copy of the Code is available bycontacting us through our website under Investor Relations, or by writing tothe Investor Relations Department at the corporate headquarters.

 

Our principal executiveoffices are located at 720 Park Boulevard, Boise, Idaho 83712. Our telephonenumber is (208) 386-5000.

*** ***

**GENERAL**

 

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

 

•                  In providingengineering and design services, we participate in the conceptualization andplanning stages of projects that are part of our customers’ overall capitalprograms. We develop the physical designs and determine the technicalspecifications. We also devise project configurations to maximize bothconstruction and operating efficiency.

 

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

 

•                  On someprojects, we function as a construction manager, engaged by the customer tooversee other contractors’ compliance with design specifications andcontracting terms.

 

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

 

On some projects,particularly those of significant size and requiring specialized technology, wepartner with other firms, both to increase our opportunity to win the contractand to manage development and execution risk. Partners may include, amongothers, specialized process engineering firms, engineers, constructors,operations contractors or equipment manufacturers. These partnerships may bestructured as joint ventures or consortia, with each participating firm havingan economic interest relative to the scope of its work.

 

We enter into four basictypes of contracts with our customers:

 

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

 

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

 

•                  Under a “target-price”contract, we provide the customer with a total project at a target price agreedupon by the customer, subject to project circumstances and changes in scope.Should costs exceed the target within the agreed-upon scope, we will generallyabsorb a portion of those costs to the extent of our

 

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expected fee or profit;however, the customer reimburses us for the costs that we incur if costscontinue to escalate beyond our expected fee. An additional fee may be earnedif costs are below the target.

 

•                  Under a “cost-type”contract, a customer reimburses us for the costs that we incur (primarilymaterials, labor, overhead and subcontractor services), plus a fee. The feeportion of the contract may be a percentage of the costs incurred and/or may bebased on the achievement of specific performance incentives or milestones. Thefee portion may also be subject to a maximum. Engineering, constructionmanagement and environmental and hazardous substance remediation contracts,including most of our work for U.S. government customers, are typically awardedpursuant to a cost-type contract.

 

Some fixed-price contracts require the contractor toprovide a surety bond to its customer or a letter of credit. This generalindustry practice provides indemnification to the customer if the contractorfails to perform its obligations. Surety companies consider factors such ascapitalization, available working capital, past performance and managementexpertise to determine the amount of bonds they are willing to issue on behalfof a particular engineering and construction company.

 

We participate in construction joint ventures, oftenas sponsor and manager of projects, which are formed for the sole purpose ofbidding, negotiating and completing specific projects. We participate in twoincorporated mining ventures: MIBRAG mbH (“MIBRAG”), a company that operateslignite coal mines and power plants in Germany, and Westmoreland Resources,Inc. (“Westmoreland Resources”), a coal mining company in Montana.

 

**BACKGROUND**

 

We were originallyincorporated in Delaware on April 28, 1993 under the name Kasler HoldingCompany. In April 1996, we changed our name to Washington Construction Group,Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation andchanged our name to Morrison Knudsen Corporation. The purchase was structuredas a merger and was an integral part of a bankruptcy plan of reorganization. Wehave no remaining obligations under that plan of reorganization.

 

On March 22, 1999, we andBNFL Nuclear Services, Inc. (“BNFL”) acquired the government and environmentalservices businesses of CBS Corporation (now Viacom, Inc.). We refer to thesebusinesses, together with other government services operations, as the “GovernmentServices Business.” The Government Services Business currently makes up ourEnergy & Environment and Defense business units. See Note 15, “Acquisitionof BNFL’s Interest in Government Services Business,” of the Notes toConsolidated Financial Statements in Item 8 of this report for a discussionregarding our agreements to acquire BNFL’s 40 percent interest in a portion of theGovernment Services Business. BNFL no longer has any interest in our GovernmentServices Business.

 

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

 

On May 14, 2001, due tonear-term liquidity problems resulting from our acquisition of RE&C, wefiled for protection under Chapter 11 of the U.S. Bankruptcy Code. On December21, 2001, the bankruptcy court entered an order confirming the Second AmendedJoint Plan of Reorganization of Washington Group International, Inc., et al.,as modified (the “Plan of Reorganization”). The Plan of Reorganization becameeffective and we emerged from bankruptcy protection on January 25, 2002.

 

The U.S. Bankruptcy Courtfor the District of Nevada retains jurisdiction to interpret the Plan ofReorganization and to resolve outstanding claims and third party disputesrelating thereto. A reorganization plan committee (the “Plan Committee”) wasestablished by the bankruptcy court to evaluate claims of unsecured creditors,prosecute any disputed unsecured claims, determine each unsecured creditor’sdistribution under the Plan of Reorganization and generally monitorimplementation of the Plan of Reorganization.

 

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**BUSINESS UNITS**

 

We operate our businessthrough six business units, each of which comprises a separate reportablebusiness segment: Power, Infrastructure, Mining, Industrial/Process, Defenseand Energy & Environment.

 

***Power***

 

OurPower business unit specializes in engineering, design, construction,modification and maintenance of power generating facilities and the systemsthat transmit and distribute electricity. Customers include regulated andderegulated utilities, industrial co-generators, independent power producers,original equipment manufacturers (“OEMs”) and governments. These customersgenerate power in a wide variety of methods, including coal-, oil- andgas-fired power plants, combustion turbine in both simple cycle and combinedcycle configurations, nuclear power, hydroelectric power and waste-to-energy.We provide our services to customers in the United States and around the worldon target-price, fixed-price and cost-reimbursable bases, and the work we havepursued recently has reflected an array of commercial arrangements. (See Item1, “Business – General,” earlier in Part I of this report for a description oftypes of contracts and corresponding risks). The Power business unit provides a range of services that includes:

 

# ***Basic Services***

•                  General planning

•                  Siting and licensing

•                  Environmental permitting

•                  Engineering, procurement and construction,startup

•                  Expansion, retrofit, and modification

•                  Operations and maintenance

•                  Decontamination and decommissioning

 

# ***Basic Markets***

•                  New generation

•                  Combustion turbine (natural gas, oil)

•                  Coal

•                  Nuclear

•                  Other: waste-to-energy, biomass

 

•                  Modifications and maintenance

•                  Fossil: clean air retrofits

•                  Repowering

•                  Nuclear: major component replacement

•                  Maintenance: fossil and nuclear

 

•                  Engineering services

•                  Planning studies and ongoing operations forfossil and nuclear

•                  Transmission, distribution, substations

 

Overthe past year, the climate for power generation development has improvedconsiderably from the downturn suffered in 2002. Nevertheless, in the UnitedStates, deregulated and regulated power providers and independent producers arestill operating in a market heavily influenced by excess power reserves,extreme prices of oil and natural gas and the security of a fuel supplydependent on unpredictable international politics. The most significantpositive impact on the future of the power industry in the U.S. has been theelimination of a long-standing cloud of legislative uncertainty as a result ofCongress passing the Energy Policy Act of 2005 (“Energy Policy Act”) and theEnvironmental Protection Agency (“EPA”) promulgating two clean air regulations,the Clean Air Interstate Rule and the Clean Air Mercury Rule. Among the manyprovisions and goals of the Energy Policy Act are programs to stimulate moreadvanced and cleaner forms of power generation, emphasizing coal and nucleartechnologies. The EPA rules now have established clear attainment levels andprogressive timelines for sulfur oxides (“SOx”) and nitrous oxides (“NOx”)emissions in 25 states, plus the District of Columbia, and

 

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mercurylimits nationwide. Owners of power generation facilities now have bothgovernment support for investment in new capacity and a definitiveenvironmental direction to pursue.

 

Theinternational power industry is also emerging from a slow cycle of development.Economic growth demands in Asia, particularly in China, India and SoutheastAsia, are spawning new, but highly competitive, programs for capacityadditions. Environmental concerns in some regions - China, motivated by public image and agrowing internal green movement and Central and Eastern Europe, motivated bystandards for admission to the EEU - are stimulating clean air system retrofitprojects on older coal-fired plants. In North America, the high price of oil isstimulating the development of vast reserves embedded in Canadian oil sands,which ultimately may give U.S. generators a dependable and stable supply offuel for existing and future operations.

 

Recognizingboth the uncertainty of power industry dynamics and the potential forsignificant upside benefits from any of several markets, the Power businessunit has pursued a strategy to maintain its presence in all of its establishedmarkets while minimizing its exposure to long-term capital risk. In new powergeneration, we are limiting the opportunities we pursue to those we determinepose an acceptable level of risk, particularly with established customers. Thiswas the case in 2005, when our engineering, procurement and construction (“EPC”)performance on the first unit of a 550-megawatt (MW), combustion turbine,combined cycle power plant in Wisconsin led to an industry award as the bestgas-fired project of 2005 and a new contract to design and build an identicalunit at the same site. Work continues on the construction of a new coal-firedunit, also in Wisconsin, an EPC contract for two combined cycle units in PuertoRico, and the conversion of a plutonium reactor to a coal-fired plant inRussia.

 

Propelledby either the new EPA regulations, previously signed consent decrees,independent state legislation, or proactive owners, a substantial number oflarge system retrofits to control SOx and NOx have beenannounced or are under consideration. Washington Group International hassecured several new awards, including the retrofit of a selective catalyticreduction (“SCR”) system and a limited release for two flue gas desulfurization(“FGD”) systems at the same station in Michigan, EPC of another FGD system at aconfidential location in the U.S., and engineering for a large FGD system inthe oil sands region of Canada. We are also completing work on an EPC contractfor the retrofit of two FGD systems and an SCR system for a coal plant inWisconsin.

 

Theabundance of power supply in the United States, combined with the manifestationof electricity as a commodity, has forced most power suppliers to compete forthe sale of kilowatts and improve the efficiency of existing resources. Manynuclear plant owners are seeking extensions of existing licenses rather thandecommissioning units with up to 40 years of service or developing replacementcapacity. Among the most common life-extension strategies is the replacement ofsteam generators and reactor vessel heads. Through a 50 percent owned jointventure with Framatome-ANP, Inc., we specialize in these replacements and haveestablished ourselves as a leading competitor in the United States for thismarket. Following successful component replacements at nuclear plants inFlorida, South Carolina and Minnesota in 2004, we completed three additionalcomponent replacements in 2005 at nuclear plants in Florida, Missouri andArkansas, two of which set world records for short durations, and one receivedindustry recognition as the best nuclear project of 2005. Also in 2005, we wereawarded new replacement projects in California, Florida, and New Jersey, plus aconsulting assignment in Canada.

 

Thecompetitive nature of the power generation industry is developing a trendtoward stronger ties between customers seeking engineering solutions to improveoutput and contractors assuming the responsibility of in-house specialists. Weare engaged in several alliance-type relationships at various levels ofmaturity, including a pacesetting program that has established a full servicescontract for a total generation system that exceeds 11,000 MWs, and outsourcingagreements with two utilities in which we are providing engineering services asneeded at a total of more than 90 generating facilities.

 

The Power business unit, together with theInfrastructure business unit, is also involved in a contract with the U.S. ArmyCorps of Engineers (the “USACOE”) to provide a variety of design, engineeringand construction services to the Transatlantic Programs Center of the USACOE,throughout Central Asia, North Africa and the

 

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Middle East. The contract is an indefinite delivery/indefinite quantity(“ID/IQ”) contract that does not identify a specific quantity of services, butsets ceilings on the total amount of work that can be awarded to a companyduring the life of the contract. To date, we have been awarded ID/IQ contractsproviding for potential task order awards up to $3.1 billion for the Power andInfrastructure business units, including a $500 million ID/IQ contract forpower projects. Under the ID/IQ contracts, we bid for specific assignments tosupport the USACOE in Iraq and 24 other countries. Under the ID/IQ contracts,to date we have developed or refurbished over 700 MWs of generation capacity,and we are now building or rehabilitating transmission and distributionsystems. In 2005 new tasks supporting transmission and distribution needs wereauthorized. This work is expected to continue into 2007.

 

***Infrastructure***

 

Our Infrastructure business unit provides a full rangeof infrastructure services to clients globally, including project development,design-build-operate-maintain, consulting, engineering, design, projectmanagement, construction management, construction and operations andmaintenance. The Infrastructure business unit generally performs as a generalcontractor or as a joint venture partner with other contractors on domestic andinternational projects. Typically, consulting, engineering, design, projectmanagement, construction management and operations and maintenance typecontracts are performed on a cost-type basis, while design-build andconstruction contracts are performed on a fixed-price basis.

 

***Infrastructure serves both private andpublic sector customers across three major markets:***

*** ***

•                  *Rail and transit*: Design, construction, operation andmaintenance of light rail, subways, commuter/inter-city railroads, railroads,freight transport, people movers, bus rapid transit, electrification andmultimodal facilities. Our current significant projects in this market include:

 

•                  Hudson-BergenLight Rail Transit System: We are operating under a contract with a valueexceeding $860 million to design, build, operate and maintain the Hudson-BergenLight Rail Transit System in New Jersey. The design-build phase is scheduled tobe completed in 2006. The term of our contract to operate and maintain thesystem extends to 2011, with two five-year extension options.

 

•                  Metro Gold Line:A $600 million design/build contract for a six-mile-long extension to the MetroGold Line light rail system in Los Angeles. The contract was awarded by the LosAngeles Metropolitan Transportation Authority (“MTA”) to a joint venture led byus.

 

•                  *Highways and bridges*: Design and construction ofinterstates/freeways, arterial highways/streets, interchanges, bridges, tunnelsand intelligent transportation systems. The Infrastructure business unit hasmade the strategic decision to no longer participate in the public agencyhighway “construction only” market sector. The contract and change orderadministration practices of the client agencies, together with an increase inthe number of smaller local bidders has lowered available margins tounacceptable levels. Our significant projects in this market include:

 

•                  SR-125: A jointventure led by us to design and build the 10-mile privately-funded toll roadsection of the public-private State Route 125 South Expressway project in SanDiego, California and a 3.5-mile publicly-funded segment of State Route 125with a total value of approximately $380 million.

 

•                  I-215/I-515Interchange: A $91 million contract with the Nevada Department ofTransportation to construct an interchange and six-lane connector near LasVegas which was substantially completed during 2005.

 

•                  I-215/91/60Riverside Interchange: A joint venture led by us to perform a design sequencecontract  to upgrade and widen a 7.8 milesection of I-215 and connecting highways for the California Department ofTransportation in Riverside, California with an approximate value of $220million.

 

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We recognized losses onall three of these projects during 2005. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations – 2005 Compared to 2004 – Infrastructure,” in item 7 ofthis report.

 

•                  *Water resource and hydropower*: Design and construction ofhydroelectric power, water supply, flood control, locks and dams, irrigationand drainage, hydraulic structures and environmental and safety analysis. Asignificant project in this market includes:

 

•                  Olmsted Dam: A$620 million cost-reimbursable-plus-base-and-award-fee joint venture for theconstruction of a 2,700-foot concrete dam across the lower Ohio River awardedin January 2004.

 

The Infrastructurebusiness unit is also jointly involved with the Power business unit in our workfor the USACOE providing design, engineering and construction services in theMiddle East. Infrastructure participated in the development and refurbishmentof 700MWs of generation capacity and building or rehabilitating transmissionand distribution systems. Infrastructure has also been awarded water and sewerrehabilitation projects in Iraq and other construction projects in the region.

 

We anticipate growth in domestic infrastructuremarkets. Federal highway funding is subject to authorization from the Safe,Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users(“SAFETEA-LU”) and is expected to provide long-term funding. State tax revenuesare anticipated to increase, which will provide for matching funds for capitalprograms as well. Increased funding for projects will be adversely effected byhigher commodity prices in fuel, steel and lumber. Certain markets continue tohave viable projects and the design-build method of delivery, with its relianceon private capital and potential opportunities for public-private partnerships,continues to grow in popularity.

 

***Mining***

 

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

 

Currently, the Miningbusiness unit is providing services to the phosphate industry in Canada and theUnited States, coal mines in the United States and Germany, silica and ballastquarry operations in the United States, a silver, zinc and lead mine in Boliviaand gold mines in the United States and Mexico. Mining contracts are typicallyone to ten years in length that are normally renewed in subsequent biddingcycles throughout the useful life of the mine, which can typically range from 5to 30 years. Mining contracts are generally fixed-unit price, cost-type, ortarget price.

 

In addition to the Miningbusiness unit’s contracted services, we hold ownership interests in two miningventures:

 

•                  MIBRAG (50percent) is located in Germany and operates two surface lignite coal mines thatprovide lignite to two utility-owned power generation plants, as well as smallcommercial plants and three company-owned power plants. Power generated by thecompany-owned plants is primarily utilized by the mining operations and surpluspower is sold at wholesale to the utilities. The mines have lignite reservesand contracts in place for 20 to 40 years of supply. Because of thesignificance of MIBRAG to our results of operations for the year ended December30, 2005, the financial statements of MIBRAG have been included in this reporton Form 10-K as Exhibit 99.1

 

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•                  WestmorelandResources (20 percent) is a Montana surface coal mine providing sub-bituminouscoal to utilities in the upper Midwest.

 

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

 

***Industrial/Process***

 

Our Industrial/Processbusiness unit is a single-source provider of integrated engineering,construction, operations, maintenance, logistics and program managementservices. A key component of Industrial/Process’ approach is close alignmentwith its clients to support their business objectives and develop long-term,value-added partnerships and to balance the markets we serve in order toeffectively deal with economic cycles that impact industrial and consumerspending.

 

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

 

Organized in fourdivisions, the Industrial/Process business unit is focused on the followingstrategic areas: Life Sciences, Facility Management, Industrial Services andOil, Gas and Chemicals.

 

•                  *Life Sciences.* Our Life Sciences division provides design,engineering, construction, validation and maintenance services to thebiotechnology and pharmaceutical industries. An integrated delivery platform isprovided in the areas of biologics, chemical synthesis, dosage form and devisemanufacturing to create innovative production solutions.

 

Current Clients includeAmgen, Sanofi-Pateur, Pfizer, Schering Plough, Merck, Eli Lilly, Johnson &Johnson, Novartis and Wyeth.

 

•                  *Facility Management.* Our Facility Management divisionprovides life-cycle services allowing our customers to focus on core businessactivities. As a facility management market leader for industrial customers, weoffer management solutions that include operations, production maintenance andfacility management across a diverse set of industries to customers seeking tooutsource non-core business functions.

 

Customers include manylong-term clients such as Caterpillar, DuPont, IBM, Nissan, Micron andTektronix.

 

•                  *Industrial Services.* Our Industrial Services divisionprovides life-cycle services, including design, engineering, construction,quality assurance, logistics and quality programs, for the automotive,manufacturing, food, consumer product and the pulp and paper industries.

 

In the automotive markets,clients include General Motors, Ford, Daimler/Chrysler and Hyundai.

 

We have long-termalliance partnerships with Anheuser-Busch, Kraft and General Mills/Pillsbury inthe foods market. We provide facility and process design solutions forbreweries and producers of baked goods, cake mix, cereal, prepared entrees,snack foods, soups and yogurt.

 

•                  *Oil, Gas & Chemicals.* The Oil, Gas & Chemicalsdivision provides services to several markets, including oil production, gastreating, gas monetization, gas storage, refineries and bulk/specialtychemicals producers. Our services span a wide range of offerings includingengineering, procurement, construction and operations and maintenance.

 

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Customers includeExxonMobil, ConocoPhillips, ChevronTexaco, BP, Qatar Petroleum, DuPont,Burlington Resources, El Paso, Dow Corning, PolyOne and ADNOC among others.

 

***Defense***

 

The structure of theDefense business unit is matched to the needs of our major customer, the U.S.government, and, more specifically, the Departments of Defense, State andHomeland Security. Our Defense business unit manages, integrates and deliverslife-cycle services for domestic and international programs under threemarkets: Threat Reduction, Defense Infrastructure Services and HomelandSecurity.

 

•                  *Threat Reduction.* Threat Reduction focuses on globalproliferation prevention and elimination of CBRNE (chemical, biological,radiological, nuclear and high explosives) materials and weapon systems.  We are a global leader in the elimination ofchemical weapons and agents. We provide demilitarization services to federalclients, including chemical and biological warfare material elimination andnuclear weapons delivery systems disarmament. This market includes support forthe Department of Defense in the destruction of the United States chemicalweapons stockpile, as the system contractor for three of the U.S. Army’s fourincineration-based chemical weapons destruction thermal facilities.Additionally, we purchase equipment for all of the Army’s sites. We are alsoresponsible for the start-up, pilot plant testing, operations and maintenanceand closure of two additional neutralization-based plants dealing with intactchemical weapons. All of these facilities are designed to destroy chemicalweapons that have been stored for many years in underground bunkers.****In 2005, we expanded our chemical weapons demilitarizationactivities to the destruction of stockpiles in Albania.

 

We also providedemilitarization services, funded by the U.S. government, to the former SovietUnion, and have been awarded significant participation in the CooperativeThreat Reduction Integrated Contract in that area. This contract is financed bythe United States to prevent proliferation of and safely eliminate weapons ofmass destruction located in the former Soviet Union. Work performed includeselimination of strategic missiles and related delivery systems and conversionof the Seversk, Russia plutonium production facility into a peacetimeelectrical power production plant. We also were selected to assist theAzerbaijan and Uzbekistan governments in establishing weapons of massdestruction material detection and interdiction capabilities.

 

A major objective ofThreat Reduction is optimizing the value of existing contracts. Since we havenow exhausted major domestic chemical demilitarization opportunities, ourbusiness development efforts are focused on evaluating adjacent marketopportunities and selecting higher probability market sectors for developmentand penetration in the U.S. and abroad.

 

•                  *Defense Infrastructure Services.* Defense InfrastructureServices principally addresses Department of Defense needs, offering operationservices, management/technical services and EPC services with an objective ofreducing their risk in mission execution due to infrastructure vulnerabilities.We support the Department of Defense entities and agencies that operate ormaintain major facilities, providing classified and unclassified architectural engineeringservices and engineering, procurement and construction services. These sameservices are provided to the Department of State and various intelligenceagencies of the U.S. government. In late 2005, our team was one of six teamsnamed to provide a wide range of support services under a $10 billion ID/IQ,rapid response contract to the U.S. Air Force.

 

•                  *Homeland Security.* Homeland Security provides integrated solutions that reducevulnerability to terrorist acts or similar hostile acts and that mitigate theconsequences of such acts, with emphasis on high-value security systems, forceprotection and emergency response services. We provide threat analysis andmitigation services to a variety of clients. We support one of the nation’shighest priorities, the security of our nation and the safety of United Statescitizens abroad. The market and demand for our services are principally derivedfrom federal requirements and include funding estimates for 17 federal agencies(including defense activities). With the creation of the Department of HomelandSecurity, we devote our

 

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considerable experiencein security research and technologies to compete for resulting business. We arepursuing multiple opportunities for securing transportation systems, includingenhanced security at ports of entry and military bases, improved security ofoffshore transport systems and improved intelligence and data mining for earlythreat identification. In 2005, Washington Group International became the firstcompany certified by the U.S. Department of Homeland Security to provideanti-terrorism services for cargo-container facilities at ports in the UnitedStates.

 

The Defense business unitapplies our comprehensive skills to create cost-effective solutions tooperational challenges, drawing resources from all of our business units. Suchintegration is essential to successfully compete in existing and emergingmarkets. We perform virtually all Defense work on a cost-plus-fee basis.

 

***Energy& Environment***

 

Our Energy &Environment business unit provides services to the U.S. Department of Energy,which is responsible for maintaining the nation’s nuclear weapons stockpile,performing legacy environmental cleanup and remediation, and leading thedevelopment of next generation nuclear power. The services provided includeconstruction, contract management, supply-chain management, quality assurance,waste management, facilities management, decontamination and decommissioning,environmental cleanup and restoration services. Energy & Environment provides safety management consulting and wasteand environmental technology, engineered products, including radioactive wastecontainers and technical support services.

 

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

 

The Energy &Environment business unit primarily services the U.S. Department of Energy inthe environmental management market segment, while also serving the NationalNuclear Security Agency by managing nuclear operations and the Department ofDefense in selected engineering, design, construction, environmental cleanupand remediation projects. There are currently three market units within Energy& Environment: Management Services, Projects and Consulting Services. Weare positioning a fourth market unit, International, to provide the services ofthe existing three market units to international customers, primarily in theUnited Kingdom.

 

•                  *Management Services.* The Management Services market unit focuses on Department of Energy sitemanagement and support contracts, under which key personnel are supplied toeffectively manage existing site operations, infrastructure and humanresources. Our current emphasis is managing complex, high-hazard facilities andoperations using our experience in technology, commercial nuclear operations,safety and operations in a regulatory environment.

 

Management Services haslong-term management contracts with the Department of Energy. We serve threemajor programs within the Department of Energy, Environmental Management,Science and the National Nuclear Security Agency. The Environmental Managementprogram consists of the environmental cleanup activities (radioactive andhazardous waste), resulting from the U.S. government’s nuclear weapons program.Our key existing contracts include the Savannah River Site in South Carolina,the West Valley Nuclear Services Site in New York, Idaho Cleanup Project inIdaho, River Corridor Project in Washington and the Waste Isolation PilotProject in New Mexico. The Science program consists of facility andinfrastructure management, such as our contract at the Idaho NationalLaboratory. The National Nuclear Security Agency consists of the Department ofEnergy’s defense programs and weapons production activities, such as ourcontracts at Los Alamos National Laboratory and production facilities at theSavannah River Site. These contracts range in term from five to ten years andmay include options to renew for up to five years.

 

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•                  *Projects.* The Projects market unit provides life-cycleservices to the Department of Energy and its prime contractors, as well as toother U.S. government agencies. We utilize our skills in environmentalremediation, design of complex high-hazard facilities and constructioncapability to service this market.  TheProjects market unit provides nuclear and high-hazard facility engineering,procurement and construction; nuclear and high-hazard facility deactivation,decommissioning, decontamination and dismantlement; and environmentalcharacterization, design and remediation. The Projects market also includesmid-level design, construction and environmental projects for the Department ofDefense.

 

The Projects market unitoffers a broad portfolio of services and technologies to the Department ofEnergy, the Department of Defense and the Environmental Projection Agency, withfive distinct clients within the agencies. In the Department of Energy, we serve Environmental Management and the NationalNuclear Security Agency. In the Department of Defense, our customers includethe U.S. Air Force Center for Environmental Excellence (“AFCEE”), the USACOEand the U.S. Navy Facilities Engineering Command.  The Defense and Infrastructure business unitsare executing AFCEE contracts in Iraq.

 

•                  *Consulting Services*. Consulting Services provides services to most Department of Energysites. These services are also sold to other governmental agencies orcommercial clients. The core products and services include safety analysis,regulatory services, criticality and radiological engineering, safeguards andsecurity management and environmental services. We self-perform for our sites,support other sites and are equipped to provide services throughout the lifecycle of a project.

 

Consulting Services isprimarily concentrated in the Washington Safety Management Solutions LLC.  Washington Safety Management Solutions LLCtakes the expertise developed through our experience in the Department of EnergyManagement Services business and develops programs that are utilized at otherDepartment of Energy and governmental sites and with commercial clients. TheDepartment of Energy facilities are our principal customers.

 

•                  *International.*  TheInternational market unit addresses new markets for our core services in theUnited Kingdom, which is actively seeking such services to address theirenvironmental legacies. We are currently providing cleanup support to severalsites in the United Kingdom and are supporting project work with the AtomicWeapons Establishment. We believe we are well-positioned to compete for thiswork given our experience and the scope of our projects in the hazardousenvironmental management field in the United States.

 

For financial informationabout each of our business units, geographic areas in which we operate, andadditional disclosures, see “Management’s Discussion and Analysis of FinancialCondition and Results of Operations -Business Unit Results” in Item 7 of this report and Note 11, “OperatingSegment, Geographic and Customer Information,” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

**MATERIAL CUSTOMERS**

 

During 2005, ten percentor more of our total consolidated revenue was derived from contracts andsubcontracts performed by the Power, Infrastructure, Industrial/Process,Defense and Energy & Environment business units for the followingcustomers:

 
| ** **             | ** ** | **Percent of Consolidated Revenue** | ** ** |
|------------------------|------------|-------------------------------------|------------|
| Department  of Defense |       | 29                                  | %          |
| Department  of Energy  |       | 19                                  | %          |

 

Although we presentlyhave positive relationships with the Department of Defense and the Departmentof Energy, the loss of these customers, or significant reductions in governmentfunding, could have a material adverse effect primarily on our Defense andEnergy & Environment business units as well as on our company as a whole.The percentage of total consolidated revenue derived from the Department ofDefense decreased from 37

 

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percent in 2004 to 29percent in 2005, primarily due to the reduction****ofrevenue from work in the Middle East. See Item 1A, “Risk Factors,” later inthis report.

 

**GOVERNMENT CONTRACTS AND BACKLOG**

 

Government fundedcontracts continue to be a significant part of our business.****We derived 51 percent of our consolidated operating revenuein 2005 from contracts with the U.S. government, including 12 percent from workperformed in Iraq. We also have a number of U.S. government contracts thatextend beyond one year and for which government funding has not yet beenapproved. All U.S. government contracts and some foreign contracts are subjectto unilateral termination at the convenience of the customer.

 

Backlog represents thetotal value of all awarded contracts that have not been completed and will berecognized as revenue or as equity in income over the life of the project.Backlog includes our proportionate share of construction joint venturecontracts and the uncompleted portions of mining contracts and ventures for thenext five years. Backlog for government contracts includes only two years’worth of the portions of such contracts that are currently funded or that weare highly confident will be funded. The reported backlog excludesapproximately $2.9 billion of government contracts in progress for work to beperformed beyond December 2007 and $0.7 billion for mining contracts beyondfive years.

 

We have ID/IQ contractsthat are signed contracts under which we perform work only when the clientissues specific task orders. The terms of these contracts include a maximumcontract value and a specified time period that may include renewal optionperiods at the client’s discretion. While we believe that we will continue toreceive work over the entire term, because of the uncertainty of the renewalsand our dependence on the issuance of individual task orders for new projects,we cannot be assured that we will ultimately realize the maximum contract valuefor any particular contract. Only those task orders that are signed and fundedare included in backlog.

 

Backlog at December 30,2005 totaled $4.9 billion compared with backlog of $4.0 billion at December 31,2004. Approximately $2.0 billion of the backlog at December 30, 2005 wascomprised of U.S. government contracts that are subject to termination by thegovernment, $1.4 billion of which had not yet been funded. Historically, wehave not experienced significant reductions in funding of U.S. governmentcontracts once they have been awarded. Terminations for the convenience of thegovernment generally provide for recovery of contract costs and relatedearnings. Approximately $2.4 billion, or 50 percent, of backlog at December 30,2005 is expected to be recognized as contract revenue or as equity in income in2006, compared to $2.1 billion, or 53 percent, at December 31, 2004.

 

Although backlog reflectsbusiness that we consider to be firm, cancellations or scope adjustments mayoccur.

 
| **Composition of backlog**                  | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In  millions)**                          | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Cost-type  and target-price contracts       |       | $                     | 3,465.8    |                  | 71         | % | $ | 2,568.1 |   | 64 | % |
| Fixed-price  and fixed-unit-price contracts |       | 1,414.5               |       | 29                    | %          | 1,436.0 |   | 36 | % |
| Total  backlog                              |       | $                     | 4,880.3    |                  | 100        | % | $ | 4,004.1 |   | 100 | % |

 

For additionalinformation about backlog of our business units, see “Managements Discussionand Analysis of Financial Condition and Results of Operations – Business UnitNew Work and Backlog” in Item 7 of this report.

 

**COMPETITION**

 

We are engaged in highlycompetitive businesses in which customer contracts are typically awardedthrough competitive bidding processes. We compete based primarily on price,reputation and reliability with other general

 

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and specialtycontractors, both foreign and domestic, including large international contractorsand small local contractors. Success or failure in our lines of business is, inlarge measure, based upon the ability to compete successfully for contracts andto provide the engineering, planning, procurement, construction, operations andproject management and project financing skills required to complete them in atimely and cost-efficient manner. Some competitors have greater financial andother resources than we do, which, in some instances, could give them acompetitive advantage over us.

 

**EMPLOYEES**

 

Our global employmentvaries widely with the volume, type and scope of operations at any given time.At December 30, 2005, we employed approximately 23,900 employees. Approximately15 percent of our employees are covered either by one of our regional laboragreements, which expire between June 2006 and June 2007, or by specificproject labor agreements, each of which expires upon completion of the relevantproject.

 

**RAW MATERIALS**

 

We can purchase most ofthe raw materials and components necessary to operate our businesses fromnumerous sources. However, the price and availability of raw materials andcomponents may vary widely from year to year due to customer demand, productioncapacity, market conditions and material shortages. We do not anticipate anyunavailability of raw materials or components that would have a materialadverse effect on our businesses in the foreseeable future.

 

**ENVIRONMENTAL MATTERS**

 

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

 

We are subject to risksof liability under federal, state and local environmental laws and regulations,as well as common law. These laws and regulations and the risk of attendantlitigation can cause significant delays to a project and add significantly toits cost. Violations of these laws and regulations could subject us to civiland criminal penalties and other liabilities, including liabilities for propertydamage, costs of investigation and cleanup of hazardous or toxic substances onproperty currently or previously owned by us or arising out of our current andpast remediation, waste management and contract mining activities.

 

For additionalinformation regarding environmental matters, see Item 1A, “Risk Factors,” laterin this report.

 

**ITEM 1A.  RISK FACTORS**

 

We are subject to anumber of risks, including those enumerated below. Any or all of these riskscould have a material adverse effect on our business, financial condition,results of operations and cash flows and on the market price of our commonstock. See also “Note Regarding Forward-Looking Information” earlier in Part Iof this report.

 

***Thedocuments governing our indebtedness restrict our ability and the ability ofsome of our subsidiaries to engage in some business transactions.***

 

On October 9, 2003, we obtained a senior securedrevolving credit facility (the “Credit Facility”), which provides for up to$350 million of loans and other financial accommodations. On June 14,2005, we amended the

 

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Credit Facility toprovide for improved pricing and terms. The credit agreement governing theCredit Facility restricts or places certain limits on our ability and theability of some of our subsidiaries to, among other things:

 

•      incur or guarantee additionalindebtedness;

 

•      declare or pay dividends on, redeem orpurchase capital stock;

 

•                  makeinvestments;

 

•                  incur or permitliens to exist;

 

•                  enter intotransactions with affiliates;

 

•                  make materialchanges in the nature or conduct of our business;

 

•                  merge orconsolidate with, or acquire substantially all of the stock or assets of, othercompanies;

 

•                  transfer or sellassets; and

 

•                  engage insale-leaseback transactions.

 

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

 

Our failure to complywith obligations under the Credit Facility could result in an event of defaultunder the facility. A default, if not cured or waived, could permitacceleration of any outstanding indebtedness. We cannot be certain that we willbe able to remedy any default. If our indebtedness is accelerated, we cannot becertain that we will have funds available to pay the accelerated indebtednessor that we will have the ability to refinance the accelerated indebtedness onterms favorable to us or at all.

 

***Weare engaged in highly competitive businesses and must typically bid against competitorsto obtain engineering, construction and service contracts.***

 

We are engaged in highlycompetitive businesses in which customer contracts are typically awardedthrough competitive bidding processes. We compete with other general andspecialty contractors, both foreign and domestic, including large internationalcontractors and small local contractors. Some competitors have greaterfinancial and other resources than we do, which, in some instances, could givethem a competitive advantage over us.

 

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

 

We are party to severalregional labor agreements that expire between June 2006 and June 2007, as wellas project-specific labor agreements that commit us to use union buildingtrades on certain projects. If the industry were unable to negotiate with anyof the unions, it could result in strikes, work stoppages or increasedoperating costs as a result of higher than anticipated wages or benefits. Ifthe unionized workers engage in a strike or other work stoppage, or otheremployees become unionized, we could experience a disruption of our operationsand higher ongoing labor costs, which could adversely affect portions of ourbusinesses and our financial position, results of operations and cash flows.See Item 1 “Business - Employees” earlier in Part I of this report.

 

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***Oursuccess depends on attracting and retaining qualified personnel in acompetitive environment.***

 

We are dependent upon ourability to attract and retain highly qualified managerial, technical andbusiness development personnel. Competition for key personnel is intense. Wecannot be certain that we will retain our key managerial, technical andbusiness development personnel or that we will attract or assimilate keypersonnel in the future. Failure to retain or attract such personnel couldadversely affect our businesses, financial position, results of operations andcash flows.

 

***Economicdownturns and reductions in government funding could have a negative impact onour businesses.***

 

Demand for the servicesoffered by us has been, and is expected to continue to be, subject tosignificant fluctuations due to a variety of factors beyond our control,including economic conditions. During economic downturns, the ability of bothprivate and governmental entities to make expenditures may declinesignificantly. We cannot be certain that economic or political conditions willbe generally favorable or that there will not be significant fluctuationsadversely affecting our industry as a whole or key markets targeted by us. Inaddition, our operations are, in part, dependent upon government funding. Significantchanges in the level of government funding could have an unfavorable impact onour business, financial position, results of operations and cash flows.

 

***Ourfixed-price contracts subject us to the risk of increased project costs.***

 

Our fixed-price contractsinvolve risks relating to our inability to receive additional compensation inthe event the costs of performing those contracts prove to be greater thananticipated. Our cost of performing the contracts may be greater thananticipated due to uncertainties inherent in estimating contract completioncosts, contract modifications by customers resulting in claims, failure ofsubcontractors and joint venture partners to perform and other unforeseenevents and conditions. At December 30, 2005, approximately 29 percent, or $1.4billion, of our backlog represented fixed-price and fixed-unit-price contracts.Any one or more of these risks could result in reduced profits or increasedlosses on a particular contract or contracts.

 

***TheU.S. government can audit and disallow claims for compensation under ourgovernment contracts and can terminate those contracts without cause.***

 

Government contracts,primarily with the U.S. Departments of Energy and Defense, are, and areexpected to continue to be, a significant part of our business. We derivedapproximately 51 percent of our consolidated revenue in 2005 from contractsfunded by the U.S. government. Allowable costs under government contracts aresubject to audit by the U.S. government. To the extent that these audits resultin determinations that costs claimed as reimbursable are not allowable costs orwere not allocated in accordance with federal government regulations, we couldbe required to reimburse the U.S. government for amounts previously received.In addition, if we were to lose and not replace our revenue generated by one ormore of the U.S. government contracts, our businesses, financial condition,results of operations and cash flows could be adversely affected.

 

We have a number ofcontracts and subcontracts with agencies of the U.S. government, principallyfor environmental remediation, restoration and operations work, which extendbeyond one year and for which government funding has not yet been approved. Wecannot be certain that funding will be approved. All contracts with agencies ofthe U.S. government and some commercial and foreign contracts are subject tounilateral termination at the convenience of the customer. In the event of atermination, we would not receive projected revenue or profits associated withthe terminated portion of those contracts.

 

In addition, governmentcontracts are subject to specific procurement regulations, contract provisionsand a variety of other socioeconomic requirements relating to the formation,administration, performance and accounting for these contracts. Many of thesecontracts include express or implied certifications of compliance withapplicable laws and contract provisions. As a result of our governmentcontracting, claims for civil or criminal fraud may be brought by thegovernment for violations of these regulations, requirements or statutes. Wemay also be subject to *qui tam*litigation brought by private individuals on behalf of the government under theFederal Civil False Claims Act, which could include claims for up to trebledamages. Further, if we fail to comply

 

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with any of theseregulations, requirements or statutes, our existing government contracts couldbe terminated, we could be suspended from government contracting orsubcontracting, including federally funded projects at the state level and ourability to participate in foreign projects funded by the U.S. government couldbe adversely affected. If one or more of our government contracts are terminatedfor any reason, or if we are suspended from government work, we could suffer asignificant reduction in expected revenue.

 

***Ourdependence on one or a few customers could adversely affect us.***

 

One or a few clients havein the past and may in the future contribute a significant portion of ourconsolidated revenue in any one year or over a period of several consecutiveyears. In 2005, approximately 29 percent of our revenue was from the U.S.Department of Defense and approximately 19 percent of our revenue was from theU.S. Department of Energy. As our backlog frequently reflects multiple projectsfor individual clients, one major customer may comprise a significantpercentage of our backlog at any point in time. For example, the U.S.Department of Defense, with which we have 72 contracts, represented anaggregate of 25 percent of our backlog at December 30, 2005, and the U.S.Department of Energy, with which we have 127 contracts, represented anaggregate of 21 percent of our backlog at December 30, 2005.

 

Because these significantcustomers generally contract with us for specific projects, we may lose thesecustomers from year to year as their projects with us are completed. If we donot replace them with other customers or other projects, our business could bematerially adversely affected.

 

Additionally, we havelong-standing relationships with many of our significant customers. Ourcontracts with these customers, however, are on a project-by-project basis, andthe customers may unilaterally reduce or discontinue their purchases at anytime. The loss of business from any one of such customers could have a materialadverse effect on our business or results of operations.

 

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

 

As of December 30, 2005,our backlog was approximately $4.9 billion. We cannot assure that the revenueprojected in our backlog will be realized or, if realized, will result inprofits. Projects may remain in our backlog for an extended period of timeprior to project execution and, once project execution begins, it may occurunevenly over the current and multiple future periods. Although we have notexperienced any significant cancellations, project terminations, suspensions orreductions in scope, these could occur from time to time with respect tocontracts reflected in our backlog. Such backlog reductions would adverselyaffect the revenue and profit we actually receive from contracts reflected inour backlog.

 

***Ourbusinesses involve many project-related and contract-related risks.***

 

Our businesses aresubject to a variety of project-related risks, including changes in politicaland other circumstances, particularly since contracts for major projects are performedover extended periods of time. These risks include the failure of applicablegoverning authorities to take necessary actions, opposition by third parties toparticular projects and the failure by customers to obtain adequate financingfor particular projects. Due to these factors, losses on a particular contractor contracts could occur, and we could experience significant changes inoperating results on a quarterly or annual basis.

 

We may also be adverselyaffected by various risks and hazards, including industrial accidents, labordisputes, geological conditions, environmental hazards, acts of terrorism orwar, weather and other natural phenomena such as earthquakes and floods.

 

***Ourdependence on subcontractors and equipment manufacturers could adversely affectus.***

 

We rely on third-partysubcontractors as well as third-party equipment manufacturers to complete ourprojects. To the extent that we cannot engage subcontractors or acquireequipment or materials, our ability to

 

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complete a project in atimely fashion or at a profit may be impaired. If the amount we are required topay for these goods and services exceeds the amount we have estimated inbidding for fixed-price, fixed-unit-price or target-price contracts, we couldexperience losses in the performance of these contracts. In addition, if asubcontractor or a manufacturer is unable to deliver its services, equipment ormaterials according to the negotiated terms for any reason, including thedeterioration of its financial condition, we may be required to purchase theservices, equipment or materials from another source at a higher price. Thismay reduce the profit to be realized or result in a loss on a project for whichthe services, equipment or materials were needed.

 

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

 

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

 

***Thesuccess of our joint ventures is dependent on the performance of our jointventure partners of their contractual obligations.***

 

We enter into variousjoint ventures as part of our engineering and construction business and projectspecific joint ventures. Success of these joint ventures depends largely on thesatisfactory performance by our partners of their contractual obligations. Ifour joint venture partners fail to perform their contractual obligations as a resultof financial or other difficulties, we may be required to make additionalinvestments and provide additional services to ensure the adequate performanceand delivery of the contracted services. These additional obligations couldresult in reduced profits or in losses for us.

 

***Ourinternational operations involve special risks.***

 

We pursue projectopportunities internationally through foreign and domestic subsidiaries as wellas through agreements with domestic and foreign joint venture partners. Our internationaloperations accounted for approximately 22 percent of our revenue in 2005,including 12 percent from work performed in Iraq. Our foreign operations aresubject to special risks, including:

 

•      unstable political, economic, financialand market conditions;

 

•      potential incompatibility with foreignjoint venture partners;

 

•      foreign currency controls andfluctuations;

 

•      trade restrictions and governmentalregulations;

 

•      restrictions on repatriating foreignprofits back to the United States;

 

•      increases in taxes;

 

•      civil disturbances and acts of terrorism,violence or war in the United States or elsewhere; and

 

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

 

I-18

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Events outside of ourcontrol may limit or disrupt operations, restrict the movement of funds, resultin the deprivation of contract rights, increase foreign taxation or limitrepatriation of earnings. In addition, in some cases, applicable law and jointventure or other agreements may provide that each joint venture partner isjointly and severally liable for all liabilities of the venture.

 

***Ourinternational operations may require our employees or subcontractors to travelto high security risk countries, which may result in employee injury,repatriation costs or other unforeseen costs.***

 

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

 

***Wecould be subject to liabilities as a result of our performance.***

 

The nature of ourengineering and construction businesses exposes us to potential liabilityclaims and contract disputes that may reduce our profits.

 

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

 

***Wecould be subject to liability under environmental laws and regulations.***

 

We are subject to avariety of environmental, health and safety laws and regulations governing,among other things, discharges to air and water, the handling, storage anddisposal of hazardous or solid waste materials and the remediation of contaminationassociated with releases of hazardous substances. These laws and regulationsand the risk of attendant litigation can cause significant delays to a projectand add significantly to its cost. Violations of these environmental, healthand safety laws and regulations could subject us and our management to civiland criminal penalties and other liabilities. These laws and regulations maybecome more stringent, or be more stringently enforced, in the future.

 

Various federal, stateand local environmental laws and regulations, as well as common law, may imposeliability for property damage and costs of investigation and cleanup ofhazardous or toxic substances on property currently or previously owned by usor arising out of our waste management or environmental remediation activities.These laws may impose responsibility and liability without regard to knowledgeof or causation of the presence of contaminants. The liability under these lawsis joint and several. We have potential liabilities associated with our pastwaste management and contract mining activities and with our current and priorownership of various properties.

 

***Changesin environmental laws, regulations and programs, could reduce demand for ourenvironmental services, which could negatively impact our revenue.***

 

Our environmentalbusiness is driven by federal, state, local and foreign laws, regulations andprograms related to pollution and environmental protection. Accordingly, arelaxation or repeal of these laws and regulations, or changes in governmentalpolicies regarding the funding, implementation or enforcement of these

 

I-19

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programs, could result ina decline in demand for environmental services that could negatively impact ourrevenue.

 

***Expirationof the Price-Anderson Act’s indemnification authority could have adverseconsequences on our Power and Energy & Environment business units.***

 

Our Power and Energy& Environment business units provide engineering, construction andoperations and maintenance services in the nuclear power market, andapproximately 20 percent of our backlog is derived from nuclear services. ThePrice-Anderson Act promotes and regulates the nuclear power industry in theUnited States. It comprehensively regulates the manufacture, use and storage ofradioactive materials and promotes the nuclear power industry by offering broadindemnification to nuclear power plant operators and certain Department ofEnergy contractors like us. While the Price-Anderson Act’s indemnificationprovisions are broad, it has not been determined whether they apply to allliabilities that might be incurred by a radioactive materials cleanupcontractor. The Price-Anderson Act’s provisions with respect to indemnificationof Department of Energy contractors under newly signed contracts extend throughDecember 31, 2006. Congress has extended the expiration date of the Act in thepast, and it is expected that it will extend the expiration date beyondDecember 31, 2006. Our business units could be adversely affected if thePrice-Anderson Act is not extended beyond December 31, 2006 due to either theunwillingness of plant operators to retain us or our inability to obtainadequate indemnification and insurance because of the unavailability of theprotections of the Price-Anderson Act.

 

***Actualresults could differ from the estimates and assumptions used to prepare ourfinancial statements.***

 

In order to preparefinancial statements in conformity with accounting principles generallyaccepted in the United States of America, our management is required to makeestimates and assumptions as of the date of the financial statements. Theseestimates and assumptions affect the reported values of assets, liabilities,revenue and expenses and disclosure of contingent assets and liabilities. Areasrequiring significant estimates by our management include:

 

•                  determination ofnew work awards and backlog;

 

•                  recognition ofcontract revenue, costs, profit or losses in applying the principles ofpercentage-of-completion accounting;

 

•                  recognition ofrecoveries under contract change orders or claims;

 

•                  collectibilityof billed and unbilled accounts receivable and the need and amount of anyallowance for doubtful accounts;

 

•                  the amount ofreserves necessary for self-insured risks;

 

•                  thedetermination of liabilities under pension and other post-retirement benefitprograms;

 

•                  estimatedamounts for expected project losses, reclamation costs, warranty costs or othercontract closing costs;

 

•                  recoverabilityof goodwill and other intangible assets;

 

•                  provisions forincome taxes and any related valuation allowances; and

 

•                  accruals forother estimated liabilities, including litigation reserves.

 

I-20

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***Ouruse of percentage-of-completion accounting could result in a reduction orelimination of previously reported profits.***

 

As more fully discussedin “Management’s Discussion and Analysis of Financial Condition and Results ofOperations - Overview” in Item7 of this report and in Note 2, “Significant Accounting Policies,” of the Notesto Consolidated Financial Statements in Item 8 of this report, a substantialportion of our revenue is recognized using the percentage-of-completion methodof accounting. Generally, the percentage-of-completion accounting practices weutilize result in our recognizing contract revenues and earnings ratably, basedon the proportion of costs incurred to total estimated contract costs or on theproportion of labor hours or labor costs incurred to total estimated laborhours or labor costs. For certain long-term contracts, completion is measuredon estimated physical completion or units of production.

 

The cumulative effect ofrevisions to contract revenue and estimated completion costs, includingincentive awards, penalties, change orders, claims and anticipated losses, isrecorded in the accounting period in which the amounts are known and can bereasonably estimated. Such revisions could occur at any time and the effectscould be material. A change order is included in total estimated contractrevenue when it is probable that the change order will result in a bona fideaddition to contract value and can be reliably estimated. Claims are includedin total estimated contract revenue, only to the extent that contract costsrelated to the claim have been incurred, when it is probable that the claimwill result in a bona fide addition to contract value and can be reliablyestimated. No profit is recognized on claims until final settlement occurs.

 

Although we have a historyof making reasonably dependable estimates of the extent of progress towardscompletion of contract revenue and of contract completion costs on ourlong-term engineering and construction contracts, due to uncertainties inherentin the estimation process, it is possible that actual completion costs may varyfrom estimates, and it is possible that such variances could be material to ouroperating results.

 

***If wehave to write off a significant amount of intangible assets, our earnings willbe negatively impacted.***

 

Goodwill and otherintangible assets totaling $199.7 million are included in our balance sheet atDecember 30, 2005. We must evaluate our goodwill and other intangible assetsfor impairment at least annually. If our goodwill and other intangible assetswere to become impaired, we would be required to write-off the impaired amount.The write-off would negatively impact our earnings; however, it would notimpact our cash flows. Asof December 30, 2005, $149.3 million of goodwill and other intangible assetsrelate to our Defense and Energy & Environment business units, which arealmost entirely dependent on continued spending by the U.S. government. SeeNote 2, “Significant Accounting Policies,” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

***Ourorganizational documents, some of our agreements and provisions of Delaware lawcould inhibit a change in control.***

 

We are subject to variousrestrictions and other requirements that may have the effect of delaying,deterring or preventing a change in control of us, such as:

 

•      provisions in our certificate ofincorporation and bylaws;

 

•                  someof our agreements, including the disbursing agreement that we entered into inconnection with our emergence from bankruptcy; and

 

•      Section 203 of the Delaware GeneralCorporation Law.

 

I-21

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A number of provisions inour certificate of incorporation and bylaws may make a change in control moredifficult, including, among others, removal of directors only for cause, theelimination of our stockholders’ ability to fill vacancies on the board ofdirectors and to call special meetings and supermajority stockholderamendments. In addition, our certificate of incorporation authorizes theissuance of up to 100 million shares of our common stock and 10 million sharesof our preferred stock. Our board of directors has the power to determine theprice and terms under which additional capital stock may be issued and to fixthe terms of preferred stock. Existing stockholders will not have preemptiverights with respect to any of those shares.

 

On January 25, 2002, thedate on which we emerged from bankruptcy protection pursuant to our Plan ofReorganization, we issued 5,000,000 shares of our common stock and warrants toacquire an additional 8,520,424 shares of our common stock, to a disbursingagent for the benefit of unsecured creditors in our bankruptcy. As of February27, 2006, 1,026,822 shares of our common stock and no warrants were held by thedisbursing agent pending future distribution to unsecured creditors pursuant toour Plan of Reorganization. Pending the distribution of the remaining shares tothe unsecured creditors, the disbursing agreement requires the disbursing agentto vote the shares held by the disbursing agent as recommended by our board ofdirectors, unless the Plan Committee established in connection with ourbankruptcy directs it to vote the shares in proportion to the votes cast andabstentions claimed by all other stockholders eligible to vote on theparticular matter.

 

Since March 6, 2003, ourcommon stock has been quoted on the NASDAQ National Market®. As a result,Section 203 of the Delaware General Corporation Law is applicable to us andgenerally limits the ability of major stockholders to engage in specifiedtransactions with us that may be intended to effect a change in control.

 

***Exerciseof our outstanding stock options may dilute the ownership interests of ourexisting stockholders and could adversely affect the market price of our commonstock.***

 

We have issued stockoptions to our chairman and key employees under our long-term incentiveprogram. As of December 30, 2005, we had 5,489,749 outstanding options topurchase common shares at a weighted-average exercise price of $29.00 pershare. The exercise of these options may dilute the ownership interests of ourexisting stockholders. Furthermore, any sales in the public market of thecommon stock issuable upon exercise of the options could adversely affect theprevailing market price of our common stock.

 

See additionalinformation on our outstanding stock options in Note 14, “Capital Stock, StockPurchase Warrants and Stock Compensation Plans,” of the Notes to ConsolidatedFinancial Statement in Item 8 of this report.

 

***Thesignificant demands on our cash resources could affect our ability to achieveour business plan.***

 

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

 

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

 

•      reducing or delaying capital expenditures;

 

•      limiting our growth;

 

•      seeking additional debt financing orequity capital; or

 

•      selling assets.

 

I-22

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

 

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

 

In line with industry practice, we are often required,primarily in our Infrastructure business unit, to provide performance andsurety bonds to customers under fixed-price contracts. These bonds indemnifythe customer should we fail to perform our obligations under the contract. If abond is required for a particular project and we are unable to obtain anappropriate bond, we cannot pursue that project. We have bonding capacity but,as is typically the case, the issuance of a bond is at the surety’s solediscretion. Moreover, due to events that affect the insurance and bondingmarkets generally, bonding may be more difficult to obtain in the future or mayonly be available at significant additional cost. There can be no assurancethat bonds will continue to be available to us on reasonable terms. Our inabilityto obtain adequate bonding and, as a result, to bid on new work could have amaterial adverse effect on our businesses, financial condition, results ofoperations and cash flows. Of $4.2 billion of new work awarded during 2005,four percent required bonding.

 

***Unavailability of insurance coverage could have a negative impact onour operations and results.***

 

We maintain insurance coverage as part of our overallrisk management strategy and due to requirements to maintain specific coveragein our financing agreements and in most of our construction contracts. Althoughwe have been able to obtain insurance coverage to meet our requirements in thepast, there is no assurance that such insurance coverage will be available inthe future.

 

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

 

We have over the past few years seen an increase inthe volume and the amount of claims brought by us against project owners foradditional costs exceeding the contract price or for amounts not included inthe original contract price. These types of claims occur due to matters such asowner-caused delays or changes from the initial project scope, both of whichmay result in additional costs, both direct and indirect. Often, these claimscan be the subject of lengthy arbitration or litigation proceedings, and it isdifficult to accurately predict when these claims will be fully resolved. Whenthese types of events occur and unresolved claims are pending, we have usedsignificant working capital in projects to cover cost overruns pending theresolution of the relevant claims. A failure to promptly recover on these typesof claims could have a negative impact on our liquidity and financialcondition.

 

***If we experiencedelays and/or defaults in customer payments, we could suffer liquidity problemsor we could be unable to recover all expenditures.***

 

Because of the nature of our contracts, at times wecommit resources to projects prior to receiving payments from the customer inamounts sufficient to cover expenditures on client projects as they areincurred. Delays in customer payments may require us to make a working capitalinvestment. If a customer defaults in making its payments on a project in whichwe have devoted significant resources, it could have a negative effect on ourresults of operations.

 

**ITEM 1B.  UNRESOLVED STAFF COMMENTS**

 

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

 

I-23

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**ITEM2.  PROPERTIES**

 

We do not own significant real property foroperations. Our principal office facilities located in Boise, Idaho; Aiken,South Carolina; Denver, Colorado; Princeton, New Jersey; Cleveland, Ohio;Birmingham, Alabama; and Arlington, Virginia are leased under long-term,noncancelable leases expiring at various dates through 2015. As of December 30,2005, we owned more than 2,550 units of heavy and light mobile construction,environmental remediation and contract mining equipment. We consider ourconstruction, environmental remediation and mining equipment and leasedadministrative and engineering facilities to be well maintained and suitablefor our current operations.

 

As of December 30, 2005, our principal facilities were as follows:

 
| ** **            | ** ** | ** **           | ** ** | ** **       | ** ** | **Segment/**       | ** ** | ** **                                               |
|-----------------------|------------|----------------------|------------|------------------|------------|--------------------|------------|----------------------------------------------------------|
| **Property location** | ** ** | **Facility Sq. Ft.** | ** ** | **Owned/Leased** | ** ** | **Business Unit*** | ** ** | **Usage**                                                |
|                  |       |                 |       |             |       |               |       |                                                     |
| Aiken, SC             |       | 96,250               |       | Leased           |       | 5,6                |       | Business unit headquarters/engineering                   |
| Arlington, VA         |       | 25,009               |       | Leased           |       | 2,5,6,7            |       | Business unit headquarters/regional office               |
| Bellevue, WA          |       | 20,991               |       | Leased           |       | 2,4,8              |       | Area office                                              |
| Birmingham, AL        |       | 140,635              |       | Leased           |       | 4,8                |       | Business unit  headquarters/regional office              |
| Boise, ID             |       | 50,511               |       | Leased           |       | 7                  |       | Records/retention center                                 |
| Boise, ID             |       | 193,461              |       | Leased           |       | 1,2,4,6,7,8        |       | Corporate/business unit headquarters                     |
| Bucharest,  Romania   |       | 48,438               |       | Leased           |       | 1,2,4,5,8          |       | Engineering                                              |
| Carlsbad, NM          |       | 191,300              |       | Leased           |       | 6                  |       | Office/warehouse/container fabrication                   |
| Cleveland, OH         |       | 88,775               |       | Leased           |       | 4,5,8              |       | Engineering                                              |
| Denver, CO            |       | 259,379              |       | Leased           |       | 1,2,3,4,5,         |       | Business unit headquarters/regional office               |
|                  |       |                 |       |             |       | 6,7,8              |       |                                                     |
| Las Vegas, NV         |       | 236,996              |       | Leased           |       | 2                  |       | Storage yards                                            |
| New York, NY          |       | 35,015               |       | Leased           |       | 1,2,8              |       | Area office                                              |
| Perris, CA            |       | 413,820              |       | Leased           |       | 2                  |       | Office/precast concrete fabrication                      |
| Petaluma, CA          |       | 43,800               |       | Owned            |       | 2                  |       | Office/precast concrete fabrication                      |
| Princeton, NJ         |       | 368,245              |       | Leased           |       | 1,2,4,5,8          |       | Business unit  headquarters/regional offices/engineering |
| Warrington, England   |       | 51,836               |       | Leased           |       | 4,6                |       | Office                                                   |
| Whitehall, AR         |       | 129,640              |       | Leased           |       | 5                  |       | Warehouse                                                |

 

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* Segment/businessunit:

1 - Power

2 - Infrastructure

3 - Mining

4 - Industrial/Process

5 - Defense

6 - Energy &Environment

7 – Corporate

8 – Operations centers used by all business units

 

I-24

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**ITEM3.  LEGAL PROCEEDINGS**

 

We are a defendant in various lawsuits resulting from allegations thatthird parties sustained injuries and damage from the inhalation of asbestosfibers contained in materials used in construction projects. We never were amanufacturer of asbestos or products which contain asbestos. Asbestos-relatedlawsuits against us result from allegations that third parties sustainedinjuries and damage from the inhalation of asbestos fibers contained inmaterials used in construction projects and that we allegedly were negligent,the typical negligence claim being that we had a duty but failed to warn theplaintiff or claimant of, or failed to protect the plaintiff or claimant from,the dangers of asbestos. We expect that additional asbestos claims will befiled against us in the future.

 

We believe that all of our asbestos claims are fully insured except forasbestos claims relating to a subsidiary acquired in 1986. Based on the 1986stock purchase agreement and the insurance policies obtained by the priorowners of the subsidiary, we believe we are entitled to the benefit of theinsurance coverage obtained by the prior owners. We have tendered the claimsrelated to the acquired company to such insurance carriers, and to date onecarrier has agreed to pay at least a portion of the claims relating to thesubsidiary.

 

The outcome of these claims, including the adequacy of insurancecoverage, cannot be predicted with certainty. However, we believe that anypossible additional loss, including related legal costs, will not be material.

 

As previously reported, we were sued in the Supreme Court of New York,County of Kings in connection with construction management and inspectionservices performed by Washington Infrastructure, Inc. for a new school facilityfor the School Construction Authority of the City of New York by the primecontractor. This suit, *Trataros Construction,Inc. et al. v. The New York City School Construction Authority et al.*,Index No. 20213/01, has been in the discovery stage for years and there havebeen no material developments in the proceedings in some time. To the extentthere are additional material developments in this suit, we will discuss themin future reports under the Exchange Act.

 

We also incorporate by reference the information regarding legalproceedings set forth under the caption “Legal Matters” in Note 12,“Contingencies and Commitments,” of the Notes to Consolidated FinancialStatements in Item 8 of this report.

 

Our reorganization case is *In re Washington GroupInternational, Inc. and Related Cases*, Docket No. BK-N 01-31627-GWZ,in the U.S. Bankruptcy Court for the District of Nevada.

 

The lawsuit relating to our USAID-financed projects inEgypt discussed under the caption “Legal Matters” and referred to as“Litigation and Investigation related to USAID Egyptian Projects” in Note 12,“Contingencies and Commitments,” of the Notes to Consolidated FinancialStatements in Item 8 of this report refers to *UnitedStates of American v. Washington Group International, Inc., et al.,*Case No.  CIV-04545S-EJL in the U.S.District Court for the District of Idaho.

 

The *qui tam* lawsuitdiscussed under the caption “Legal Matters” and referred to as “Tar CreekLitigation” in Note 12, “Contingencies and Commitments,” of the Notes toConsolidated Financial Statements in Item 8 of this report refers to *United States ex. rel. Lovelace et. al. v. Washington Group International, Inc.,* Case No.00-CV-61 EA(M) in the U.S. District Court for the Northern District ofOklahoma.

 

The personal injury and property damage lawsuitsdiscussed under the caption “Legal Matters” and referred to as “New OrleansLevee Failure Class Action Litigation” in Note 12, “Contingencies andCommitments,” of the Notes to Consolidated Financial Statements in Item 8 ofthis report refers to *Berthelot et. al. v.Boh Bros. Construction Co., LLC, et. al.,* Case No. 05-4182, *Vodanovich et. al. v. Boh Bros. Construction Co.,LLC, et. al.,* Case No. 05-5237, *Kirschet. al. v. Boh Bros. Construction Co., LLC, et. al.,* Case No.05-6073, *Ezell v. Boh Bros. ConstructionCo., LLC, et. al.,*Case No. 05-6314, *Brown et. al. v. Boh Bros. Construction Co., LLC, et. al.,*CaseNo. 05-6324, *LeBlanc et.al. v. Boh Bros.Construction Co., LLC, et. al.,* Case No. 05-6327, and *Tauzin v. The Board of Commissioners for the OrleansParish Levee District et. al.,*Case No. 06-0020 all currentlypending in the United States District Court for the Eastern District ofLouisiana.

 

I-25

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**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

We submitted no matters to a vote of our stockholders during the fourthquarter of 2005.

 

I-26

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**PART II**

 

**ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

***Marketinformation***

 

On January 25, 2002, the date we emerged from bankruptcy protectionpursuant to our Plan of Reorganization, all of our then-existing equitysecurities, including our common stock, were canceled and extinguished, and25,000,000 shares of newly issued common stock were issued, including 5,000,000shares allocated to the unsecured creditor pool.

 

From its issuance on January 25, 2002 until March 6, 2003, our commonstock traded in the over-the-counter market. The price of our common stock wasquoted by the Pink Sheets® quotation service under the ticker symbol “WNGXQ”until July 30, 2002 when the OTC Bulletin Board® began quotation of our commonstock under the ticker symbol “WGII.” Our common stock began trading on theNASDAQ National Market® under the ticker symbol “WGII” on March 6, 2003.

 

At the close of business on February 27, 2006, we had28,989,647 shares of common stock issued and outstanding. Of the 5,000,000shares allocated to the unsecured creditor pool, 3,973,178 shares have beendistributed to various unsecured creditors and the remaining 1,026,822 shareswill be distributed as the claim pool is resolved.

 

The following tables set forth the high and low prices per share of ourcommon stock for each quarterly period in 2005 and 2004.

 

**Common stock market prices**

 
| ** **                  | ** ** | **April 1,** | ** ** | **July 1,** | ** ** | **September 30,** | ** ** | **December 30,** | ** ** |
|-----------------------------|------------|--------------|------------|-------------|------------|-------------------|------------|------------------|------------|
| **2005 quarters ended (1)** | ** ** | **2005**     | ** ** | **2005**    | ** ** | **2005**          | ** ** | **2005**         | ** ** |
| High                        |       | $            | 47.31      |        | $          | 52.79             |       | $                | 54.60      |   | $ | 54.35 |   |
| Low                         |       | 38.00        |       | 40.78       |       | 48.72             |       | 47.47            |       |
|                             |            |              |            |             |            |                   |            |                  |            |  |  |  |  |

 
| ** **                  | ** ** | **April 2,** | ** ** | **July 2,** | ** ** | **October 1,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|--------------|------------|-------------|------------|----------------|------------|------------------|------------|
| **2004 quarters ended (1)** | ** ** | **2004**     | ** ** | **2004**    | ** ** | **2004**       | ** ** | **2004**         | ** ** |
| High                        |       | $            | 40.20      |        | $          | 38.40          |       | $                | 36.50      |   | $ | 41.34 |   |
| Low                         |       | 32.57        |       | 31.47       |       | 30.75          |       | 31.40            |       |
|                             |            |              |            |             |            |                |            |                  |            |  |  |  |  |

 

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(1)   The high and lowprices are the high and low bid prices per share of our common stock, asreported by the NASDAQ National Market®.

 

***Holders***

 

The number of holders of our voting common stock at February 27, 2006was approximately 12,012. This number does not include all beneficial owners ofour common stock held in the name of a nominee.

 

***Dividends***

 

We have not paid a cash dividend since the first quarter of fiscal 1994and do not intend to pay cash dividends in the near term. Our credit facilityhas specified restrictions on dividend payments. For a more detaileddiscussion, see Note 7, “Credit Facility,” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

II-1

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***IssuerPurchases of Equity Securities***

 

As part of the Plan of Reorganization, 8,520,424 stockpurchase warrants were issued and awarded to the unsecured creditor pool. On August 3, 2005,we announced that our Board of Directors authorized management to purchase,from time to time, up to $50,000,000 of outstanding warrants and shares ofcommon stock in open market or negotiated transactions. In the fourth quarterof 2005, our Board of Directorsauthorized two increases in the amount of common stock and warrants that may bepurchased under the program to a total of $125,000,000 as of December 30, 2005.On March 1, 2006 our Board of Directors authorized an additional $25,000,000increase.

 

At the close of business on January 25, 2006, the datethe warrants were to expire, 6,767,505 warrants had been distributed to variousunsecured creditors. Of these warrants, 2,781,852 were exercised, 3,739,723were purchased by us, 192,057 expired and 53,873 were returned to us inconnection with a legal settlement with unsecured creditors and subsequentlycanceled. The remaining 1,752,919 of undistributed warrants were purchased byus from the disbursing agent for the benefit of unsecured creditors. As part ofthe legal settlement with unsecured creditors, 31,615 shares of our commonstock have been returned to us and are being treated as treasury stock.

 

The following table sets forth the warrants purchasedduring the fourth quarter of 2005 and the remaining amounts authorized forwarrant and share purchases as of December 30, 2005.

 
| ** **                             | ** ** | ** **           | ** ** | ** **      | ** ** | **(c) Total Number of** | ** ** | ** **                 | ** ** |
|----------------------------------------|------------|----------------------|------------|-----------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **           | ** ** | ** **      | ** ** | **Shares or Warrants**  | ** ** | **(d) Approximate Dollar** | ** ** |
| ** **                             | ** ** | **(a) Total Number** | ** ** | **(b) Average** | ** ** | **Purchased as Part**   | ** ** | **Value of Shares or**     | ** ** |
| ** **                             | ** ** | **of Shares or**     | ** ** | **Price Paid**  | ** ** | **of Publicly**         | ** ** | **Warrants that May Yet**  | ** ** |
| ** **                             | ** ** | **Warrants**         | ** ** | **per Share**   | ** ** | **Announced Plans**     | ** ** | **be Purchased Under the** | ** ** |
| **Period**                             | ** ** | **Purchased**        | ** ** | **or Warrant**  | ** ** | **or Programs**         | ** ** | **Plans or Programs**      | ** ** |
|                                   |       |                 |       |            |       |                    |       |                       |       |
| Tranche A  Warrants                    |       |                 |       |            |       |                    |       |                       |       |
| October 1, 2005  - October 28, 2005    |       | —               |       | —          |       | —                  |       | $                          | 78,250,374 |   |
| October 29, 2005  -November 25, 2005   |       | 388,148              |       | $               | 21.89      |                    | 388,148    |                       | 64,895,338 |   |
| November 26,  2005 - December 30, 2005 |       | 493,450              |       | 24.51           |       | 493,450                 |       | 51,271,061                 |       |
|                                   |       |                 |       |            |       |                    |       |                       |       |
| Tranche B  Warrants                    |       |                 |       |            |       |                    |       |                       |       |
| October 1, 2005  - October 28, 2005    |       | —               |       | —          |       | —                  |       | 78,250,374                 |       |
| October 29, 2005  -November 25, 2005   |       | 136,290              |       | 18.82           |       | 136,290                 |       | 64,895,338                 |       |
| November 26,  2005 - December 30, 2005 |       | 972,265              |       | 21.50           |       | 972,265                 |       | 51,271,061                 |       |
|                                   |       |                 |       |            |       |                    |       |                       |       |
| Tranche C  Warrants                    |       |                 |       |            |       |                    |       |                       |       |
| October 1, 2005  - October 28, 2005    |       | —               |       | —          |       | —                  |       | 78,250,374                 |       |
| October 29, 2005  -November 25, 2005   |       | 138,759              |       | 16.81           |       | 138,759                 |       | 64,895,338                 |       |
| November 26,  2005 - December 30, 2005 |       | 249,823              |       | 19.62           |       | 249,823                 |       | 51,271,061                 |       |
|                                   |       |                 |       |            |       |                    |       |                       |       |
| Total Warrants                         |       |                 |       |            |       |                    |       |                       |       |
| October 1, 2005  - October 28, 2005    |       | —               |       | —          |       | —                  |       | 78,250,374                 |       |
| October 29, 2005  -November 25, 2005   |       | 663,197              |       | 20.20           |       | 663,197                 |       | 64,895,338                 |       |
| November 26,  2005 - December 30, 2005 |       | 1,715,538            |       | 22.10           |       | 1,715,538               |       | 51,271,061                 |       |
|                                   |       |                 |       |            |       |                    |       |                       |       |
| Common Stock                           |       |                 |       |            |       |                    |       |                       |       |
| October 1, 2005  - October 28, 2005    |       | —               |       | —          |       | —                  |       | 78,250,374                 |       |
| October 29, 2005  -November 25, 2005   |       | —               |       | —          |       | —                  |       | 64,895,338                 |       |
| November 26,  2005 - December 30, 2005 |       | —               |       | —          |       | —                  |       | 51,271,061                 |       |
|                                        |            |                      |            |                 |            |                         |            |                            |            |  |  |

 

***RecentSales of Unregistered Equity Securities***

 

We did not sell any unregistered equity securities during 2005.

 

II-2

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**ITEM6.  SELECTED FINANCIAL DATA**

*(Inmillions, except per share data)*

 

As of February 1, 2002, in connection with our emergence frombankruptcy protection, we adopted fresh-start reporting pursuant to theguidance provided by the American Institute of Certified Public AccountantsStatement of Position (“SOP”) 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code*. In connectionwith the adoption of fresh-start reporting, we created a new entity forfinancial reporting purposes. The effective date of our emergence frombankruptcy is considered to be the close of business on February 1, 2002 forfinancial reporting purposes. In the tables below, the periods presented throughFebruary 1, 2002 have been designated “Predecessor Company.”

 

Effective December 29, 2001, we changed our fiscal year to the 52/53weeks ending on the Friday closest to December 31 from the 52/53 weeks endingon the Friday closest to November 30.

 
| ** **                                        | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **     | ** ** | **Predecessor Company** | ** ** |
|---------------------------------------------------|------------|------------------|------------|------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|
| ** **                                        | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | **Eleven**     | ** ** | **One**                 | ** ** | **One** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | **Months**     | ** ** | **Month**               | ** ** | **Month** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **Year Ended** | ** ** | **Ended**      | ** ** | **Ended**               | ** ** | **Ended** | ** ** | **Year Ended** | ** ** |
| ** **                                        | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **January 2,** | ** ** | **January 3,** | ** ** | **February 1,**         | ** ** | **December 28,** | ** ** | **November 30,** | ** ** |
| ** **                                        | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2004**       | ** ** | **2003**       | ** ** | **2002**                | ** ** | **2001** | ** ** | **2001** | ** ** |
| **OPERATIONS  SUMMARY**                           | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **     | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                           |       | $                | 3,188.5    |             | $          | 2,915.4        |       | $              | 2,501.2    |                    | $          | 3,311.6 |   | $ | 349.9 |   | $ | 308.3 |   | $ | 4,041.6 |   |
| Gross profit                                      |       | 130.4            |       | 150.0            |       | 176.3          |       | 149.0          |       | 11.1                    |       | .2 |   | 97.7 |   |
| Equity in income  of unconsolidated affiliates    |       | 29.6             |       | 26.9             |       | 25.5           |       | 27.4           |       | 3.1                     |       | 1.3 |   | 17.9 |   |
| Operating income  (loss)                          |       | 99.5             |       | 118.0            |       | 150.5          |       | 131.7          |       | 9.4                     |       | (31.8 | ) | 18.3 |   |
| Extraordinary  item – gain on debt discharge |       | —           |       | —           |       | —         |       | —         |       | 567.2                   |  (a)  | — |   | — |   |
| Net income  (loss)                                |       | 58.4             |       | 51.1             |       | 42.1           |       | 37.7           |       | 522.2                   |       | (26.0 | ) | (85.0 | ) |
| Income per  share:                                |       |             |       |             |       |           |       |           |       |                    |       |   |   |   |   |
| Basic                                             |       | 2.24             |       | 2.02             |       | 1.68           |       | 1.51           |       | —                  |  (b)  | — |  (b) | — |  (b) |
| Diluted                                           |       | 1.93             |       | 1.86             |       | 1.66           |       | 1.51           |       | —                  |  (b)  | — |  (b) | — |  (b) |
| Shares used to  compute income per share:         |       |             |       |             |       |           |       |           |       |                    |       |   |   |   |   |
| Basic                                             |       | 26.0             |       | 25.3             |       | 25.0           |       | 25.0           |       | —                  |  (b)  | — |  (b) | — |  (b) |
| Diluted                                           |       | 30.3             |       | 27.4             |       | 25.3           |       | 25.0           |       | —                  |  (b)  | — |  (b) | — |  (b) |
|                                              |       |             |       |             |       |           |       |           |       |                    |       |   |   |   |   |
| **FINANCIAL  POSITION SUMMARY AT END OF PERIOD**  |       |             |       |             |       |           |       |           |       |                    |       |   |   |   |   |
| Cash and cash  equivalents                        |       | $                | 237.7      |             | $          | 224.5          |       | $              | 118.2      |                    | $          | 80.4 |   | $ | 40.7 |   | $ | 50.7 |   | $ | 70.6 |   |
| Current assets                                    |       | 1,027.6          |       | 949.3            |       | 789.0          |       | 731.1          |       | 1,072.4                 |       | 1,191.8 |   | 1,203.0 |   |
| Total assets                                      |       | 1,649.1          |       | 1,588.2          |       | 1,410.5        |       | 1,415.4        |       | 1,783.4                 |       | 2,133.9 |   | 2,140.4 |   |
| Current  liabilities                              |       | 697.3            |       | 621.9            |       | 532.5          |       | 585.7          |       | 962.3                   |       | 596.1 |   | 625.9 |   |
| Liabilities  subject to compromise                |       | —           |       | —           |       | —         |       | —         |       | —                  |       | 1,950.3 |   | 1,928.2 |   |
| Long-term debt                                    |       | —           |       | —           |       | —         |       | —         |       | 40.0                    |       | — |   | — |   |
| Minority  interests                               |       | 5.6              |       | 47.9             |       | 48.5           |       | 56.1           |       | 78.0                    |       | 75.8 |   | 76.5 |   |
| Stockholders’  equity (deficit)              |       | 741.2            |       | 732.9            |       | 660.9          |       | 596.8          |       | 550.0                   |       | (576.9 | ) | (551.5 | ) |

 

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(a)          Extraordinary item consists of the gain on debt discharge of $1,460.7,less the value of common stock and warrants issued of $550.0, net of income taxof $343.5, upon emergence from bankruptcy.

 

(b)         Income per share is not presented for these periods as it is notmeaningful because of the revised capital structure of the Successor Company.

 

II-3

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**ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following management’s discussion and analysis offinancial condition and results of operations should be read in conjunctionwith the consolidated financial statements and notes thereto in Item 8 of thisreport. The following analysis contains forward-looking statements about ourexpectations related to future potential revenue and operating results. See “NoteRegarding Forward-Looking Statements” for a discussion of the risks anduncertainties affecting these statements and “Risk Factors” in Item 1A  of this report.*

 

References in our management’s discussion and analysisto 2005 are for our fiscal year ended December 30, 2005. References to 2004 arefor our fiscal year ended December 31, 2004. References to 2003 are for ourfiscal year ended January 2, 2004.

 

**OVERVIEW**

 

We are an internationalprovider of a broad range of design, engineering, construction, constructionmanagement, facilities and operations management, environmental remediation andmining services. We offer our various services separately or as part of anintegrated package throughout the life cycle of a customer’s project. We serveour clients through six business units: Power, Infrastructure, Mining,Industrial/Process, Defense, and Energy & Environment.

 

We are subject to numerousfactors that have an impact on our ability to obtain new work. The Powerbusiness unit is dependent on the domestic demand for new power generatingfacilities and the modification of existing power facilities. Infrastructure isaffected by the availability of public sector funding for transportationprojects and the availability of bonding. Mining is affected by demand forcoal, precious metals and other extractive resources. The Industrial/Processbusiness unit is affected in general by the growth prospects in the U.S.economy and more directly by the capital spending plans of its large customerbase. Industrial/Process also provides services to the natural gas processingindustry. With the increase in the price of oil and natural gas, the businessunit is actively pursuing opportunities in this market. Finally, the Defenseand Energy & Environment business units are almost entirely dependent onthe spending levels of the U.S. government, in particular, the Departments ofEnergy and Defense.

 

**CRITICAL ACCOUNTING POLICIES AND RELATED CRITICALACCOUNTING ESTIMATES**

 

Our accounting and financialreporting policies are in conformity with accounting principles generallyaccepted in the United States of America (“GAAP”). The preparation of ourconsolidated financial statements in conformity with GAAP requires us to makeestimates and judgments that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the balancesheet date, and the reported amounts of revenue and expenses during thereporting period. Although our significant accounting policies are described inNote 2, “Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Item 8 of this report,the following discussion is intended to describe those accounting policies mostcritical to the preparation of our consolidated financial statements. Thedevelopment and selection of the critical accounting policies, related criticalaccounting estimates and the disclosure below have been reviewed with the auditreview committee of our board of directors. There were no changes in ourcritical accounting policies during 2005.

 

***Revenuerecognition.*** Wefollow the provisions of SOP 81-1, *Accountingfor Performance of Construction-Type and Certain Production-Type Contracts.*Werecognize revenue on certain engineering and construction-type contracts usingthe percentage-of-completion method of accounting whereby revenue is recognizedas performance under the contract progresses. For most of our fixed-price andtarget-price contracts, we use a cost-to-cost approach to measure progresstowards completion. Under the cost-to-cost method, we make periodic estimatesof our progress towards completion by comparing costs incurred to date withtotal estimated contract costs. Revenue is then calculated on a cumulativebasis (project-to-date) as the total contract value multiplied by the currentpercentage complete. Revenue for a reporting period is calculated as the cumulativeproject-to-date revenue less project revenue recognized in prior periods.However, we defer profit recognition on fixed-price and

 

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certain target-priced contracts untilprogress is sufficient to estimate the probable outcome, which generally doesnot occur until the project is at least 20 percent complete. Fixed-pricecontracts accounted for 23 percent of our total revenue during 2005.

 

For contracts that includesignificant materials or equipment costs, we use an efforts expended method tomeasure progress towards completion based on labor hours, labor dollars or someother measurement of physical completion. For certain long-term contractsinvolving mining and environmental and hazardous substance remediation,progress towards completion is measured using the units of production method.Revenue from reimbursable or cost-plus contracts is recognized on the basis ofcosts incurred during the period plus the fee earned. Service-related contracts,including operations and maintenance contracts, are accounted for over theperiod of performance, in proportion to the costs of performance, evenly overthe period or over units of production. Award fees associated with U.S.government contracts are initially estimated and recognized based on historicalperformance until the client has confirmed the final award fee.Performance-based incentive fees are included in contract value when a basisexists for the reasonable prediction of performance in relation to establishedtargets. When a basis for reasonable prediction does not exist,performance-based incentive fees are recognized when actually awarded by theclient.

 

The amount of revenuerecognized depends on whether the contract or project is determined to be an “at-risk”or an “agency” relationship between the client and us. Determination of therelationship is based on characteristics of the contract or the relationshipwith the client. For at-risk relationships, the gross revenue and the costs ofmaterials, services, payroll, benefits, non-income tax and other costs arerecognized in our statement of income. For agency relationships, where we actas an agent for our client, only fee revenue is recognized, meaning that directproject costs and the related reimbursement from the client are netted. AtDecember 30, 2005, agency relationships comprised approximately five percent ofour total backlog.

 

The use of thepercentage-of-completion method for revenue recognition requires the use ofvarious estimates, including among others, the extent of progress towardscompletion, contract completion costs and contract revenue. Profit to berecognized is dependent upon the accuracy of estimated engineering progress,materials quantities, achievement of milestones and other incentives, penaltyprovisions, labor productivity and other cost estimates. Such estimates aredependent upon various judgments we make with respect to those factors, andsome are difficult to accurately determine until the project is significantly underway.Progress is evaluated each reporting period. We recognize adjustments toprofitability on contracts utilizing the percentage-of-completion method on acumulative basis, when such adjustments are identified. We have a history ofmaking reasonably dependable estimates of the extent of progress towardscompletion, contract revenue and contract completion costs on our long-termengineering and construction-type contracts. However, due to uncertaintiesinherent in the estimation process, it is possible that actual completion costsmay vary from estimates. In limited circumstances, we may use thecompleted-contract method for specific contracts for which reasonablydependable estimates cannot be made or for which inherent hazards make theestimates doubtful. The completed contract method was not utilized during anyof the periods presented.

 

***Change orders and claims.***Once contract performance is underway, we often experience changes inconditions, client requirements, specifications, designs, materials and workschedule. Generally, a “change order” will be negotiated with our customer tomodify the original contract to approve both the scope and price of the change.Occasionally, however, disagreements arise regarding changes, their nature,measurement, timing and other characteristics that impact costs and revenueunder the contract. When a change becomes a point of dispute between ourcustomer and us, we then consider it as a claim.

 

Costs related to changeorders and claims are recognized when they are incurred. Change orders areincluded in total estimated contract revenue when it is probable that thechange order will result in a bona fide addition to contract value and can bereliably estimated. Estimated contract revenue associated with change orders mayinclude amounts in excess of incurred costs (profit) when appropriate. Claimsare included in total estimated contract revenue, only to the extent thatcontract costs related to the claim have been incurred, when it is probablethat the claim will result in a bona fide addition to contract value and can bereliably estimated which generally occurs when amounts have been received orawarded. This can lead to a situation where costs are recognized in

 

II-5

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one period and revenue is recognized whencustomer agreement is obtained or claim resolution occurs, which can be insubsequent periods. Historical claim recoveries should not be consideredindicative of future claim recoveries. We recognized revenue and relatedadditional contract costs from claims in the following amounts for the periodspresented:

 
| ** **                                                                                  | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**      | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                  | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Revenue from  claims                                                                        |       | $                     | 22,899     |                  | $          | 30,439              |       | $ | 35,199 |   |
| Less additional  contract related costs and subcontractors’ share of claim settlements |       | (1,697                | )          | (1,901                | )          | (8,998              | )          |
| Net impact on  gross profit from claims                                                     |       | $                     | 21,202     |                  | $          | 28,538              |       | $ | 26,201 |   |

 

Substantially all claims were settled and collectedduring each respective period for which claim revenue was recognized.

 

***Estimated losses on uncompleted contracts and changes incontract estimates.***We record provisions for estimated losses on uncompleted contracts in theperiod in which such losses are identified. The cumulative effect of revisionsto contract revenue and estimated completion costs are recorded in theaccounting period in which the amounts become evident and can be reasonablyestimated. These revisions include such items as the effects of change ordersand claims, warranty claims, liquidated damages or other contractual penalties,adjustments for audit findings on U.S. government contracts and contractcloseout settlements. It is possible that there will be future and currentlyunknown significant adjustments to our estimated contract revenue, costs andgross margins for contracts currently in process, particularly in the laterstages of the contracts. These adjustments are common in the constructionindustry and inherent in the nature of our contracts. These adjustments could,depending on the magnitude of the adjustments and/or the number of contractsbeing completed, materially, positively or negatively, affect our operatingresults in an annual or quarterly reporting period.

 

***Goodwill.***Effective February 1, 2002, in conjunction with fresh-start reporting,we used the purchase method of accounting to allocate our reorganization valueof $550 million to our net assets, based on estimates of fair value, with theexcess being recorded as goodwill. As of December 30, 2005, we have $162.3million of goodwill. Pursuant to Statement of Financial Accounting Standards (“SFAS”)No. 142, *Goodwill and Other Intangible Assets,*goodwill is no longer amortized but istested for impairment at least annually. We regularly evaluate whetherevents and circumstances have occurred which may indicate a possible impairmentof goodwill and perform the annual impairment test for all of our reportingunits each October. In conducting the impairment test, we apply varioustechniques to estimate the fair value of our reporting units. These techniquesare inherently subjective, and the resulting values are not necessarilyrepresentative of the values we might obtain in a sale of our reporting unitsto a willing third party. Based on our annual review of the recoverability ofgoodwill as of October 31, 2005, we determined that our goodwill is notimpaired. However, our businesses are cyclical and subject to competitivepressures. Additionally, $111.9 million of our goodwill as of December 30, 2005,relates to our Defense and Energy & Environment business units, which arealmost entirely dependent on continued spending by the U.S. government.Therefore it is possible that the goodwill values of our business units couldbe adversely impacted in the future by these or other factors and that asignificant impairment adjustment, which would reduce earnings and potentiallyaffect debt covenants, could be required in such circumstances.

 

***Litigation claims and contingencies.*** In the normal course of business, we aresubject to a variety of contractual guarantees and litigation. In general,guarantees can relate to project scheduling, project completion, plantperformance or meeting required standards of workmanship. Most of ourlitigation involves us as a defendant in workers’ compensation, personalinjury, contract, environmental, environmental exposure, professional liabilityand other similar lawsuits. We maintain insurance coverage for some aspects ofour business and operations. In addition, we have elected to retain a portionof insured losses that may occur through the use of various deductibles, limitsand retentions under our insurance programs. This situation may subject us tosome future liability for which we are only partially insured, or completelyuninsured. Self-insurance reserves are established and maintained for uninsuredbusiness risks.

 

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Government contracts are,and are expected to continue to be, a significant part of our business. Wederived 51 percent of our consolidated operating revenue in 2005 from contractswith the U.S. government. Allowable costs under U.S. government contracts aresubject to audit by the government. To the extent that these audits result indeterminations that costs claimed as reimbursable are not allowable costs orwere not allocated in accordance with federal regulations, we could be requiredto reimburse the government for amounts previously received. We also have anumber of U.S. government contracts which extend beyond one year and for whichgovernment funding has not yet been approved. All U.S. government contracts andsome foreign contracts are subject to unilateral termination at the convenienceof the customer. However, we have not experienced any unilateral termination ofU.S. government contracts within the recent past.

 

Estimating liabilities andcosts associated with such claims, guarantees, litigation and audits andinvestigations requires judgment and assessment based on professional knowledgeand 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 isprobable that a liability has been incurred and the amount of loss can be reasonablyestimated. The ultimate resolution of any such exposure may vary from earlierestimates as further facts and circumstances become known. We maintain reservesfor both self-insured claims that are known as well as for self-insured claimsthat are believed to have been incurred based on actuarial analysis, but havenot yet been reported to our claims administrators. We include any adjustmentsto such insurance reserves in our consolidated results of operations.

 

**OTHER SIGNIFICANT ACCOUNTING POLICIES AND TERMS**

 

The following summary of significant accountingpolicies and terms is presented to provide a better understanding of ourindustry, our consolidated financial statements and discussion and analysis ofour results of operations and financial position and liquidity.

 

**New work**represents the monetary value of a contract entered into with a client that isbinding on both parties and reflects the revenue, or equity in income, expectedto be recognized from that contract.

 

**Backlog** represents the total accumulation of newwork awarded less the amount of revenue, or equity in income, recognized todate on contracts at a specific point in time. We believe backlog is anindicator of future earnings potential. Although backlog reflects business thatwe consider to be firm, cancellations or reductions may occur and may reducebacklog and future revenue. We have a significant number of clients thatconsistently extend or add to the scope of existing contracts. We do notinclude any estimate of this ongoing work in backlog until awarded.

 

There are three unique aspects of our approach torecording new work and backlog:

 

•                  ***Government contracts***-Most of our government contracts cover several years. However, funding for thecontracts is subject to annual appropriations by Congress. To account for therisk that future amounts may not be appropriated, we only include the next twoyears of forecast revenue in our backlog. Therefore, as time passes andappropriations occur, additional new work is recorded on existing governmentcontracts. At December 30, 2005, U.S. government funded contracts comprisedapproximately 46 percent of our total backlog.

 

•                  ***Mining contracts***-Mining contracts span varying periods of time up to the life of the resource.For new work and backlog purposes, we limit the amount recorded to five years.Similar to our practices with government contracts, as time passes, werecognize additional new work as commitments for that future work are firmedup. At December 30, 2005, mining contracts comprised approximately 12 percentof our total backlog.

 

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•                  ***At-risk and agency contracts***-The amount of new work and related backlog recognized depends on whether thecontract or project is determined to be an “at-risk” or “agency” relationshipbetween the client and us. For at-risk relationships, the expected grossrevenue is included in new work and backlog. For relationships where we act asan agent for our client, only the expected net fee revenue is included in newwork and backlog. At December 30, 2005, expected net fee revenue for agencyrelationships comprised approximately five percent of our total backlog.

 

**Joint ventures and equityinvestments** are utilized when contracts are executed jointlythrough partnerships and joint ventures with unrelated third parties.

 

•                  ***Joint ventures***. A significant partof our work on large construction and engineering projects is performed throughunincorporated joint ventures with one or more partners. For those in which wecontrol the joint venture by contract terms or other means, the assets,liabilities and results of operations of the joint venture are fullyconsolidated in our financial statements, and the minority interests of thirdparties are separately deducted in our financial statements. For thoseconstruction joint ventures in which we do not control the joint venture, wereport our pro rata portion of revenue and costs, but the balance sheetreflects only our net investment in the project. Joint ventures not involvingconstruction or engineering activities, and which we do not control, arereported using the equity method of accounting in which we record our portionof the joint venture’s net income or loss as equity in income or loss ofunconsolidated affiliates and our investment on the balance sheet reflects ouroriginal investment, at cost, as adjusted for our equity in the income or lossof the joint venture.

 

•                  ***Partially owned subsidiary companies.***For incorporated ventures in which we have a controlling interest, the assets,liabilities and results of operations of the subsidiary company are fullyconsolidated in our financial statements, and the minority interests of thirdparties are separately deducted in our financial statements. However, for thosein which we do not have a controlling interest but do have significantinfluence, we use the equity method of accounting in which we record ourportion of the subsidiary company’s net income or loss as equity in income orloss of unconsolidated affiliates and our investment on the balance sheetreflects our original investment, at cost, as adjusted for our equity in theincome or loss of the subsidiary company.

 

**Restricted cash**consists primarily of cash collateralizing a letter of credit and trustagreement associated with our self-insurance program, cash restricted for usein the operations of our consolidated joint ventures and projects havingcontractual cash restrictions.

 

**Accounts receivable**represent amounts billed to clients that have not been paid. On largefixed-price construction contracts, contract provisions may allow the client towithhold from 5 percent to 10 percent of invoices until the project iscompleted, which may be several months or years. These amounts withheld,referred to as retentions, are recorded as receivables and are separatelydisclosed in the financial statements.

 

**Unbilled receivables**includecosts incurred on projects, together with any profit recognized on projectsusing the percentage-of-completion method, and represents work performed butnot yet billed pursuant to contract terms or billed after the accounting periodcut-off occurred.

 

**Billings in excess of cost andestimated earnings on uncompleted contracts** represent amountsactually billed to clients, and perhaps collected, in excess of costs incurredand profit recognized on a project. Also, we occasionally negotiate advancepayments as a contract condition. These advance payments are reflected inbillings in excess of cost and estimated earnings on uncompleted contracts. Provisionsfor losses on contracts, reclamation reserves on mining contracts and reservesfor punch-list costs, demobilization and warranty costs on contracts that haveachieved substantial completion and reserves for audit and contract closingadjustments on U.S. government contracts are also included in billings inexcess of cost and estimated earnings on uncompleted contracts.

 

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**Estimate at completion**is a financial forecast of a project that indicates the best current estimateof total revenue and profit or loss at the point in time when the project willbe completed. If a project estimate at completion indicates that a project willincur a loss, a provision for the entire loss on the contract is recognizedcurrently.

 

**General and administrativeexpenses** include executive and corporate functions, such aslegal, human resources and finance and accounting.

 

**Self-insurance reserves**are maintained for uninsured business risks. We carry substantial premium-paid,traditional insurance for our various business risks; however, we doself-insure the lower level deductibles for workers’ compensation and general,automobile and professional liability. As such, we carry self-insurancereserves on our balance sheet. The current portion of the self-insurancereserves is included in other accrued liabilities.

 

**Minority interest**reflects the equity investment by third parties in certain subsidiary companiesand joint ventures that we have consolidated in our financial statements.

 

**Governmentcontract costs** areincurred under some of our contracts, primarily in our Defense, Energy &Environment, Power and Infrastructure business units. We have contracts withthe U.S. government that contain provisions requiring compliance with the U.S.Federal Acquisition Regulations and the U.S. Cost Accounting Standards. Theallowable costs we charge to those contracts are subject to adjustment uponaudit by various agencies of the U.S. government. Audits of indirect costs arecomplete through 2002. Audits of 2003 and 2004 indirect costs are in process.We have prepared and submitted cost impact statements for 1989 through 1998that have been audited by the U.S. government. We are currently negotiating theresolution of certain proposed audit adjustments to the cost impact statements.We are also in the process of preparing cost impact statements for 1999 through2005. While we have recorded reserves for amounts we believe may be owed to theU.S. government under cost reimbursable contracts, actual results may differfrom our estimates.  We believe that theresults of indirect cost audits and cost impact assessments will not have amaterial adverse effect on our financial position, results of operations orcash flows.

 

**Pensionand post-retirement benefit obligations** include defined benefit pension plans thatprimarily cover certain groups of current and former employees of ourGovernment Services Business. We utilize actuarial estimates of the pensionobligation for financial reporting purposes and make contributions as necessaryto meet the Employee Retirement Income Security Act of 1974 (“ERISA”) fundingrequirements for these plans. We also provide benefits under company-sponsoredretiree health care and life insurance plans for certain groups of employees.The retiree health care plans require retiree contributions and contain othercost-sharing features. The retiree life insurance plans provide basic coverageon a noncontributory basis. As of December 31, 2005, all benefits providedunder the pension and post-retirement health care plans have been frozen.

 

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**BUSINESS UNIT NEW WORK AND BACKLOG**

 

New work for each business unit, which representsadditions to backlog for the period, is presented below:

 
| ** **                | ** ** | **Three months ended** | ** ** | **Year ended**        | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| **NEW WORK**         | ** ** | **December 30,**  | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| **(In millions)**    | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Power                     |       | $                      | 273.1      |                  | $          | 266.1 |   | $ | 1,003.8 |   | $ | 854.0 |   |
| Infrastructure            |       | 74.5                   |       | 136.1                 |       | 593.6 |   | 959.8 |   |
| Mining                    |       | 21.5                   |       | (50.0                 | )          | 311.7 |   | 216.3 |   |
| Industrial/Process        |       | 313.3                  |       | 87.7                  |       | 619.5 |   | 434.5 |   |
| Defense                   |       | 251.1                  |       | 291.1                 |       | 676.5 |   | 723.4 |   |
| Energy &  Environment |       | 122.7                  |       | 114.7                 |       | 987.8 |   | 442.1 |   |
| Other                     |       | 0.8                    |       | (1.9                  | )          | 2.8 |   | (6.1 | ) |
| Total new work            |       | $                      | 1,057.0    |                  | $          | 843.8 |   | $ | 4,195.7 |   | $ | 3,624.0 |   |

 

The following table summarizes our changes in backlogfor each of the periods presented:

 
| ** **                            | ** ** | **Three months ended** | ** ** | **Year ended**   | ** ** |
|---------------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| **CHANGES IN BACKLOG**      | ** ** | **December 30,**            | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| **(In millions)**                | ** ** | **2005**                         | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Beginning  backlog                    |       | $                                | 4,733.0    |                  | $          | 3,928.2 |   | $ | 4,004.1 |   | $ | 3,322.5 |   |
| New work                              |       | 1,057.0                          |       | 843.8                 |       | 4,195.7 |   | 3,624.0 |   |
| Adjustments to  backlog               |       | —                           |       | —                |       | (101.4 | ) | — |   |
| Revenue and  equity income recognized |       | (909.7                           | )          | (767.9                | )          | (3,218.1 | ) | (2,942.4 | ) |
| Ending backlog                        |       | $                                | 4,880.3    |                  | $          | 4,004.1 |   | $ | 4,880.3 |   | $ | 4,004.1 |   |

 

Backlog at December 30, 2005, September 30, 2005 andDecember 31, 2004 consisted of:

 
| **BACKLOG**               | ** ** | **December 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions)**    | ** ** | **2005**              | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Power                     |       | $                     | 924.9      |                   | $          | 896.8                 |       | $ | 716.4 |   |
| Infrastructure            |       | 1,046.1               |       | 1,122.6                |       | 1,121.3               |       |
| Mining                    |       | 565.4                 |       | 594.3                  |       | 516.1                 |       |
| Industrial/Process        |       | 487.7                 |       | 299.4                  |       | 293.5                 |       |
| Defense                   |       | 990.4                 |       | 880.6                  |       | 869.7                 |       |
| Energy &  Environment |       | 865.8                 |       | 939.3                  |       | 487.1                 |       |
| Total backlog             |       | $                     | 4,880.3    |                   | $          | 4,733.0               |       | $ | 4,004.1 |   |

 

***New work and backlog***

 

At December 30, 2005, our backlog was $4,880.3million, an increase of $147.3 million and $876.2 million from the thirdquarter and the beginning of 2005, respectively. Backlog on governmentcontracts includes only two years’ worth of the portions of such contracts thatare currently funded or which management is highly confident will be funded andbacklog on mining contracts includes only the next five years. In this regard,the reported backlog at December 30, 2005 excludes $2.9 billion of governmentcontracts in progress for work to be performed beyond December 2007 andexcludes $0.7 billion for mining contracts beyond five years. Approximately$2.4 billion, or 50 percent, of backlog at December 30, 2005 is expected to berecognized as contract revenue or as equity in income in 2006. Our backlog atthe end of 2005 consisted of approximately 71 percent cost-type and 29 percentfixed-price contracts compared with 64 percent cost-type and 36 percentfixed-price contracts at the end of 2004.

 

II-10

----

 

                New work for thethree months and year ended December 30, 2005 includes the followingsignificant contracts:

 
| ** **                                                                                   | ** **   | **Three months ended** | ** **   | **Year ended**        | ** **   |
|----------------------------------------------------------------------------------------------|--------------|------------------------|--------------|-----------------------|--------------|
| **(In millions)**                                                                            | ** **   | **December 30, 2005**  | ** **   | **December 30, 2005** |         |
| ***Power***                                                                                  |         |                   |         |                  |         |
| Plant modification contracts                                                                 |         | $                      | 21.1         |                  | $            | 202.7 |   |
| Middle East task orders                                                                      |         | —                 |         | 213.3                 |         |
| New generation contract in Wisconsin                                                         |         | 101.3                  |         | 101.3                 |         |
|                                                                                         |         |                   |         |                  |         |
| ***Infrastructure***                                                                         |         |                   |         |                  |         |
| Construction of dam located in Illinois                                                      |         | 12.6                   |         | 215.5                 |         |
| Middle East task orders                                                                      |         | 8.7                    |         | 111.9                 |         |
| Engineering, operations and maintenance contract in Texas                                    |         | —                 |         | 55.2                  |         |
| *** ***                                                                                 | *** *** | *** ***           | *** *** | *** ***          | *** *** |
| ***Mining***                                                                                 |         |                   |         |                  |         |
| Silver and zinc mining contract in Bolivia                                                   |         | 8.9                    |         | 179.8                 |         |
| Phosphate mine in Idaho                                                                      |         | —                 |         | 56.4                  |         |
|                                                                                         |         |                   |         |                  |         |
| ***Industrial/Process***                                                                     |         |                   |         |                  |         |
| Sulfur handling facility in Qatar                                                            |         | 210.7                  |         | 215.4                 |         |
| Facilities operation and management contract                                                 |         | 16.0                   |         | 61.0                  |         |
|                                                                                         |         |                   |         |                  |         |
| ***Defense***                                                                                |         |                   |         |                  |         |
| Chemical demilitarization contract continuations                                             |         | 197.0                  |         | 450.6                 |         |
| Threat reduction project in the former Soviet Union                                          |         | 25.1                   |         | 94.8                  |         |
|                                                                                         |         |                   |         |                  |         |
| ***Energy &  Environment***                                                              |         |                   |         |                  |         |
| Department of Energy site operations, maintenance and management  services contract in Idaho |         | 63.5                   |         | 620.6                 |         |
| Department of Energy operations, maintenance and management services  contract continuations |         | 29.9                   |         | 106.3                 |         |
|                                                                                              |              |                        |              |                       |              |  |  |

 

**RESULTS OF OPERATIONS**

 

                The followingtable summarizes our results of operations and is included to facilitate thefollowing analysis and discussion:

 
| ** **                                                               | ** ** | **Three months ended** | ** ** | **Year ended**   | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **December 30,**       | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **January 2,** | ** ** |
| **(In millions)**                                                        | ** ** | **2005**               | ** ** | **2004**         | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** |
| Revenue                                                                  |       | $                      | 899.4      |             | $          | 761.4 |   | $ | 3,188.5 |   | $ | 2,915.4 |   | $ | 2,501.2 |   |
| Gross profit                                                             |       | 37.1                   |       | 35.9             |       | 130.4 |   | 150.0 |   | 176.3 |   |
| Equity in income  of unconsolidated affiliates                           |       | 10.3                   |       | 6.5              |       | 29.6 |   | 26.9 |   | 25.5 |   |
| General and  administrative expenses                                     |       | (18.1                  | )          | (18.0            | )          | (60.5 | ) | (60.4 | ) | (57.5 | ) |
| Other operating  income, net                                             |       | —                 |       | 1.5              |       | — |   | 1.5 |   | 6.2 |   |
|                                                                     |       |                   |       |             |       |   |   |   |   |   |   |
| Operating income                                                         |       | 29.3                   |       | 25.9             |       | 99.5 |   | 118.0 |   | 150.5 |   |
| Interest income                                                          |       | 2.3                    |       | 1.0              |       | 8.3 |   | 2.7 |   | 1.8 |   |
| Interest expense                                                         |       | (1.7                   | )          | (3.1             | )          | (9.9 | ) | (14.6 | ) | (24.6 | ) |
| Write-off of  deferred financing fees                                    |       | —                 |       | —           |       | (3.6 | ) | — |   | (9.8 | ) |
| Other expense,  net                                                      |       | (0.1                   | )          | (1.9             | )          | (0.6 | ) | (1.5 | ) | (2.1 | ) |
| Income before  reorganization items, income taxes and minority interests |       | 29.8                   |       | 21.9             |       | 93.7 |   | 104.6 |   | 115.8 |   |
| Reorganization  items                                                    |       | —                 |       | —           |       | — |   | 1.2 |   | (4.9 | ) |
| Income tax  expense                                                      |       | (7.6                   | )          | (5.5             | )          | (29.9 | ) | (39.5 | ) | (46.9 | ) |
| Minority  interests in income of consolidated subsidiaries               |       | (0.7                   | )          | (3.9             | )          | (5.4 | ) | (15.2 | ) | (21.9 | ) |
| Net income                                                               |       | $                      | 21.5       |             | $          | 12.5 |   | $ | 58.4 |   | $ | 51.1 |   | $ | 42.1 |   |

 

II-11

----

 

**THREE MONTHS ENDED DECEMBER 30, 2005 COMPARED TOTHE THREE MONTHS****ENDEDDECEMBER 31, 2004**

*** ***

# ***Revenue and operatingincome***

 

***                Revenuefor the three months ended December 30, 2005 increased $138.0 million, or 18percent, from the comparable period of 2004. The increase in revenue isprincipally from new projects and increased volume of work on certaincontinuing projects. New projects include an environmental cleanup project inIdaho, a power modification services contract in Wisconsin and an internationalsulfur handling facility contract in Qatar. Revenue from task orders in theMiddle East declined to $101.6 million for the three months ended December 30,2005, from $111.2 million for the comparable period of 2004.***

*** ***

***                Operatingincome for the three months ended December 30, 2005 increased $3.4 million fromthe three months ended December 31, 2004. Significant contributors to thehigher earnings include an increase in earnings on a Department of Energymanagement services contract primarily related to the achievement of specificmilestones, a pension and post-retirement benefits curtailment gain, areduction in our self-insurance reserves based on favorable claims experienceand initial profit recognition on a new light rail Infrastructure project.  Also contributing to this increase, werecorded a charge related to a legal matter on completed U.S. government fundedinternational projects during the fourth quarter of 2004.  The increases in earnings, however, wereoffset by additional losses on two fixed-price highway projects. Operatingincome between the quarters was also impacted by the change in recording BNFL’sshare of earnings in our Government Services Business from minority interest in2004, to cost of revenue in 2005.***

*** ***

***                Asummary of the significant changes in operating income during the three monthsended December 30, 2005 as compared to the three months ended December 31, 2004is included in the following table (in millions):***

*** ***
| **Operating  income for the three months ended December 31, 2004**             | ** **   | **$**        | **25.9**     | ** ** |
|--------------------------------------------------------------------------------|--------------|--------------|--------------|------------|
| Increases  (decreases) in operating income:                                    | *** *** | *** *** | *** *** |
| Increase in  earnings on Department of Energy management services contract     |         | 22.5         |         |
| Pension and  post-retirement benefits curtailment gain                         |         | 9.3          |         |
| Reduction of  self-insurance reserves                                          |         | 6.5          |         |
| Initial profit  recognition on light rail project                              |         | 5.1          |         |
| Decrease in  earnings from completion of contracts                             |         | (6.7         | )            |
| Significant  highway project losses in 2005                                    |         | (36.5        | )            |
| Significant  highway project loss in 2004                                      |         | 10.7         |         |
| BNFL’s share of  earnings reported as cost of revenue in 2005             |         | (19.6        | )            |
| Legal charge in  2004 related to U.S. government funded international projects |         | 8.2          |         |
| Other                                                                          |         | 3.9          |         |
| Net increase                                                                   |         | 3.4          |         |
| **Operating  income for the three months ended December 30, 2005**             | ** **   | **$**        | **29.3**     | ** ** |

*** ***

***The diversification of our business may cause margins tovary between periods due to the inherent risks and rewards on fixed-pricecontracts causing unplanned gains and losses on contracts. Margins may alsovary between periods due to changes in mix and timing of contracts executed byus, which contain various risk and profit profiles and are subject touncertainties inherent in the estimation process.*** As discussed in our summary of critical accountingpolicies, we provide for estimated losses on contracts when such losses areidentified and can be reasonably estimated. However, we do not recognizerevenue for change orders or claims until it is probable that they will resultin additions to the contract value.  Inmany cases revenue is not recognized until an actual settlement is reached. Thecombination of these accounting policies can result in volatility in operatingincome with a charge recognized in one period and change order or claim revenuerecognized in a subsequent period.

*** ***

***For a more detailed discussion of our revenue and operatingincome, see “Business Unit Results,” later in this Management’s Discussion andAnalysis.***

*** ***

***II-12***

----

*** ***

# ***Equity in income ofunconsolidated affiliates***

# *** ***

Equity in income of unconsolidated affiliates for thethree months ended December 30, 2005 increased $3.8 million from the comparableperiod of 2004. The most significant component of this increase was a $3.6million increase in earnings from our share of the MIBRAG mining venture inGermany. The majority of this increase is due to an adjustment to the estimatedcost associated with the demolition of an old manufacturing facility.

 

***Other operating income, net***

 

Other operating income, net,of $1.5 million for the three months ended December 31, 2004 primarilyconsisted of a recovery related to a legal settlement. No similar transactionsoccurred in the three months ended December 30, 2005.

 

***Interest income***

 

***Interest income for the three months ended December 30, 2005increased $1.3 million from the comparable period of 2004 due to higher averagecash balances available for investment and an increase in short-term interestrates.***

*** ***

***Interest expense***

 

***Interest expense for the three months ended December 30,2005 declined $1.4 million from the comparable period of 2004 due to improvedterms from amendments to our credit facility and a reduction in the amount ofletters of credit outstanding under the facility.***

*** ***

***Income tax expense***

 

The effective income taxrate for the three months ended December 30, 2005 and December 31, 2004 was25.6 percent and 25.2 percent, respectively. The effective rates are substantially lower than the statutory rates dueto the following factors. In the fourth quarter of 2005, we implemented adomestic reinvestment plan for dividends received from our interest in MIBRAG.The plan allows us to take advantage of a temporary dividend deduction andgenerated a $3.8 million tax benefit. Income from work performed in the MiddleEast is generally not subject to state income tax. As a result of earnings fromwork in the Middle East, the state tax effective rate is lower than in previousperiods.  Income tax expense was reducedby $3.6 million during the three months ended December 31, 2004 due to thereversal of accrued Dutch withholding taxes following the ratification of the2004 Protocol to U.S.-Netherlands Income Tax Treaty.

 

***Minority interestsin income of consolidated subsidiaries***

 

***Minority interests in income of consolidated subsidiariesfor the three months ended December 30, 2005 decreased $3.2 million from thecomparable period of 2004. On April 7, 2005, we consummated the acquisition ofBNFL’s interest in the Government Services Business. See Note 15, “Acquisitionof BNFL’s Interest in Government Services Business,” of Notes to ConsolidatedFinancial Statements in Item 8 of this report. During 2005, BNFL’s share of theearnings on certain contracts was classified as cost of revenue rather thanminority interest in income of consolidated subsidiaries as had been the caseprior to the acquisition. During the three months ended December 30, 2005, BNFL’sshare of earnings reported as cost of revenue totaled $19.6 million, including$2.9 million related to a pension and post-retirement benefits curtailmentgain.***

 

II-13

----

 

***2005 COMPARED TO 2004***

*** ***

***Revenue andoperating income***

*** ***

Revenue for 2005 increased $273.1 million, or ninepercent, compared to 2004. Revenue increased from a new environmental cleanupproject in Idaho; work performed on a domestic infrastructure dam project; apower modification services contract in Wisconsin; increased activity and scopeon projects in the former Soviet Union; and revenue from contract miningprojects. The winding down and completion of a new generation power project andlower revenue from Middle East task orders reduced revenue as compared to 2004.Revenue from task orders in the Middle East declined $175.2 million to $381.1million for 2005 as compared to 2004 revenue of $556.3 million. This declinewas due to the completion of several large infrastructure and power task orderswith the USACOE.

 

Operating income for 2005 declined $18.5 million from2004. The most significant impacts on operating income were contract losses onthree highway projects totaling $99.6 million in 2005, compared to $44.3million of contract losses in 2004. Earnings for 2005 were also impacted by thewinding down and completion of certain major projects in the Power andInfrastructure business units, lower claim recoveries and the impact ofrecording BNFL’s share of earnings in our Government Services Business as costof revenue rather than minority interest. The decline in operating income waspartially offset by higher earnings on a large Department of Energy managementservices contract primarily related to achievement of specific milestones,increased award and incentive fees on our chemical demilitarization projects,increased earnings on projects in the former Soviet Union, a pension and post-retirementbenefits curtailment gain and an increase in earnings from task order work inthe Middle East.

 

A summary of the significant changes in operatingincome during 2005 as compared to 2004 is included in the following table (inmillions):

 
| **Operating  income for the year ended December 31, 2004**                        | ** ** | **$**  | **118.0** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------|-----------|------------|
| Increases (decreases) in operating income:                                        |       |   |      |
| Increase in  earnings on Department of Energy management services contract        |       | 19.6   |      |
| Increased award  and incentive fees on chemical demilitarization projects         |       | 13.3   |      |
| Increased  earnings on projects in the former Soviet Union                        |       | 9.4    |      |
| Pension and  post-retirement benefits curtailment gain                            |       | 9.3    |      |
| Increase in  earnings from task order work in the Middle East                     |       | 5.1    |      |
| Increase in  earnings from other continuing projects                              |       | 52.5   |      |
| Increase in  earnings from new projects                                           |       | 15.8   |      |
| Decrease in  earnings from completion of contracts                                |       | (33.6  | )         |
| Significant  highway project losses in 2005                                       |       | (99.6  | )         |
| Significant  highway project losses in 2004                                       |       | 44.3   |      |
| Decrease in  claim settlements                                                    |       | (7.3   | )         |
| BNFL’s share of  earnings reported as cost of revenue                        |       | (29.8  | )         |
| Legal charge in  2004 related to U.S. government funded international projects    |       | 8.2    |      |
| Increase in  business development, personnel development and other overhead costs |       | (19.3  | )         |
| Other                                                                             |       | (6.4   | )         |
| Net decrease                                                                      |       | (18.5  | )         |
| **Operating  income for the year ended December 30, 2005**                        | ** ** | **$**  | **99.5**  | ** ** |

 

Fora more detailed discussion of our revenue and operating income, see “BusinessUnit Results” later in this Management’s Discussion and Analysis.

 

II-14

----

 

***Equity in incomeof unconsolidated affiliates***

*** ***

Equityin income of unconsolidated affiliates for 2005 increased by $2.7 million from2004. Equity earnings in 2005 from the MIBRAG mining venture in Germany, whichaccounts for a significant portion of our unconsolidated affiliates, were up$1.8 million from 2004.

 

***Other operatingincome, net***

*** ***

Otheroperating income, net, of $1.5 million in 2004 primarily consisted of arecovery related to a legal settlement. No similar transactions occurred in2005.

 

***Interest income***

*** ***

***Interest income for 2005 increased $5.6 million from thecomparable period of 2004 due to higher average cash balances available forinvestment and an increase in short-term interest rates.***

*** ***

***Interest expense***

*** ***

Interestexpense for 2005 decreased $4.7 million from 2004 due to improved terms fromamendments to our credit facility and a reduction in the amount of letters ofcredit outstanding under the facility.

 

# ***Write-off of deferredfinancing fees***

# *** ***

***On June 14, 2005, we amended our credit facility to includemore favorable provisions and to extend the term to June 2010. The amendment ofthe credit facility required a $3.6 million write-off of unamortized deferredfinancing fees.***

*** ***

***Income tax expense***

 

The components of theeffective tax rate for 2005 and 2004 are shown in the table below:

 
| ** **                  | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** |
|-----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Federal tax rate            |       | 35.0                  | %          | 35.0                  | %          |
| State tax                   |       | (2.5                  | )          | 3.1                   |       |
| Nondeductible  items        |       | 2.5                   |       | 2.1                   |       |
| Domestic reinvestment  plan |       | (4.0                  | )          | —                |       |
| Foreign tax                 |       | 0.9                   |       | (2.9                  | )          |
| Effective tax  rate         |       | 31.9                  | %          | 37.3                  | %          |

 

In the fourth quarter of2005, we implemented a domestic reinvestment plan for dividends received fromour interest in MIBRAG. The plan allows us to take advantage of a temporarydividend received deduction and generated a $3.8 million tax benefit.

 

Income from work performedin the Middle East is generally not subject to state income tax. As a result ofan increase in earnings from work in the Middle East during 2005, the state taxeffective rate is substantially lower than in previous periods. Also, inpreparing the state income tax returns for 2004, we revised our estimate of theimpact of foreign earnings not subject to state income taxes. The result ofthis change in estimate was a $2.0 million tax benefit recorded in the secondquarter of 2005.

 

The foreign tax benefit for2004 relates to a $3.6 million benefit derived from the reversal of accruedDutch withholding taxes following the ratification of the 2004 Protocol toU.S.-Netherlands Income Tax Treaty.

 

II-15

----

 

***Minority interests***

 

Minority interests in incomeof consolidated subsidiaries for 2005 declined by $9.8 million from 2004. OnApril 7, 2005, we consummated the acquisition of BNFL’s interest in ourGovernment Services Business. See Note 15, “Acquisition of BNFL’s Interest inGovernment Services Business,” of Notes to Consolidated Financial Statements inItem 8 of this report. BNFL’s share of the earnings on certain contracts hasbeen classified as cost of revenue rather than minority interest in income ofconsolidated subsidiaries as was the case prior to the acquisition. During2005, BNFL’s share of earnings reported as cost of revenue totaled $29.8million, including $2.9 million related to a pension and post-retirementbenefits curtailment gain.

 

***2004 COMPARED TO 2003***

*** ***

***Revenue andoperating income***

*** ***

Revenue for 2004 increased $414.2 million, or 17percent, compared to 2003. The increase was principally due to substantialinfrastructure and power work performed under task orders with the USACOE inthe Middle East totaling $556.3 million, an increase of $497.1 million from2003, and revenue from new large highway projects, new domestic power contractsand new threat reduction contracts, primarily in the former Soviet Union. Theincrease in revenue was partially offset by a decline in revenue due to thecompletion of certain major contracts in the Power, Infrastructure, Defense andEnergy & Environment business units.

 

Operating income for 2004 declined $32.5 million from2003. Operating income was impacted by several items including contract losseson three highway projects totaling $44.3 million, the winding down orcompletion of certain major projects in the Power, Infrastructure and Energy& Environment business units and a fourth quarter charge of $8.2 millionrelated to a legal matter on completed U.S. government funded internationalcontracts. In addition, operating income in 2003 included the recognition ofcontract incentives, claim settlements and contract renegotiations. The declinein operating income was partially offset by an increase in earnings from taskorder work in the Middle East, earnings from new power and threat reductioncontracts and the favorable renegotiation and improved performance on severalEnergy & Environment contracts. A summary of the significant changes inoperating income is included in the following table:

 
| **Operating  income for the year ended January 2, 2004**                                          | ** ** | **$**  | **150.5** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------|-----------|------------|
| Increases  (decreases) in operating income:                                                       |       |   |      |
| Increase in  earnings from Middle East task orders                                                |       | 41.7   |      |
| Increase in  earnings from other new contracts                                                    |       | 19.1   |      |
| Increase in  earnings from continuing projects                                                    |       | 13.1   |      |
| Decrease in  earnings from completion of contracts                                                |       | (44.3  | )         |
| Significant  highway project losses                                                               |       | (44.3  | )         |
| Increase in  business unit business development overhead and general and administrative  expenses |       | (10.2  | )         |
| Other, including  charges for legal issues                                                        |       | (7.6   | )         |
| Net decrease                                                                                      |       | (32.5  | )         |
| **Operating  income for the year ended December 31, 2004**                                        | ** ** | **$**  | **118.0** | ** ** |

 

Revenueand operating income from the Middle East task orders successively declinedduring the second and third quarters of 2004 as compared to the first quarterof 2004 principally due to the substantial completion of a large task order inthe first quarter. During the fourth quarter of 2004, revenue remainedessentially unchanged from the second and third quarters; however, earningsincreased significantly due to the resolution of funding and other related contingencies.In addition, the pace of awards of new task orders by the USACOE and other U.S.agencies slowed in the first and second quarters of 2004 as funding for taskorders was diverted from reconstruction to security efforts in the Middle East.During the third and fourth quarters of 2004, awards of new task ordersincreased.

 

II-16

----

 

***Equity in income of unconsolidated affiliates***

 

Equityin income of unconsolidated affiliates for 2004 increased by $1.4 million from2003 generally due to improved performance. Equity earnings in 2004 from theMIBRAG mining venture in Germany, which accounts for a significant portion ofour unconsolidated affiliates, were comparable to 2003. The quantity of coalshipments by MIBRAG in 2004 declined by 9 percent compared to 2003 resultingfrom planned maintenance outages by MIBRAG’s power plant customers that were oflonger duration than those experienced in 2003. An increase in the averagesales price per ton offset, in part, the decline in coal shipments. However,operating expenses, some related to lower volume, also offset the impact oflower shipments. A strengthening of the euro of approximately 10 percent, ascompared to the U.S. dollar, offset an increase in MIBRAG’s municipal taxliability.

 

***General and administrative expenses***

 

Generaland administrative expenses for 2004 increased $2.9 million from 2003. Theincrease was principally due to costs associated with complying with theSarbanes-Oxley Act and higher international business development costs. Theincrease was partially offset by a reduction in expense of $5.4 million ascompared to 2003 related to the extension of the term of previously grantedoptions of our chairman, Dennis R. Washington.

 

***Other operating income, net***

 

Otheroperating income, net, of $1.5 million in 2004, primarily consisted of arecovery related to a legal settlement. Other operating income, net of $6.2million in 2003 included a gain of $4.9 million from the April 2003 sale of theTechnology Center, a gain of $3.2 million from the sale of coal leases, a gainof $1.5 million from the resolution of certain contingent issues related to theOctober 2002 sale of EMD offset by a charge of $3.4 million related to a legalsettlement.

 

***Interest expense***

 

Interestexpense for 2004 declined $10.0 million from 2003 due to improved terms under anew credit facility entered into in October 2003, as compared to the priorcredit facility. On March 19, 2004 and again on August 5, 2004, we successfullyamended the credit facility to include more favorable terms and reduce interestexpense over the remaining term of the agreement.

 

***Write-off of deferred financing fees***

 

OnOctober 9, 2003, we entered into an agreement replacing our prior seniorsecured revolving credit facility with a new credit facility. In connectionwith the termination of the senior secured revolving credit facility, we wroteoff the remaining unamortized balance of the related deferred financing feestotaling $9.8 million.  No such write-offoccurred in 2004.

 

***Reorganization items***

 

Reorganizationitems of $1.2 million for 2004 consisted of a reduction in estimatedprofessional expenses to settle outstanding claims from our bankruptcy. During2003, we recognized a charge of $4.9 million as a result of estimatedadditional professional fees and expenses to be incurred primarily by theunsecured creditors’ committee to settle outstanding claims in connection withour reorganization.

 

II-17

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***Income tax expense***

 

                Thecomponents of the effective tax rate for 2004 and 2003 are shown in the tablebelow:

 
| ** **           | ** ** | **Year ended**        | ** ** | **Year ended**      | ** ** |
|----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **           | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Federal tax rate     |       | 35.0                  | %          | 35.0                | %          |
| State tax            |       | 3.1                   |       | 3.2                 |       |
| Nondeductible  items |       | 2.1                   |       | 2.8                 |       |
| Foreign tax          |       | (2.9                  | )          | 1.3                 |       |
| Effective tax  rate  |       | 37.3                  | %          | 42.3                | %          |

 

The effective tax rate for2004 decreased from 2003, primarily due to the impact of lower foreigntaxes.  Foreign taxes for 2004 decreasedsubstantially from 2003 due to a $3.6 million impact from the ratification ofthe 2004 Protocol to U.S.-Netherlands Income Tax Treaty.

 

***Minority interests***

 

                Minority interestsin income of consolidated subsidiaries for 2004 declined by $6.7 million from2003. The majority of our minority interests related to BNFL’s 40 percentinterest in our Government Services Business. Increases or decreases in incomeof our majority-owned subsidiaries result in a corresponding increase ordecrease in the minority interest share of income from those operations. During2004, a consolidated joint venture recorded a $10.7 million contract loss ofwhich $3.7 million related to the minority interest.

 

**BUSINESS UNIT RESULTS**

*(In millions)*

 
| ** **                            | ** ** | **Three months ended** | ** ** | **Year ended**   | ** ** |
|---------------------------------------|------------|------------------------|------------|------------------|------------|
| ** **                            | ** ** | **December 30,**       | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **January 2,** | ** ** |
| **Revenue**                           | ** ** | **2005**               | ** ** | **2004**         | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** |
| Power                                 |       | $                      | 244.9      |             | $          | 190.7 |   | $ | 766.1 |   | $ | 634.0 |   | $ | 511.8 |   |
| Infrastructure                        |       | 150.6                  |       | 196.6            |       | 665.2 |   | 891.1 |   | 585.9 |   |
| Mining                                |       | 40.7                   |       | 29.3             |       | 171.1 |   | 109.8 |   | 84.2 |   |
| Industrial/Process                    |       | 124.9                  |       | 100.0            |       | 424.6 |   | 394.7 |   | 430.3 |   |
| Defense                               |       | 141.3                  |       | 135.2            |       | 555.8 |   | 495.3 |   | 506.1 |   |
| Energy &  Environment             |       | 196.2                  |       | 111.5            |       | 602.8 |   | 396.6 |   | 385.5 |   |
| Intersegment,  eliminations and other |       | 0.8                    |       | (1.9             | )          | 2.9 |   | (6.1 | ) | (2.6 | ) |
| Total revenue                         |       | $                      | 899.4      |             | $          | 761.4 |   | $ | 3,188.5 |   | $ | 2,915.4 |   | $ | 2,501.2 |   |
|                                  |       |                   |       |             |       |   |   |   |   |   |   |
| **Operating  income (loss)**          |       |                   |       |             |       |   |   |   |   |   |   |
| Power                                 |       | $                      | 21.0       |             | $          | 14.6 |   | $ | 78.9 |   | $ | 34.8 |   | $ | 39.0 |   |
| Infrastructure                        |       | (29.6                  | )          | (15.8            | )          | (79.1 | ) | (16.2 | ) | 32.3 |   |
| Mining                                |       | 7.4                    |       | 6.7              |       | 28.6 |   | 33.4 |   | 33.5 |   |
| Industrial/Process                    |       | 0.5                    |       | 1.6              |       | 3.6 |   | 17.8 |   | 2.5 |   |
| Defense                               |       | 17.4                   |       | 12.6             |       | 60.3 |   | 40.1 |   | 49.8 |   |
| Energy &  Environment             |       | 28.5                   |       | 23.0             |       | 67.5 |   | 73.1 |   | 69.9 |   |
| Intersegment and  other unallocated   |       |                   |       |             |       |   |   |   |   |   |   |
| operating costs                       |       | 2.2                    |       | 1.2              |       | 0.2 |   | (4.6 | ) | (19.0 | ) |
| General and  administrative expenses  |       | (18.1                  | )          | (18.0            | )          | (60.5 | ) | (60.4 | ) | (57.5 | ) |
| Total operating  income               |       | $                      | 29.3       |             | $          | 25.9 |   | $ | 99.5 |   | $ | 118.0 |   | $ | 150.5 |   |

 

II-18

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## **2005 COMPARED TO 2004**

## ** **

## ***Power***

## ** **

***Revenue for 2005 increased $132.1 million, or 21 percent,from 2004. The increase was due primarily to $93.8 million higher revenue fromwork in the Middle East. A new plant modification project in Wisconsin, a newgeneration project in Puerto Rico and modification projects in Michigancombined to also generate increased revenue. Offsetting these increases was adecrease in revenue from a Wisconsin new generation plant project as theproject achieved substantial completion in the third quarter of 2005 and acombined revenue decrease in nuclear power plant modification projects and anannually funded project in Tennessee.***

*** ***

Operating income for 2005 increased $44.1 million from2004. Earnings from work in the Middle East increased $23.1 million from $7.0million to $30.1 million.A portion of this increase was due to favorable performance ratings resultingin performance-based award fees associated with work performed during 2004.Based on the actual awards and consistent with our policy, we are accruingperformance-based awards for the ongoing work in the Middle East. Workon the Wisconsin plant modification project provided an increase of $6.6million and a new generation project in Puerto Rico generated increased incomeof $4.9 million. In addition, a claim settlement on an international projectprovided another $18.0 million of income. The increase was partially offset bya decrease in earnings of $10.6 million from completion of a new generationpower project.

 

## ***Infrastructure***

## ** **

***Revenue for 2005 declined $225.9 million, or 25 percent,from 2004 due to the substantial completion of several large task orders in theMiddle East. Revenue from the Middle East decreased $290.9 million to $110.7million in 2005 as compared to $401.6 million in 2004. In addition, revenuedeclined from the winding down of a light rail project in New Jersey and ahighway construction project in Nevada. Partially offsetting this decline wereprojects that moved from the start-up phase in 2004 to full operation in 2005including a dam construction project in Illinois, a light rail design/buildproject in California and an airport runway construction project in California.***

*** ***

The operating loss increased $62.9 million to $(79.1)million in 2005 compared to $(16.2) million in 2004. Three highway constructioncontracts located in California and Nevada that recognized $44.3 million oflosses in 2004 continued to experience cost increases resulting in a loss of$99.6 million in 2005. Todate, we have only been able to negotiate acceptable change orders with theclients involved for a small portion of the cost increases. We believe therewill be significant recoveries once the claim process is completed. Because wehave not been able to reach agreement on the change orders and claims,recoveries will be recognized only when it is probable they will result inadditional revenue and the amount can be reliably estimated. While the entireamount of the current estimated losses have been recognized, actual results maydiffer from our estimates.

 

Partially offsetting these losses was goodperformance in completion of a runway replacement project in California,continuing work on a dam project located in Illinois and a light rail projectin California, increasing our earnings $19.3 million over 2004. OurInfrastructure related work in the Middle East may be winding down. Earningsfrom work in the Middle East were $18.9 million and $38.9 million during 2005and 2004, respectively. Claim settlements in 2005 totaled $3.2 million comparedto $14.2 million in 2004.

 

***Mining***

 

Revenue for 2005 increased $61.3 million, or 56percent, from 2004 as a result of work at a new domestic gold mine project inNevada, a phosphate mine in Idaho, a new international silver mining projectand higher production at a copper mine in Nevada. The operating contract forthe copper mine in Nevada ended in the fourth quarter of 2005 due to the ownersdecision to self-perform the contract. As a result, our contract was terminatedand $59.1 million was removed from backlog.

 

II-19

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***Operating income for 2005 decreased $4.8 million from 2004primarily as a result of lower earnings on contract mining projects due tohigher equipment maintenance, project startup and contract renegotiation costs.Earnings from our share of the MIBRAG mining venture in Germany increased $1.8million in 2005.***

*** ***

## ***Industrial/Process***

## ** **

Revenue for 2005 increased $29.9 million, or eightpercent, from 2004. The increase was driven by continued growth on a majorinternational facility management project, a major life sciences project inPuerto Rico and from the start up of an international sulfur handling facilitycontract. The increase in revenue was partially offset by a reduction inrevenue from the completion of several facilities management contracts in 2005.Industrial/Process continues to see improvement in all of its growth marketsincluding Oil, Gas & Chemicals, Life Sciences and Facility Managementoutsourcing opportunities.

 

Operating income for 2005 declined $14.2 million from2004 primarily due to claim settlements and the expiration of the warrantyperiod on a major process contract, totaling $15.6 million, all recognized in2004.

 

## ***Defense***

## ** **

Revenue for 2005 increased $60.5 million, or 12percent, from 2004. The increase was primarily due to higher procurement andconstruction activities on a plutonium reactor conversion project and increasedactivity on four other threat reduction projects in the former Soviet Union. Inaddition, revenue for 2005 also increased from 2004 from a higher volume ofoperations and maintenance activities on chemical demilitarization projects.The increase in revenue for 2005 was partially offset by reduced task orderactivities on a program in the former Soviet Union.

 

Operating income for 2005 increased $20.2 million, or50 percent, compared to 2004 primarily due to a $9.4 million increase inearnings on projects in the former Soviet Union and $13.3 million in higherfees and incentives earned on chemical demilitarization projects. Operatingincome for 2005 was reduced by $4.4 million as a result of a change inrecording BNFL’s share of certain earnings. See additional discussion below under Energy and Environment.

 

## ***Energy & Environment***

## ** **

Revenue for 2005 increased $206.2 million, or 52percent, from 2004. The increase in revenue was primarily associated with a newenvironmental cleanup project in Idaho, an increase in revenue from newcontracts in the Middle East totaling $21.9 million and an increase from theachievement of specific milestones on a large Department of Energy managementservices contract. The increase in revenue for 2005 was partially offset by adecline related to a large environmental construction project and thecompletion of a decontamination and demolition contract.

 

Operating income for 2005 declined $5.6 million from2004; however, operating income before BNFL’s share of earnings increased $19.8million in 2005 as compared to 2004. Beginning in the second quarter of 2005,payments to BNFL totaling $25.4 million were charged to operating income ratherthan being reflected as minority interest. See Note 15, “Acquisition of BNFL’sInterest in Government Services Business,” of Notes to Consolidated FinancialStatements in Item 8 of this report. Operating income in 2005 was also impactedby $15.9 million lower earnings on a large environmental construction projectand losses recognized relating to a reduction in work performed in the UnitedKingdom. Other factors contributing to the higher earnings before BNFL’s shareincluded a $19.6 million increase primarily related to the achievement ofspecific milestones on a large Department of Energy management servicescontract, $6.9 million related to a post-retirement benefits curtailment gain,$4.9 million from a new environmental cleanup project and a $2.0 millionincrease in earnings from work in the Middle East to $2.3 million in 2005 ascompared to $0.3 million in 2004.

 

II-20

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## **2004 COMPARED TO 2003**

## ** **

***Power***

 

Revenue for 2004 increased $122.2 million, or 24percent, from 2003. The increase in revenue was primarily due to work in theMiddle East totaling $152.0 million and new major domestic fossil and nuclearpower projects including the construction of new generation power plants inWisconsin and Puerto Rico, reactor containment vessel head and steam generatorreplacement projects in South Carolina, Minnesota and Florida and a plantmodification and maintenance project in Wisconsin. The increase in revenue for2004 was partially offset by a decline in revenue from the winding down and completionof two new generation power projects in Massachusetts in 2003 totaling $112.1million, and the completion of several other projects including a plantmodification project in Michigan and a steam generator replacement project inMaryland.

 

Operating income for 2004 declined $4.2 millionfrom 2003 due to the completion of several projects including the favorableperformance on a steam generator replacement project and a plant modificationproject in 2003 that together totaled $24.4 million. The decline in operatingincome was partially offset by earnings on a new generation power project of$7.6 million, favorable performance from a steam generator replacement projectof $6.9 million and earnings from power projects performed in the Middle Eastof $7.0 million.

 

***Infrastructure***

 

Revenue for 2004 increased$305.2 million, or 52 percent, from 2003. The increase was due to revenue fromtask order contracts in the Middle East with the USACOE and other U.S. agenciestotaling $401.5 million, revenue from three new highway projects in Californiaand Nevada and a new light rail project in California. The increase in revenuewas partially offset by a decline of $138.3 million from the substantialcompletion of several large projects.

 

The Infrastructure businessunit incurred an operating loss of $16.2 million for 2004 compared to operatingincome of $32.3 million in 2003, a decline in earnings of $48.5 million. Duringthe year, Infrastructure performed $401.5 million in work in the Middle Eastwhich generated earnings of $38.9 million. However, during the year, threefixed price highway projects with a total value of approximately $450 millionexperienced significant cost growth resulting from design changes, costescalation and quantity growth and project delays which resulted in higher thanestimated costs. Infrastructure recognized losses on these projects of $44.3million. In addition, the earnings for Infrastructure’s engineering servicesdivision were down by approximately $15 million as a result of fewer engineeringhours resulting in unabsorbed fixed costs, costs associated with right sizingthe operation and the inability to negotiate change orders with certain clientsprior to year-end. Lastly, an $8.2 million charge was taken related to apotential settlement associated with legal issues surrounding completed U.S.government funded international contracts. Operating income for 2004 includedclaim settlements of $14.2 million compared with $12.1 million in 2003.

 

***Mining***

 

Revenue for 2004 increased $25.6 million, or 30percent, from 2003 as a result of revenue provided from new mining contracts,including a copper mine in Nevada and a phosphate mine in Canada. The increasein revenue was partially offset by a decline of $5.5 million from thecompletion of two mining contracts in Wyoming and Nevada.

 

Operatingincome for 2004 was essentially unchanged from 2003. Operating income for 2004benefited from earnings on new contracts, improved performance and higherproduction on existing contracts. Operating income for 2003 included a $3.2million gain from the sale of coal leases in the fourth quarter of 2003. Equityearnings in 2004 from the MIBRAG mining venture in Germany, which accounts fora significant portion of operating income, were comparable to 2003. The quantityof coal shipments by MIBRAG in 2004 declined by nine percent compared to 2003resulting from planned maintenance outages by MIBRAG’s power plant customersthat were of longer duration than those experienced in 2003. An increase in theaverage sales price per ton offset, in part, the

 

II-21

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declinein coal shipments. In addition, lower operating expenses, primarily related tolower volume, also offset the impact of lower shipments. A strengthening of theeuro as compared to the U.S. dollar, of about ten percent, offset an increasein MIBRAG’s municipal tax liability.

 

***Industrial/Process***

 

Revenuefor 2004 declined $35.6 million, or eight percent, from 2003. The decline wasdue to the winding down or completion of several automotive contracts, thecompletion of a refinery shutdown project and several other contracts. Thedecline was partially offset by an increase in revenue from a food processingfacility construction contract, a new major facilities management contract andthe recognition of a $10.0 million claim settlement.

 

Operatingincome for 2004 increased by $15.3 million from 2003 primarily due to a $9.8million net claim settlement and $3.9 million from the expiration of thewarranty period on a major process contract. Operating income for 2004 includes$13.2 million of claim settlements as compared to no claim settlementsrecognized in 2003.

 

***Defense***

 

Revenuefor 2004 declined $10.8 million, or two percent, from 2003 primarily fromclosure activities on a chemical demilitarization contract in 2003 thatresulted in a decrease in revenue of $66.1 million and the completion ofconstruction activities and slower start-up requirements at another chemicaldemilitarization contract. The decline in revenue was partially offset by anincrease in revenue attributable to an increase in scope of work on threatreduction contracts in the former Soviet Union and revenue from a new powerenhancement contract.

 

Operatingincome for 2004 declined by $9.7 million from 2003. The decline in operatingincome was primarily the result of certain events occurring in 2003 includingfavorable claim settlements on construction projects totaling $13.6 million (ascompared to zero in 2004), which was partially offset by a charge in the fourthquarter associated with unbilled indirect costs related to a completed chemicaldemilitarization project of $5.4 million. Earnings in 2004 from chemicaldemilitarization projects and threat reduction projects in the former SovietUnion have improved marginally.

 

***Energy & Environment***

 

Revenuefor 2004 increased $11.1 million, or three percent, from 2003. The increase inrevenue was primarily due to improved performance at two large DoE managementservice contracts and at a design-build project, and revenue from a newdecontamination and demolition contract. The increase in revenue was partiallyoffset by a decline in revenue from the winding down of a large design-buildcontract and a reduction in volume at an engineered-products business.

 

Operatingincome for 2004 increased $3.2 million from 2003. Operating income in 2004increased $23.0 million from the favorable renegotiation of one contract andimproved performance at two other DoE management services contracts. Theincrease in 2004 operating income was partially offset by a $5.2 milliondecline in earnings from the winding down of a large design-build contract, an$8.8 million impact from a reduction in volume at an engineered-productsbusiness and increased business development costs associated with pursuit ofnew DoE procurements.

 

***Intersegment and other***

 

Intersegment operating loss of ($4.6) million in 2004primarily consisted of residual costs from our non-union subsidiary of $4.1million.

 

II-22

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Intersegment operating loss of ($19.0) million in 2003included residual costs from our non-union subsidiary of $8.4 million andbonding fees of $5.3 million, a $5.4 million charge resulting from anunderaccrual of employee benefits related to periods prior to our emergencefrom bankruptcy protection, a charge of $3.4 million related to a legalsettlement, all partially offset by a gain of $4.9 million from the sale of theTechnology Center.

 

**FINANCIAL CONDITION AND LIQUIDITY**

 

We have three principal sources of liquidity: (i) cashgenerated by operations; (ii) existing cash and cash equivalents; and (iii)available capacity under our Credit Facility. We had cash and cash equivalentsof $237.7 million at December 30, 2005. At December 30, 2005, we had noborrowings and $92.0 million in face amount of letters of credit outstandingunder the Credit Facility, leaving a borrowing capacity of $258.0 million. Formore information on our financing activities, see “Credit Facility” below.

 

Our cash flows are primarily impacted from period toperiod by fluctuations in working capital and purchases of construction andmining equipment required to perform our contracts. Working capital is affectedby numerous factors including:

 

•                  ***Business unit mix.***  Our working capital requirements are uniqueby business unit, and changes in the type, size and stage of completion ofcontracts performed by our business units can impact our working capitalrequirements. Also, growth in the business requires working capital investmentand the purchase of construction and mining equipment.

 

•                  ***Commercial terms.***  The commercial terms of our contracts withcustomers and subcontractors may vary by business unit, contract type andcustomer type and utilize a variety of billing and payment terms.  These could include client advances, milestonepayment schedules, monthly or bi-monthly billing cycles and performance baseincentives. Additionally, some customers have requirements on billingdocumentation including documentation from subcontractors, which may increasethe level of billing complexity and cause delays in the billing cycle andcollection cycle from period to period.

 

•                  ***Contract life cycle.***  Our contracts typically involve initial cashfor working capital during the start-up phase, reach a cash neutral positionand eventually experience a reduction of working capital during the wind-downand completion of the project.

 

•                  ***Delays in execution. ***At times, we may experiencedelays in scheduling and performance of our contracts and encounter unforeseenevents or issues that may negatively affect our cash flow.

 

***Liquidity position and cash flows***

*(Inmillions)*

 
| **Liquidity**              | ** ** | ** ** | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| Cash and cash  equivalents |       |       |       | $                               | 237.7      |                            | $          | 224.5 |   |
| Restricted cash            |       |       |       | 52.5                            |       | 61.6                            |       |
| Short-term  investments    |       |       |       | —                          |       | 30.2                            |       |
| Total                      |       |       |       | $                               | 290.2      |                            | $          | 316.3 |   |

 
| ** **                         | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**           | ** ** |
|------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **Cash flow activities** | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Net cash  provided (used) by:      |       |                            |       |                            |       |                          |       |
| Operating activities               |       | $                               | 105.2      |                            | $          | 110.6                         |       | $ | 79.6 |   |
| Investing activities               |       | (40.0                           | )          | 15.0                            |       | 10.5                          |       |
| Financing activities               |       | (52.0                           | )          | (19.2                           | )          | (52.3                         | )          |
| Increase in cash                   |       | $                               | 13.2       |                            | $          | 106.4                         |       | $ | 37.8 |   |

 

II-23

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The discussion below highlights significant aspects ofour cash flows.

 

•                  ***Operating activities:***

 

In 2005, our operating activitiesprovided $105.2 million of cash compared to $110.6 million provided in 2004.Cash from operating activities in 2005 included net income of $58.4 million andseveral significant non-cash charges including non-cash income tax expense of$26.7 million, depreciation of $21.9 million and amortization and write-off offinancing fees of $6.3 million. During 2005 and 2004, we recognized contractlosses of $99.6 million and $44.3 million, respectively, on three highwayconstruction projects. During 2005, the three highway projects required $54.8million of cash and we expect an additional $75 million of cash requirements in2006.

 

During 2005, excludingthe impact of the highway contract losses, we funded a $45.1 million increasein working capital requirements primarily associated with new projects. Workingcapital requirements for the USACOE task orders in the Middle East, in both ourInfrastructure and Power business units, increased in 2005. We expect theMiddle East working capital of $58.0 million at December 30, 2005 to decreasein 2006.

 

In 2004, our operatingactivities provided $110.6 million of cash compared to $79.6 million providedin 2003. Cash from operating activities in 2004 included net income of $51.1million and several significant non-cash charges including non-cash income taxexpense of $34.6 million and depreciation and amortization of $21.9 million.Included in 2004 operating earnings were estimated losses of $44.3 million onthree large highway construction projects which required minimum cash funding.Cash flow for 2004 was impacted by an increase of working capital requirementsfor the USACOE task orders in the Middle East, in both our Infrastructure andPower business units. At December 31, 2004, capital invested in contracts in theMiddle East amounted to $51.6 million up from $0.7 million at the end of 2003.

 

•                  ***Investing activities:***

 

During 2005, investingactivities required $40.0 million of cash including $63.2 million of capitalexpenditures, net of $13.0 million of proceeds from equipment sales,principally for new contracts in the Infrastructure and Mining business units.Also, in the fourth quarter of 2005, we completed the acquisition of BNFL’sinterest in our Government Services Business resulting in a $36.2 million lumpsum cash payment.  A portion of the lumpsum payment applied to amounts payable to BNFL at the time of the acquisition.Cash flow from investing activities was positively impacted by the net sales of$30.2 million of short-term investments and a $9.0 million decrease inrestricted cash.

 

During 2004, investingactivities provided $15.0 million of cash. We used $35.2 million for equipmentpurchases, principally for new contracts in the Infrastructure and Miningbusiness units. The uses were offset by $21.3 million of proceeds from thesales of property and equipment including $13.6 million of equipment sales froma completed dam and hydropower project in the Philippines. Restricted cash alsodecreased $9.1 million in 2004. In addition, we had net sales of $19.8 millionof short-term investments.

 

•                  ***Financing activities:***

 

During 2005, financingactivities used $52.0 million in cash, consisting of $4.6 million in financingfees in amending our Credit Facility, $4.4 million in distributions to ourpartners in consolidated joint ventures, primarily BNFL, and $72.9 million forthe purchase of warrants. Proceeds from the exercise of stock options andwarrants totaled $29.9 million.

 

II-24

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In 2004, we distributed$25.5 million to our partners in consolidated joint ventures, primarily BNFL.In addition, we received $10.2 million in proceeds from the exercise of stockoptions and warrants and paid $3.9 million of financing fees in amending ourCredit Facility.

 

***Income taxes***

 

We anticipate that cash payments for income taxes for2006 and later years will be substantially less than income tax expenserecognized in the financial statements. This difference results from expectedtax deductions for goodwill amortization and from use of net operating loss (“NOL”)carryovers. As of December 30, 2005, we have remaining tax goodwill of $53.8million resulting from the original acquisition of the Government ServicesBusiness in 1999 and $524.1 million resulting from the acquisition of RE&C.The amortization of this tax goodwill is deductible over remaining periods of8.2 and 9.5 years, respectively, resulting in annual tax deductions of $61.8million. The federal NOL carryovers as of December 30, 2005 were approximately$159.4 million, most of which are subject to an annual limitation of $26.5million and expire in years 2020 through 2022. Unused available NOL carryoversfrom previous years plus the 2006 annual limitation of $26.5 million wouldallow us to use up to approximately $56 million of the NOL carryovers in 2006.Until the tax goodwill deductions and the NOL carryovers are exhausted, we willnot pay cash taxes (other than a minimal impact for alternative minimum tax) onthe first $88.3 million of federal taxable income before tax goodwillamortization and application of NOL carryovers each year.

 

***Cash flows for 2006***

 

In 2006, we expect to incur negative cash flows fromoperations. Specific issues which are relevant to understanding 2006 cash flowsinclude:

 

•                  ***Income taxes:*** Because of anticipatedutilization of tax goodwill amortization of $61.8 million, and the availabilityof approximately $56 million of NOL carryovers, we will likely not pay federaltaxes, other than a minimal amount for alternative minimum tax. We will paystate and foreign income taxes, which are not expected to be significant.

 

•                  ***Property and equipment:*** Capitalexpenditures for construction and mining projects, along with normal capitalexpenditures to upgrade our information systems hardware and software, are expectedto be approximately $40 to $50 million. Additional capital may be required fornew projects obtained during the year. Additionally, in the normal course ofbusiness, we sell a portion of our construction and mining equipment fleet eachyear, depending on estimated future requirements.

 

•                  ***Pension, post-retirement and 401(k) benefitobligations:***We expect to use $15.4 million to fund our pension and post-retirementbenefit plans during 2006 as compared to $12.3 million funded in 2005. Weestimate financial statement expense under these plans to be approximately $6.4million in 2006 as compared to $12.5 million in 2005.  Beginning in 2006, we have increased theamount of 401(k) matching contributions that we expect to make which willincrease our cash funding requirements by approximately $5 million.

 

•                  ***Financing activities:***   On December 30, 2005, we had outstandingapproximately 4.5 million warrants to purchase common stock. In January 2006,we purchased and cancelled 2.0 million of the warrants at a cost of $34.9million; 2.3 million warrants were exercised providing proceeds of $70.0million and the remaining 0.2 million warrants expired. Additionally, we haveissued stock options that are currently exercisable. At December 30, 2005, themarket price of our common stock exceeded the exercise price of outstandingoptions. If the options are exercised, we will receive proceeds based on theexercise price of the options. For additional information related to warrantsand options, see Note 14, “Capital Stock, Stock Purchase Warrants and StockCompensation Plans,” of the Notes to Consolidated Financial Statements in Item8 of this report.

 

II-25

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•                  ***Operating Activities:***  We expect to fund approximately $75 millionof the highway project losses during 2006. Future change orders and claimrecoveries on these projects which, if received, could reduce the amount ofrequired funding.

 

***Financial condition and liquidity***

 

We expect to use cash to,among other things, satisfy contractual obligations, fund working capitalrequirements and make capital expenditures. For additional information oncontractual obligations and capital expenditures, see “Contractual Obligations”below and “Property and Equipment” above.

 

We believe that our cashflows from operations, existing cash and cash equivalents and availablecapacity under our revolving credit facility will be sufficient to meet ourreasonably foreseeable liquidity needs.

 

In line with industrypractice, we are often required to provide performance and surety bonds tocustomers under fixed-price contracts. These bonds indemnify the customershould we fail to perform our obligations under the contract. If a bond isrequired for a particular project and we are unable to obtain an appropriatebond, we cannot pursue that project. We have existing bonding capacity but, asis customary, the issuance of a bond is at the sureties’ discretion. Moreover,due to events that affect the insurance and bonding markets generally, bondingmay be more difficult to obtain in the future or may only be available atsignificant additional cost. Although there can be no assurance that bonds willcontinue to be available on reasonable terms, we believe that we have access tothe bonding necessary to achieve our operating goals.

 

We continually evaluate alternative capital structuresand the terms of our credit facilities. We may also, from time to time, pursueopportunities to complement existing operations through business combinationsand participation in ventures, which may require additional financing andutilization of our capital resources.

 

***Contractual obligations***

 

As of December 30, 2005, we had the followingcontractual obligations:

 
| ** **                                   | ** ** | **Payments due by period** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations**             | ** ** | **Less than**                        | ** ** | **1-3** | ** ** | **3-5** | ** ** | **More than** | ** ** | ** ** | ** ** |
| **(In millions)**                       | ** ** | **1 year**                           | ** ** | **years** | ** ** | **years** | ** ** | **5 years** | ** ** | **Total** | ** ** |
| Operating lease  obligations                 |       | $                                         | 33.3       |   | $ | 41.8 |   | $ | 21.7 |   | $ | 27.0 |   | $ | 123.8 |   |
| Purchase  obligations (a)                    |       | 9.8                                       |       | 19.4 |   | 19.5 |   | — |   | 48.7 |   |
| Credit Facility  (b)                         |       | 4.5                                       |       | 8.7 |   | 6.3 |   | — |   | 19.5 |   |
| Pension and  post-retirement obligations (c) |       | 15.4                                      |       | 19.5 |   | 16.7 |   | 37.2 |   | 88.8 |   |
| Total                                        |       | $                                         | 63.0       |   | $ | 89.4 |   | $ | 64.2 |   | $ | 64.2 |   | $ | 280.8 |   |

 

----

(a)          Purchaseobligations include future cash payments pursuant to an outsourcing agreementfor certain information technology services. Commitments pursuant tosubcontracts and other purchase orders related to engineering and constructioncontracts are not included since such amounts are expected to be funded undercontract billings.

(b)         Representspayments for letter of credit, commitment and administrative fees for ourCredit Facility.

(c)          Pensionand post-retirement obligations noted under the heading “More than 5 years” arepresented for the years 2011-2015.

 

We have no long-term debt, capital leases or othermaterial long-term liabilities reflected on our consolidated balance sheets,except for a performance guarantee of a joint venture as discussed in “Guarantees”below.

 

In the normal course of business, we cause letters ofcredit and surety bonds to be issued generally in connection with contractperformance obligations that are not required to be recorded in ourconsolidated balance sheets. We are obligated to reimburse the issuer of ourletters of credit or surety bonds for any payments made 

 

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thereunder.The table below presents the expiration of our outstanding commitments onletters of credit and surety bonds outstanding as of December 30, 2005 for eachof the next five years and thereafter. Although letters of credit under theCredit Facility may not extend beyond termination of the Credit Facility, thepresentation is prepared based on the expiration period of our contractualobligations with the customer or beneficiary. At December 30, 2005, $92.0million of the outstanding letters of credit were issued under the CreditFacility. We have pledged cash and cash equivalents as collateral for ourreimbursement obligations with respect to $27.0 million in face amount ofletters of credit not issued under our Credit Facility that were outstanding atDecember 30, 2005. Our commitments under performance bonds generally endconcurrent with the expiration of our contractual obligation. The face amountof the surety bonds expiring by period is presented below. Our actual exposureis limited to estimated costs to complete our bonded contracts which wasapproximately $849.0 million at December 30, 2005.

 
| **Other commercial commitments (in millions)** | ** ** | **Letters of credit** | ** ** | **Surety bonds** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------|------------|-----------|------------|
| Commitments  expiring by period                                    |       |                            |       |                  |       |      |       |
| 2006                                                               |       | $                               | 6.0        |                  | $          | 212.7     |       | $ | 218.7 |   |
| 2007                                                               |       | 7.3                             |       | 437.6                 |       | 444.9     |       |
| 2008                                                               |       | —                          |       | 277.3                 |       | 277.3     |       |
| 2009                                                               |       | 2.1                             |       | 8.2                   |       | 10.3      |       |
| 2010                                                               |       | 12.7                            |       | 600.4                 |       | 613.1     |       |
| Thereafter                                                         |       | 90.9                            |       | 252.2                 |       | 343.1     |       |
| Total other  commercial commitments                                |       | $                               | 119.0      |                  | $          | 1,788.4   |       | $ | 1,907.4 |   |

 

# ***Indemnities***

 

In connection witha prior sale of a business, we have guaranteed certain indemnity provisionsrelating to environmental conditions that obligate us to pay the buyer up to amaximum of $3.5 million for environmental losses they incur over $5.0 millionuntil October 2007. We are also responsible for environmental losses throughOctober 2012 that exceed $1.3 million related to a specified parcel of propertywe sold. We believe that the indemnification provisions will not have a materialadverse effect on our financial position, results of operations or cash flows.

 

***Guarantees***

 

In the ordinarycourse of business, we enter into various agreements providing financial orperformance assurances to clients on behalf of certain unconsolidatedsubsidiaries, joint ventures and other jointly executed contracts. Theseagreements are entered into primarily to support the project executioncommitments of these entities. The maximum potential payment amount of anoutstanding performance guarantee is the remaining cost of work to be performedby or on behalf of third parties under engineering and construction contracts.At December 30, 2005, approximately $1.3 billion of work representing eitherour partners’ proportionate share, or work that our partners are directlyresponsible for, had yet to be completed. Amounts that may be required to bepaid in excess of estimated costs to complete contracts in progress are notestimable. For cost reimbursable contracts, amounts that may become payablepursuant to guarantee provisions are normally recoverable from the client forwork performed under the contract. For lump sum or fixed price contracts, thisamount is the cost to complete the contracted work less amounts remaining to bebilled to the client under the contract. Remaining billable amounts could begreater or less than the cost to complete. In those cases where costs exceedthe remaining amounts payable under the contract we may have recourse to thirdparties, such as owners, co-venturers, subcontractors or vendors, for claims.

 

We alsoparticipate, from time to time, in consortiums or “line item” joint ventureagreements under which each partner is responsible for performing certaindiscrete items of the total scope of contracted work. The revenue for thesediscrete items is defined in the contract with the project owner and eachventure partner bears the profitability risk associated with its own work.Generally, partners in these types of arrangements are jointly and severallyliable for completion of the total project under the terms of the contact withthe project owner. There 

 

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is not a single set ofbooks and records for this type of arrangement. Each partner accounts for itsitems of work individually as it would for any self-performed contract. Weaccount for our portion of these contracts as a project in our accountingsystem and include receivables and payables associated with our work on ourconsolidated balance sheets.

 

During the fourthquarter of 2005, we entered into a line item joint venture arrangement pursuantto which we have jointly and severally guaranteed the performance of the jointventure. Under the arrangements, we would be required to perform on theguarantee in the event our partner was not able to complete their portion ofthe construction contract through its expected completion in 2008. Our maximumexposure under this performance guarantee at the time we entered into thearrangement was estimated to be approximately $170 million but will be reducedover the contract term upon execution of the contract scope. We have recordedthe estimated fair value of this guarantee in the amount of $3.2 million as aliability with a corresponding asset as of December 30, 2005.

 

***Off-balance sheetarrangements***

 

During 2005, we entered intotwo forward foreign currency contracts to hedge contracts to acquire equipmentdenominated in Canadian dollars and South African Rand. At December 30, 2005,we had forward foreign exchange contracts to sell U.S. dollars and buy Canadiandollars and to sell U.S. dollars and buy South African Rand. The notional valueof the Canadian dollar contracts was $24.1 million and the duration was lessthan 11 months. The notional value of the South African Rand contracts was $8.8million and the duration was 6 months. The estimated fair value of thecontracts was not significant as of December 30, 2005.

 

We do not have any otheroff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on financial condition, revenue or expenses, resultsof operations, liquidity, capital expenditures or capital resources that arematerial to investors.

 

***CreditFacility***

 

Our Credit Facility provides for up to $350 million in the aggregate of loans and otherfinancial accommodations allocated pro rata between a tranche A facility and atranche B facility. On June 14, 2005, we amended and restated the CreditFacility to include more favorable terms, increase the tranche A to $247.5million from $115.0 million and decrease the tranche B to $102.5 million from$235.0 million. As amended and restated, the scheduled termination date forboth tranche A and tranche B is June 14, 2010. The borrowing rate for tranche Ais LIBOR plus an additional margin of 2.00 percent or, at our option, primeplus an additional margin of 1.00 percent, subject in each case to a 0.25percent reduction upon our obtaining a specified long-term debt rating. Theborrowing rate for tranche B is LIBOR plus an additional margin of 1.75 percentor, at our option, prime plus an additional margin of 0.75 percent. As ofDecember 30, 2005, the effective borrowing rate was 6.39 percent for tranche Aand 6.14 percent for tranche B.

 

The CreditFacility also provides for other fees, including commitment and letter ofcredit fees, normal and customary for such credit agreements. Under the currentterms of the agreement, letters of credit are allocated pro rata between thefacilities on the same basis as loans. Letter of credit fees are calculatedusing the applicable LIBOR margins stated above plus an issuance fee which isnegotiated with the issuing bank. Commitment fees are calculated on theremaining borrowing capacity of each tranche after subtracting any outstandingborrowings and letters of credit. The commitment fee is 0.50 percent fortranche A (subject to a 0.25 percent reduction upon our obtaining a specifiedlong-term debt rating) and 1.75 percent (or at our option, prime plus anadditional margin of 0.75 percent) for tranche B. At December 30, 2005, $92.0million in face amount of letters of credit were issued and outstanding and noborrowings were outstanding leaving a borrowing capacity of $258.0 millionunder the Credit Facility.

 

The CreditFacility contains financial covenants requiring the maintenance of specifiedfinancial and operating ratios, and specified events of default that aretypical for a credit facility of this size, type and tenor. The Credit Facilityalso contains covenants that limit our ability and the ability of some of oursubsidiaries to incur debt, grant liens, provide guarantees, make investments,merge with or acquire other companies and pay 

 

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dividends. At December30, 2005, we were in compliance with all of the financial covenants under theCredit Facility. The Credit Facility is secured by substantially all of theassets of Washington Group International and our wholly owned domesticsubsidiaries.

 

***EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”)***

 

We view EBITDA as aperformance measure of operating liquidity, and as such we believe that theGAAP financial measure most directly comparable to it is net cash provided byoperating activities (see “Reconciliation of EBITDA to Net Cash Provided byOperating Activities” below). EBITDA is not an alternative to and should not beconsidered instead of, or as a substitute for, earnings from operations, netincome or loss, cash flows from operating activities or other statements ofoperations or cash flow data prepared in conformity with GAAP, or as a GAAPmeasure of profitability or liquidity. In addition, our calculation of EBITDAmay or may not be comparable to similarly titled measures of other companies.

 

EBITDA is used by ourmanagement as a supplemental financial measure to evaluate the performance ofour business that, when viewed with our GAAP results and the accompanyingreconciliations, we believe provides a more complete understanding of factorsand trends affecting our business than the GAAP results alone. We alsoregularly communicate our EBITDA to the public through our earnings releasesbecause it is a financial measure commonly used by analysts that cover ourindustry to evaluate our performance as compared to the performance of othercompanies that have different financing and capital structures or effective taxrates. In addition, EBITDA is a financial measure used in the financialcovenants of our Credit Facility and therefore is a financial measure toevaluate our compliance with our financial covenants. Management compensatesfor the above-described limitations of using a non-GAAP financial measure byusing this non-GAAP financial measure only to supplement our GAAP results toprovide a more complete understanding of the factors and trends affecting ourbusiness.

 

Components of EBITDA are presented below:

 
| ** **                              | ** ** | **Year ended**   | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **January 2,** | ** ** |
| **(In millions)**                  | ** ** | **2005**              | ** ** | **2004** | ** ** | **2004** | ** ** |
| Net income                              |       | $                     | 58.4       |   | $ | 51.1 |   | $ | 42.1 |   |
| Taxes                                   |       | 29.9                  |       | 39.5 |   | 46.9 |   |
| Interest expense  (a)                   |       | 13.5                  |       | 14.6 |   | 34.4 |   |
| Depreciation and  amortization (b) |       | 21.9                  |       | 18.7 |   | 31.4 |   |
| Total (c)                               |       | $                     | 123.7      |   | $ | 123.9 |   | $ | 154.8 |   |

 

----

(a)          Interest expense for theyears ended December 30, 2005 and January 2, 2004, respectively, includes thewrite-off of deferred financing fees of $3.6 million and $9.8 million,respectively, that occurred in connection with refinancing the Credit Facility.

(b)         Depreciation andamortization includes $10.1 million for the year ended January 2, 2004 ofdepreciation on equipment used on a large dam and hydropower constructionproject in the Philippines, which we completed in 2003. We began selling theequipment during the third quarter of 2002 and the sales were completed as ofDecember 31, 2004.

(c)          EBITDA for the yearended December 31, 2004 includes reorganization income of $1.2 million whichhad minimal tax expense. EBITDA for the year ended January 2, 2004 includesreorganization charges of $(4.9) million, which provided minimal tax benefit.

 

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**RECONCILIATION OF EBITDA TO NET CASH PROVIDED BYOPERATING ACTIVITIES**

 

We believe that net cashprovided by operating activities is the financial measure calculated andpresented in accordance with GAAP that is most directly comparable to EBITDA.The following table reconciles EBITDA to net cash provided by operatingactivities for each of the periods for which EBITDA is presented.

 
| ** **                                                              | ** ** | **Year ended**  | ** ** |
|-------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                              | ** ** | **December 30** | ** ** | **December 31,** | ** ** | **January 2,** | ** ** |
| **(In millions)**                                                  | ** ** | **2005**             | ** ** | **2004** | ** ** | **2004** | ** ** |
| EBITDA                                                                  |       | $                    | 123.7      |   | $ | 123.9 |   | $ | 154.8 |   |
| Interest expense (a)                                                    |       | (13.5                | )          | (14.6 | ) | (34.4 | ) |
| Tax expense                                                             |       | (29.9                | )          | (39.5 | ) | (46.9 | ) |
| Reorganization items                                                    |       | —               |       | (1.2 | ) | 4.9 |   |
| Cash paid for reorganization items                                      |       | (2.7                 | )          | (2.5 | ) | (9.9 | ) |
| Amortization of financing fees                                          |       | 6.3                  |       | 3.2 |   | 19.6 |   |
| Non-cash income tax expense                                             |       | 26.7                 |       | 34.6 |   | 43.1 |   |
| Minority interest in net income of consolidated  subsidiaries           |       | 5.4                  |       | 15.2 |   | 21.9 |   |
| Equity in income of unconsolidated affiliates, less  dividends received |       | (14.0                | )          | (17.3 | ) | (17.1 | ) |
| Changes in net operating assets and liabilities and  other              |       | 3.2                  |       | 8.8 |   | (56.4 | ) |
| Net cash provided by operating activities                               |       | $                    | 105.2      |   | $ | 110.6 |   | $ | 79.6 |   |

 

----

(a)          Includes the write-offof deferred financing fees of $3.6 million and $9.8 million that occurred in2005 and 2003, respectively, in connection with refinancing the CreditFacility.

 

## **ACCOUNTING STANDARDS**

 

***Adoption ofaccounting standards***

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 153, *Exchanges of Non-monetary Assets – An Amendment ofAPB Opinion No. 29*. APB Opinion No. 29 provided an exception to thebasic measurement principle (fair value) for exchanges of similar productiveassets. That exception required that some non-monetary exchanges, althoughcommercially substantive, be recorded on a carryover basis. SFAS No. 153eliminates the exception to fair value for exchanges of similar productiveassets and replaces it with a general exception for exchange transactions thatdo not have commercial substance – that is, transactions that are not expectedto result in significant changes in the cash flows of the reporting entity. Wewere required to adopt SFAS No. 153 in the third quarter of 2005. The adoptionhad no impact on our financial position, results of operations or cash flows.

 

In March 2005, the FASBissued Interpretation No. 47, *Accounting for ConditionalAsset Retirement Obligations – An interpretation of FASB Statement No. 143 (*“FIN47”*).*FIN 47 clarifies the term conditionalasset retirement obligation as used in SFAS No. 143, *Accountingfor Asset Retirement Obligations,* and requires a liability to berecorded if the fair value of the obligation can be reasonably estimated. Thetypes of asset retirement obligations that are covered by FIN 47 are those forwhich an entity has a legal obligation to perform an asset retirement activity,however the timing and (or) method of settling the obligation are conditionalon a future event that may or may not be within the control of the entity. FIN47 also clarifies when an entity would have sufficient information toreasonably estimate the fair value of an asset retirement obligation. We wererequired to adopt FIN 47 in the fourth quarter of 2005. The adoption had noimpact on our financial position, results of operations or cash flows.

 

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***Recently issued accounting standards***

 

InDecember 2004, the FASB issued SFAS No. 123 (Revised), *Share-BasedPayment*. SFAS No. 123-R replaces SFAS No. 123 and supersedes APBOpinion No. 25. Adoption of SFAS No. 123-R will require us to record a non-cashexpense for our stock compensation plans using the fair value method.Historically we have recorded our compensation cost in accordance with APBOpinion No. 25, which does not require the recording of an expense for ourstock options if they were granted at a price equal to the fair market value ofour common stock on the grant date. SFAS No. 123-R is effective for usbeginning the first quarter of 2006. Based on options outstanding as ofDecember 30, 2005, and estimated future option grants in 2006, we estimate theadoption of SFAS No. 123-R will result in an additional pre-tax expense ofapproximately $8.0 million in 2006.

 

In the mining industry,companies may be required to remove overburden and waste materials to accessmineral deposits. The costs of removing overburden and waste materials arereferred to as “stripping costs.” MIBRAG incurs significant stripping costs inits lignite coal mining operations. In March 2005, the Emerging Issues Task Force(“EITF”) reached a consensus on Issue No. 04-6, *Accountingfor Stripping Costs Incurred during Production in the Mining Industry*.The EITF concluded that stripping costs incurred during the production phase ofa mine are variable production costs that should be included in the cost ofinventory produced during the period that stripping costs are incurred. EITFNo. 04-6 is effective for us in the first quarter of 2006. Based upon MIBRAG’sdeferred stripping costs recorded as of December 30, 2005, the adoption of EITFNo. 04-6 will result in a reduction of our investments in unconsolidatedaffiliates and a reduction of total stockholders’ equity of $83.2 million and$54.1 million, respectively. EITF No. 04-6 provides that any adjustment fromadoption be recognized as a cumulative effect adjustment to beginning retainedearnings in the period of adoption which will not affect our earnings in 2006.MIBRAG’s mines are open pit lignite coal mines which cover several square milesand have an estimated remaining life of 40 or more years. Because of the miningprocedures used, MIBRAG generally does not maintain any significant inventoryof mined coal. Accordingly, under EITF No. 04-6 costs of removing overburdenwill be expensed in the period incurred. The execution of the mine plan mayresult in fiscal periods during which costs incurred for the removal ofoverburden will not bear a direct relationship to the revenue derived from thesale of coal. This may result in a degree of variability in the future reportedearnings of MIBRAG.

 

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## **ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

***(In millions)***

 

***Interest rate risk***

 

Our exposure tomarket risk for changes in interest rates relates primarily to our CreditFacility. Our short-term investment portfolio consisted primarily of highlyliquid instruments sold or re-priced as to interest rates in periods less thanthree months. In February 2005, we liquidated our entire short-term investmentportfolio and invested the proceeds in cash equivalents. Substantially all cashand cash equivalents at December 30, 2005 of $237.7 million were held in highlyliquid instruments.

 

From time to time, we may effect borrowings under bankcredit facilities or otherwise for general corporate purposes, includingworking capital requirements and capital expenditures. Borrowings under ourCredit Facility, of which there currently are none, bear interest at theapplicable LIBOR or prime rate, plus an additional margin and, therefore, aresubject to fluctuations in interest rates.

 

***Foreign currency risk***

 

We conduct our businessin various regions of the world. Our operations are, therefore, subject tovolatility because of currency fluctuations, inflation changes and changes inpolitical and economic conditions in these countries. We are subject to foreigncurrency translation and exchange issues, primarily with regard to our miningventure, MIBRAG, in Germany. At December 30, 2005 and December 31, 2004, thecumulative adjustments for translation gains (losses), net of related incometax benefits, were $19.3 million and $34.8 million, respectively. While weendeavor to enter into contracts with foreign customers with repayment terms inU.S. dollars in order to mitigate foreign exchange risk, our revenue andexpenses are sometimes denominated in local currencies, and our results ofoperations may be affected adversely as currency fluctuations affect ourpricing and operating costs or those of our competitors. We may engage from timeto time in hedging operations, including forward foreign exchange contracts, toreduce the exposure of our cash flows to fluctuations in foreign currencyrates. We do not engage in hedging for speculative investment reasons. We cangive no assurances that our hedging operations will eliminate or substantiallyreduce risks associated with fluctuating currencies.

 

During 2005, we entered intotwo forward foreign currency contracts to hedge contracts to acquire equipmentdenominated in Canadian dollars and South African Rand. At December 30, 2005,we had forward foreign exchange contracts to sell U.S. dollars and buy Canadiandollars and to sell U.S. dollars and buy South African Rand. The notional valueof the Canadian dollar contracts was $24.1 million and the duration was lessthan 11 months. The notional value of the South African Rand contracts was $8.8million and the duration was 6 months.

 

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

#### **INDEX TO FINANCIAL STATEMENTS**

 

## **WASHINGTON GROUP INTERNATIONAL, INC. AND SUBSIDIARIES**

 

ConsolidatedFinancial Statements and Financial Statement Schedule as of

December 30, 2005and December 31, 2004, and for the years ended December 30, 2005,

December 31, 2004,and January 2, 2004

 
| Report  of Independent Registered Public Accounting Firm                                                          |   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------|
| Consolidated  Statements of Income                                                                                |   |   |
| Consolidated  Statements of Comprehensive Income                                                                  |   |   |
| Consolidated  Balance Sheets                                                                                      |   |   |
| Consolidated  Statements of Cash Flows                                                                            |   |   |
| Consolidated  Statements of Stockholders’ Equity                                                             |   |   |
| Notes  to Consolidated Financial Statements                                                                       |   |   |
| Quarterly Financial  Data (Unaudited)                                                                             |   |   |
| Schedule II -  Valuation, Qualifying and Reserve Accounts                                                         |   |   |
| Management’s  Annual Report on Internal Control over Financial Reporting                                     |   |   |
| Attestation Report of Independent Registered Public  Accounting Firm on Internal Control Over Financial Reporting |   |   |
| Financial Statements of Mitteldeutsche  Braunkohlengesellschaft mbH                                               |   |   |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Tothe Board of Directors and Stockholders of Washington Group International,Inc.:

 

We have audited the accompanying consolidatedbalance sheets of Washington Group International, Inc. and subsidiaries (the “Company”)as of December 30, 2005 and December 31, 2004, and the related consolidatedstatements of income, comprehensive income, cash flows, and stockholders’equity for each of the three years in the period ended December 30,2005. Our audits also included the financial statement schedule listed inthe Index at Item 8.  These financial statements and financial statement scheduleare the responsibility of the Company’s management.  Our responsibility isto express an opinion on the financial statements and financial statementschedule based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofWashington Group International, Inc. and subsidiaries as of December 30, 2005and December 31, 2004, and the results of their operations and their cash flowsfor each of the three years in the period ended December 30, 2005, inconformity with accounting principles generally accepted in the United States ofAmerica. Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly, in all material respects, the information set forththerein.

 

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as ofDecember 30, 2005, based on the criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated February 28, 2006 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

 

 
| /s/ DELOITTE  & TOUCHE LLP |   |
|--------------------------------|--------|
| Deloitte &  Touche LLP     |
| Boise, Idaho                   |
| February 28, 2006              |

 

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## **CONSOLIDATEDSTATEMENTS OF INCOME**

(*In thousandsexcept per share data*)

 
| ** **                                                               | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**           | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                               | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Revenue                                                                  |       | $                               | 3,188,454  |                            | $          | 2,915,382                     |       | $ | 2,501,151 |   |
| Cost of revenue                                                          |       | (3,058,051                      | )          | (2,765,351                      | )          | (2,324,802                    | )          |
| Gross profit                                                             |       | 130,403                         |       | 150,031                         |       | 176,349                       |       |
| Equity in income of unconsolidated affiliates                            |       | 29,596                          |       | 26,917                          |       | 25,519                        |       |
| General and administrative expenses                                      |       | (60,481                         | )          | (60,404                         | )          | (57,520                       | )          |
| Other operating income, net                                              |       | —                          |       | 1,443                           |       | 6,182                         |       |
| Operating income                                                         |       | 99,518                          |       | 117,987                         |       | 150,530                       |       |
| Interest income                                                          |       | 8,257                           |       | 2,778                           |       | 1,748                         |       |
| Interest expense                                                         |       | (9,955                          | )          | (14,625                         | )          | (24,587                       | )          |
| Write-off of deferred financing fees                                     |       | (3,588                          | )          | —                          |       | (9,831                        | )          |
| Other expense, net                                                       |       | (551                            | )          | (1,509                          | )          | (2,101                        | )          |
| Income before reorganization items, income taxes and  minority interests |       | 93,681                          |       | 104,631                         |       | 115,759                       |       |
| Reorganization items                                                     |       | —                          |       | 1,245                           |       | (4,900                        | )          |
| Income tax expense                                                       |       | (29,906                         | )          | (39,525                         | )          | (46,888                       | )          |
| Minority interests in income of consolidated  subsidiaries               |       | (5,409                          | )          | (15,214                         | )          | (21,908                       | )          |
| Net income                                                               |       | $                               | 58,366     |                            | $          | 51,137                        |       | $ | 42,063 |   |
| Income per  share:                                                       |       |                            |       |                            |       |                          |       |
| Basic                                                                    |       | $                               | 2.24       |                            | $          | 2.02                          |       | $ | 1.68 |   |
| Diluted                                                                  |       | 1.93                            |       | 1.86                            |       | 1.66                          |       |
| Shares used to  compute income per share:                                |       |                            |       |                            |       |                          |       |
| Basic                                                                    |       | 26,037                          |       | 25,281                          |       | 25,007                        |       |
| Diluted                                                                  |       | 30,251                          |       | 27,444                          |       | 25,322                        |       |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

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**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

(*In thousands*)

### ** **

| ** **                                      | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**           | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Net income                                      |       | $                               | 58,366     |                            | $          | 51,137                        |       | $ | 42,063 |   |
| Other  comprehensive income (loss), net of tax: |       |                            |       |                            |       |                          |       |
| Foreign currency translation adjustments        |       | (15,568                         | )          | 9,348                           |       | 15,844                        |       |
| Minimum pension liability adjustment and other  |       | (603                            | )          | (991                            | )          | (1,154                        | )          |
| Other  comprehensive income (loss), net of tax  |       | (16,171                         | )          | 8,357                           |       | 14,690                        |       |
| Comprehensive  income                           |       | $                               | 42,195     |                            | $          | 59,494                        |       | $ | 56,753 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

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**CONSOLIDATED BALANCE SHEETS**

*(In thousands)*

 
| ** **                                                                      | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                      |       |                            |       |                            |       |
| **Current  assets**                                                             |       |                            |       |                            |       |
| Cash and cash  equivalents                                                      |       | $                               | 237,706    |                            | $          | 224,529 |   |
| Restricted cash                                                                 |       | 52,533                          |       | 61,549                          |       |
| Short-term  investments                                                         |       | —                          |       | 30,200                          |       |
| Accounts  receivable, including retentions of $22,849 and $14,973, respectively |       | 275,623                         |       | 250,251                         |       |
| Unbilled  receivables                                                           |       | 256,090                         |       | 214,437                         |       |
| Investments in  and advances to construction joint ventures                     |       | 56,668                          |       | 24,321                          |       |
| Deferred income  taxes                                                          |       | 107,798                         |       | 94,343                          |       |
| Other                                                                           |       | 41,202                          |       | 49,642                          |       |
| Total current  assets                                                           |       | 1,027,620                       |       | 949,272                         |       |
|                                                                            |       |                            |       |                            |       |
| **Investments  and other assets**                                               | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Investments in  unconsolidated affiliates                                       |       | 172,448                         |       | 179,347                         |       |
| Goodwill                                                                        |       | 162,270                         |       | 307,817                         |       |
| Deferred income  taxes                                                          |       | 126,651                         |       | 64,479                          |       |
| Other assets                                                                    |       | 59,362                          |       | 18,078                          |       |
| Total  investments and other assets                                             |       | 520,731                         |       | 569,721                         |       |
|                                                                            |       |                            |       |                            |       |
| **Property  and equipment**                                                     | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Construction and  mining equipment                                              |       | 121,109                         |       | 81,432                          |       |
| Other equipment  and fixtures                                                   |       | 40,415                          |       | 31,954                          |       |
| Buildings and  improvements                                                     |       | 12,575                          |       | 11,543                          |       |
| Land and  improvements                                                          |       | 2,403                           |       | 2,491                           |       |
| Total property  and equipment                                                   |       | 176,502                         |       | 127,420                         |       |
| Less accumulated  depreciation                                                  |       | (75,748                         | )          | (58,207                         | )          |
| Property and  equipment, net                                                    |       | 100,754                         |       | 69,213                          |       |
| Total assets                                                                    |       | $                               | 1,649,105  |                            | $          | 1,588,206 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

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**CONSOLIDATED BALANCE SHEETS**

*(In thousands except per share data)*

 
| ** **                                                                                                        | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                    |       |                            |       |                            |       |
| **Current  liabilities**                                                                                          |       |                            |       |                            |       |
| Accounts payable and subcontracts payable, including  retentions of $32,127 and $30,154, respectively             |       | $                               | 253,559    |                            | $          | 206,180 |   |
| Billings in excess of cost and estimated earnings on  uncompleted contracts                                       |       | 239,106                         |       | 204,263                         |       |
| Accrued salaries, wages and benefits, including  compensated absences of $49,578 and $48,908, respectively        |       | 158,033                         |       | 140,623                         |       |
| Other accrued liabilities                                                                                         |       | 46,639                          |       | 61,919                          |       |
| Total current liabilities                                                                                         |       | 697,337                         |       | 612,985                         |       |
| **Non-current liabilities**                                                                                       | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Self-insurance reserves                                                                                           |       | 66,933                          |       | 67,945                          |       |
| Pension and post-retirement benefit obligations                                                                   |       | 99,239                          |       | 103,398                         |       |
| Other non-current liabilities                                                                                     |       | 38,801                          |       | 23,037                          |       |
| Total non-current liabilities                                                                                     |       | 204,973                         |       | 194,380                         |       |
| **Contingencies and commitments (Note 12)**                                                                       |       |                            |       |                            |       |
| **Minority interests**                                                                                            |       | 5,578                           |       | 47,920                          |       |
| **Stockholders’ equity**                                                                                     | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Preferred stock, par value $.01 per share, 10,000  shares authorized                                              |       | —                          |       | —                          |       |
| Common stock, par value $.01 per share, 100,000  shares authorized; 26,870 and 25,474 shares issued, respectively |       | 269                             |       | 255                             |       |
| Capital in excess of par value                                                                                    |       | 526,460                         |       | 542,514                         |       |
| Stock purchase warrants                                                                                           |       | 15,104                          |       | 28,167                          |       |
| Retained earnings                                                                                                 |       | 188,999                         |       | 130,901                         |       |
| Treasury stock, 32 and 26 shares, respectively, at  cost                                                          |       | (1,307                          | )          | (1,012                          | )          |
| Unearned compensation – restricted stock                                                                     |       | (4,233                          | )          | —                          |       |
| Accumulated other comprehensive income                                                                            |       | 15,925                          |       | 32,096                          |       |
| Total stockholders’ equity                                                                                   |       | 741,217                         |       | 732,921                         |       |
| Total liabilities and stockholders’ equity                                                                   |       | $                               | 1,649,105  |                            | $          | 1,588,206 |   |

 

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

*(In thousands)*

 
| ** **                                                                                                     | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**           | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                     | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| **Operating activities**                                                                                       |       |                            |       |                            |       |                          |       |
| Net income                                                                                                     |       | $                               | 58,366     |                            | $          | 51,137                        |       | $ | 42,063 |   |
| Reorganization items                                                                                           |       | —                          |       | (1,245                          | )          | 4,900                         |       |
| Adjustments to reconcile net income to net cash  provided by operating activities:                             |       |                            |       |                            |       |                          |       |
| Cash paid for reorganization items                                                                             |       | (2,740                          | )          | (2,493                          | )          | (9,869                        | )          |
| Depreciation of property and equipment                                                                         |       | 21,880                          |       | 18,714                          |       | 31,369                        |       |
| Amortization and write-off of financing fees                                                                   |       | 6,300                           |       | 3,225                           |       | 19,565                        |       |
| Non-cash income tax expense                                                                                    |       | 26,651                          |       | 34,603                          |       | 43,057                        |       |
| Minority interests in income of consolidated  subsidiaries                                                     |       | 5,409                           |       | 15,214                          |       | 21,908                        |       |
| Equity in income of unconsolidated affiliates, less  dividends received                                        |       | (14,038                         | )          | (17,296                         | )          | (17,091                       | )          |
| Self-insurance reserves                                                                                        |       | (1,013                          | )          | 7,772                           |       | (11,259                       | )          |
| Stock-based compensation                                                                                       |       | 2,259                           |       | 1,164                           |       | 6,174                         |       |
| Other                                                                                                          |       | (7,610                          | )          | 5,100                           |       | (5,781                        | )          |
| Changes in other assets and liabilities:                                                                       |       |                            |       |                            |       |                          |       |
| Accounts receivable and unbilled receivables                                                                   |       | (69,481                         | )          | (73,980                         | )          | 605                           |       |
| Investments in and advances to construction joint  ventures                                                    |       | 12,312                          |       | 2,040                           |       | (7,531                        | )          |
| Other current assets                                                                                           |       | 15,747                          |       | (5,841                          | )          | 2,869                         |       |
| Accounts payable and subcontracts payable, accrued  salaries, wages and benefits and other accrued liabilities |       | 60,970                          |       | 40,511                          |       | (4,629                        | )          |
| Billings in excess of cost and estimated earnings                                                              |       | (9,822                          | )          | 32,009                          |       | (36,739                       | )          |
| Net cash provided by operating activities                                                                      |       | 105,190                         |       | 110,634                         |       | 79,611                        |       |
| **Investing activities**                                                                                       | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                    | ** ** |
| Property and equipment additions                                                                               |       | (63,192                         | )          | (35,217                         | )          | (12,213                       | )          |
| Property and equipment disposals                                                                               |       | 12,965                          |       | 21,270                          |       | 34,881                        |       |
| Purchases of short-term investments                                                                            |       | (74,900                         | )          | (617,200                        | )          | (313,701                      | )          |
| Sales of short-term investments                                                                                |       | 105,100                         |       | 637,000                         |       | 263,701                       |       |
| Acquisition of minority interest                                                                               |       | (29,057                         | )          | —                          |       | —                        |       |
| Decrease in restricted cash                                                                                    |       | 9,016                           |       | 9,118                           |       | 20,124                        |       |
| Proceeds from sale of business                                                                                 |       | —                          |       | —                          |       | 17,700                        |       |
| Net cash provided (used) by investing activities                                                               |       | (40,068                         | )          | 14,971                          |       | 10,492                        |       |
| **Financing activities**                                                                                       | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                    | ** ** |
| Payment of financing fees                                                                                      |       | (4,577                          | )          | (3,914                          | )          | (11,438                       | )          |
| Distributions to minority interests, net                                                                       |       | (4,379                          | )          | (25,501                         | )          | (42,105                       | )          |
| Proceeds from exercise of stock options and warrants                                                           |       | 29,927                          |       | 10,171                          |       | 1,207                         |       |
| Purchase of warrants                                                                                           |       | (72,916                         | )          | —                          |       | —                        |       |
| Net cash used by financing activities                                                                          |       | (51,945                         | )          | (19,244                         | )          | (52,336                       | )          |
| Increase in cash and cash equivalents                                                                          |       | 13,177                          |       | 106,361                         |       | 37,767                        |       |
| Cash and cash equivalents at beginning of year                                                                 |       | 224,529                         |       | 118,168                         |       | 80,401                        |       |
| Cash and cash equivalents at end of year                                                                       |       | $                               | 237,706    |                            | $          | 224,529                       |       | $ | 118,168 |   |
| **Supplemental cash flow information**                                                                         |       |                            |       |                            |       |                          |       |
| Interest paid                                                                                                  |       | $                               | 7,255      |                            | $          | 12,121                        |       | $ | 14,285 |   |
| Income taxes paid, net                                                                                         |       | 11,047                          |       | 7,411                           |       | 5,725                         |       |
| **Supplemental non-cash investing activities**                                                                 |       |                            |       |                            |       |                          |       |
| Adjustment to investment in foreign subsidiaries for  cumulative translation adjustments, net of income taxes  |       | $                               | (15,568    | )                               | $          | 9,348                         |       | $ | 15,844 |   |

 

*The accompanying notes are an integral part of theconsolidated financial statements.*

 

II-39

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**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

*(In thousands)*

 
| ** **                                        | ** ** | ** **        | ** ** | ** **   | ** ** | ** **    | ** ** | **Capital**   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | **Unearned**      | ** ** | **Accumulated**   | ** ** |
|---------------------------------------------------|------------|-------------------|------------|--------------|------------|---------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                        | ** ** | **Shares of**     | ** ** | ** **   | ** ** | **in**        | ** ** | **Stock**     | ** ** | ** **   | ** ** | ** **   | ** ** | **compensation-** | ** ** | **other**         | ** ** |
| ** **                                        | ** ** | **Common  stock** | ** ** | **Common**   | ** ** | **excess of** | ** ** | **purchase**  | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **restricted**    | ** ** | **comprehensive** | ** ** |
| **Period ended**                                  | ** ** | **Issued**        | ** ** | **Treasury** | ** ** | **stock**     | ** ** | **par value** | ** ** | **warrants** | ** ** | **earnings** | ** ** | **stock**         | ** ** | **stock**         | ** ** | **income (loss)** | ** ** |
| **January 3, 2003**                               |       | 25,000            |       | —       |       | $             | 250        |          | $          | 521,103      |       | $            | 28,647     |              | $          | 37,701            |       | $                 | —     |   | $ | — |   | $ | 9,049 |   |
| Net income                                        |       |              |       |         |       |          |       |          |       |         |       | 42,063       |       |              |       |              |       |              |       |
| Exercise of stock  options                        |       | 46                |       |         |       |          |       | 1,207         |       |         |       |         |       |              |       |              |       |              |       |
| Stock-based compensation                          |       |              |       |         |       |          |       | 6,174         |       |         |       |         |       |              |       |              |       |              |       |
| Foreign currency  translation adjustments, net    |       |              |       |         |       |          |       |          |       |         |       |         |       |              |       |              |       | 15,844            |       |
| Minimum pension  liability adjustment and other   |       |              |       |         |       |          |       |          |       |         |       |         |       |              |       |              |       | (1,154            | )          |
| **January  2, 2004**                              |       | 25,046            |       | —       |       | 250           |       | 528,484       |       | 28,647       |       | 79,764       |       | —            |       |              |       | 23,739            |       |
| Net income                                        |       |              |       |         |       |          |       |          |       |         |       | 51,137       |       |              |       |              |       |              |       |
| Exercise of stock  options and warrants           |       | 428               |       |         |       | 5             |       | 12,280        |       | (331         | )          |         |       |              |       |              |       |              |       |
| Stock-based  compensation                         |       |              |       |         |       |          |       | 1,164         |       |         |       |         |       |              |       |              |       |              |       |
| Foreign currency  translation adjustments, net    |       |              |       |         |       |          |       |          |       |         |       |         |       |              |       |              |       | 9,348             |       |
| Minimum pension  liability adjustment and other   |       |              |       |         |       |          |       |          |       |         |       |         |       |              |       |              |       | (991              | )          |
| Other                                             |       |              |       | (26          | )          |          |       | 586           |       | (149         | )          |         |       | (1,012            | )          |              |       |              |       |
| **December  31, 2004**                            |       | 25,474            |       | (26          | )          | 255           |       | 542,514       |       | 28,167       |       | 130,901      |       | (1,012            | )          | —            |       | 32,096            |       |
| Net income                                        |       |              |       |         |       |          |       |          |       |         |       | 58,366       |       |              |       |              |       |              |       |
| Issuance of  restricted stock, net of forfeitures |       | 134               |       |         |       | 1             |       | 5,844         |       |         |       |         |       | (4                | )          | (5,841            | )          |              |       |
| Stock-based  compensation                         |       | 4                 |       |         |       |          |       | 651           |       |         |       |         |       |              |       | 1,608             |       |              |       |
| Exercise of stock  options and warrants           |       | 1,258             |       |         |       | 13            |       | 39,472        |       | (1,415       | )          |         |       |              |       |              |       |              |       |
| Purchase of  warrants                             |       |              |       |         |       |          |       | (62,113       | )          | (11,616      | )          |         |       |              |       |              |       |              |       |
| Foreign currency  translation adjustments, net    |       |              |       |         |       |          |       |          |       |         |       |         |       |              |       |              |       | (15,568           | )          |
| Minimum pension  liability adjustment and other   |       |              |       |         |       |          |       |          |       |         |       |         |       |              |       |              |       | (603              | )          |
| Other                                             |       |              |       | (6           | )          |          |       | 92            |       | (32          | )          | (268         | )          | (291              | )          |              |       |              |       |
| **December  30, 2005**                            | ** ** | **26,870**        | ** ** | **(32**      | **)**      | **$**         | **269**    | ** **    | **$**      | **526,460**  | ** ** | **$**        | **15,104** | ** **        | **$**      | **188,999**       | ** ** | **$**             | **(1,307** | **)** | **$** | **(4,233** | **)** | **$** | **15,925** | ** ** |

 

*Theaccompanying notes are an integral part of the consolidated financial statements.*

 

II-40

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**WASHINGTON GROUP INTERNATIONAL, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

*(Inthousands except per share data)*

 

The terms “we,” “us” and “our” as used in this annualreport include Washington Group International, Inc. (“Washington GroupInternational”) and its consolidated subsidiaries unless otherwise indicated.

 

**1.****              DESCRIPTIONOF BUSINESS AND BASIS OF PRESENTATION**

 

***Business***

 

We are an international provider of a broad range ofdesign, engineering, construction, construction management, facilities andoperations management, environmental remediation and mining services to diversepublic and private sector clients, including (i) engineering, construction, andoperations and maintenance services in nuclear and fossil power markets; (ii)diverse engineering, construction, construction management, and operations andmaintenance services for the highway and bridge, airport and seaport, dam,tunnel, water resource, and railway markets; (iii) design, engineering,procurement, construction and construction management and operations andmaintenance services to industrial companies; (iv) contract mining, technicaland engineering services for the metals, precious metals, coal, minerals, andminerals processes markets; (v) comprehensive nuclear and other environmentaland hazardous substance remediation as well as management and operationsservices for governmental and private-sector clients and (vi) design,engineering, construction, management and operations, and closure services forweapons and chemical demilitarization programs for governmental clients. Inproviding these services, we enter into four basic types of contracts:fixed-price or lump-sum contracts providing for a fixed price for all work to beperformed; fixed-unit-price contracts providing for a fixed price for each unitof work to be performed; target-price contracts providing for an agreed uponprice whereby we absorb cost escalations to the extent of our expected fee orprofit and are reimbursed for costs which continue to escalate beyond ourexpected fee and share in the cost savings based on a negotiated formula; andcost-type contracts providing for reimbursement of costs plus a fee.Engineering, construction management, maintenance, and environmental andhazardous substance remediation contracts are typically awarded pursuant to acost-type contract.

 

We participate in construction joint ventures, oftenas sponsor and manager of projects, which are formed for the sole purpose ofbidding, negotiating and completing specific projects. We participate in twoincorporated mining ventures: MIBRAG mbH (“MIBRAG”), a company that operateslignite coal mines and power plants in Germany, and Westmoreland Resources,Inc. (“Westmoreland Resources”), a coal mining company in Montana.

 

***Basis of presentation***

 

The consolidated financial statements include theaccounts of Washington Group International and all of its majority-ownedsubsidiaries and certain majority-owned construction joint ventures. Investmentsin non-consolidated construction joint ventures are accounted for by the equitymethod on the balance sheet with our proportionate share of revenue, cost ofrevenue and gross profit included in the consolidated statements of income.Investments in unconsolidated affiliates are accounted for using the equitymethod. All significant intercompany transactions and accounts have beeneliminated in consolidation.

 

On March 22, 1999, we and BNFL Nuclear Services, Inc.(“BNFL”) acquired the government and environmental services businesses of CBSCorporation (now Viacom, Inc.). We refer to these businesses, together withother government services operations, as the “Government Services Business.”The Government Services Business manages highly complex facilities and programsfor the U.S. Department of Energy (“DoE”) and U.S. Department of Defense (“DoD”)and provides engineering, construction, management, and risk-analysis servicesfor a variety of governmental markets. The Government Services Businesscurrently makes up our Energy & Environment and Defense business units. SeeNote 15, “Acquisition of BNFL’s Interest in Government Services Business,” fora discussion of our acquisition of BNFL’s minority interest in the GovernmentServices Business.

 

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

 

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

 

As of February 1, 2002,we adopted fresh-start reporting pursuant to the guidance provided by theAmerican Institute of Certified Public Accountants Statement of Position (“SOP”)90-7, *Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code*. In connection with the adoption offresh-start reporting, we created a new entity for financial reportingpurposes. The effective date of our emergence from bankruptcy protection isconsidered to be the close of business on February 1, 2002 for financialreporting purposes.

 

Our fiscal year is the 52/53 weeks ending on theFriday closest to December 31.

 

**2. SIGNIFICANT ACCOUNTING POLICIES**

 

***Revenue recognition***

 

We follow the provisions ofSOP 81-1, *Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts.*Werecognize revenue on engineering and construction-type contracts using thepercentage-of-completion method of accounting whereby revenue is recognized asperformance under the contract progresses. For most of our fixed-price andtarget-price contracts, we use a cost-to-cost approach to measure progresstowards completion. Under the cost-to-cost method, we make periodic estimatesof our progress towards completion by comparing costs incurred to date withtotal estimated contract costs. Revenue is then calculated on a cumulativebasis (project-to-date) as the total contract value multiplied by the currentpercentage complete. Revenue for a reporting period is calculated as thecumulative project-to-date revenue less project revenue recognized in priorperiods. However, we defer profit recognition on fixed-price and target-pricedcontracts until progress is sufficient to estimate the probable outcome, whichgenerally does not occur until the project is at least 20 percent complete.

 

For contracts that includesignificant materials or equipment costs, we use an efforts expended method tomeasure progress towards completion based on labor hours, labor dollars or someother measurement of physical completion. For certain long-term contractsinvolving mining and environmental and hazardous substance remediation,progress towards completion is measured using the units of production method.Revenue from reimbursable or cost-plus contracts is recognized on the basis ofcosts incurred during the period plus the fee earned. Service-relatedcontracts, including operations and maintenance contracts, are accounted forover the period of performance, in proportion to the costs of performance,evenly over the period or over units of production. Award fees associated withU.S. government contracts are initially estimated and recognized based onhistorical performance until the client has confirmed the final award fee.Performance-based incentive fees are included in contract value when a basisexists for the reasonable prediction of performance in relation to establishedtargets. When a basis for reasonable prediction does not exist,performance-based incentive fees are recognized when actually awarded by theclient.

 

The amount of revenuerecognized also depends on whether the contract or project is determined to bean “at-risk” or an “agency” relationship between the client and us.Determination of the relationship is based on characteristics of the contractor the relationship with the client. For at-risk relationships, the grossrevenue and the costs of materials, services, payroll, benefits, non-income taxand other costs are recognized in our statements of income. For agencyrelationships, where we act as an agent for our client, only fee revenue isrecognized, meaning that direct project costs and the related reimbursementfrom the client are netted.

 

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The use of thepercentage-of-completion method for revenue recognition requires the use ofvarious estimates, including among others, the extent of progress towardscompletion, contract completion costs and contract revenue. Profit margins tobe recognized are dependent upon the accuracy of estimated engineeringprogress, materials quantities, achievement of milestones and other incentives,penalty provisions, labor productivity and other cost estimates. Such estimatesare dependent upon various judgments we make with respect to those factors, andsome are difficult to accurately determine until the project is significantlyunderway. Progress is evaluated each reporting period. We recognize adjustmentsto profitability on contracts utilizing the percentage-of-completion method ona cumulative basis, when such adjustments are identified. We have a history ofmaking reasonably dependable estimates of the extent of progress towardscompletion, contract revenue and contract completion costs on our long-termengineering and construction-type contracts. However, due to uncertaintiesinherent in the estimation process, it is possible that actual completion costsmay vary from estimates. In limited circumstances, we may use thecompleted-contract method for specific contracts for which reasonablydependable estimates cannot be made or for which inherent hazards make theestimates doubtful. The completed contract method was not utilized during anyof the periods presented.

 

***Change orders and claims***

 

Once contract performance isunderway, we often experience changes in conditions, client requirements,specifications, designs, materials and work schedule. Generally, a “change order”will be negotiated with our customer to modify the original contract to approveboth the scope and price of the change. Occasionally, however, disagreementsarise regarding changes, their nature, measurement, timing, and othercharacteristics that impact costs and revenue under the contract. When a changebecomes a point of dispute between our customer and us, we then consider it asa claim.

 

Costs related to changeorders and claims are recognized when they are incurred. Change orders areincluded in total estimated contract revenue when it is probable that thechange order will result in a bona fide addition to contract value and can bereliably estimated. Estimated contract revenue associated with change ordersmay include amounts in excess of incurred costs (profit) when appropriate.Claims are included in total estimated contract revenue, only to the extentthat contract costs related to the claim have been incurred, when it isprobable that the claim will result in a bona fide addition to contract valueand can be reliably estimated which generally occurs when amounts have beenreceived or awarded. This can lead to a situation where costs are recognized inone period and revenue is recognized when customer agreement is obtained orclaim resolution occurs, which can be in subsequent periods. Historical claimrecoveries should not be considered indicative of future claim recoveries.  We recognized revenue and related additionalcontract costs from claims in the following amounts for the periods presented:

 
| ** **                                                                                  | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**      | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                  | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Revenue from claims                                                                         |       | $                     | 22,899     |                  | $          | 30,439              |       | $ | 35,199 |   |
| Less additional  contract related costs and subcontractors’ share of claim settlements |       | (1,697                | )          | (1,901                | )          | (8,998              | )          |
| Net impact on gross profit from claims                                                      |       | $                     | 21,202     |                  | $          | 28,538              |       | $ | 26,201 |   |

 

Substantially all claims were settled and collectedduring each respective period for which claim revenue was recognized.

 

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***Estimated losses on uncompletedcontracts and changes in contract estimates***

 

We record provisions forestimated losses on uncompleted contracts in the period in which such lossesare identified. The cumulative effects of revisions to contract revenue andestimated completion costs are recorded in the accounting period in which theamounts become evident and can be reasonably estimated. These revisions caninclude such items as the effects of change orders and claims, warranty claims,liquidated damages or other contractual penalties, adjustments for auditfindings on U.S. government contracts and contract closeout settlements.

 

# ***Segmenting contracts***

 

Occasionally a contract may include several elementsor phases, each of which was negotiated separately with the customer and agreedto be performed without regard to the performance of others. We follow thecriteria set forth in SOP 81-1 when segmenting contracts. In these situations,we segment the contract and assign revenue to the different elements or phasesto achieve different rates of profitability based on the relative value of eachelement or phase to the estimated contract revenue. Values assigned to thesegments are based on our normal historical prices and terms of such servicesto other customers.

*** ***

***Use of estimates***

 

The preparation of our consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America (“GAAP”) necessarily requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the balance sheet dates andthe reported amounts of revenue and costs during the reporting periods. Actualresults could differ from those estimates. On an ongoing basis, we review ourestimates based on information that is currently available. Changes in factsand circumstances may result in revised estimates.

 

***Classification of current assets and liabilities***

 

We include in current assets and liabilities amountsrealizable and payable under contracts that extend beyond one year. Accountsreceivable at December 30, 2005 and December 31, 2004 included $9,399 and$12,393, respectively, of contract retentions, which are not expected to becollected within one year. Subcontracts payable at December 30, 2005 andDecember 31, 2004, included $3,868 and $16,627, respectively, of retentionspayable, which are not expected to be paid within one year. Billings in excessof cost and estimated earnings on uncompleted contracts contain amounts that,depending on contract performance, resolution of U.S. government contractaudits, negotiations, change orders, claims or changes in facts andcircumstances, may not require payment within one year.

 

***Cash and cash equivalents***

 

Cash and cash equivalents consist of liquid securitieswith remaining maturities of three months or less at the date of acquisitionthat are readily convertible into known amounts of cash.

 

***Restricted Cash***

 

As of December 30, 2005 and December 31, 2004, we had$52,533 and $61,549, respectively, of restricted cash. Restricted cash consistsprimarily of cash restricted for use in the normal operations of ourconsolidated joint ventures, by projects having contractual cash restrictionsand by our self-insurance program.

 

***Short-term investments***

*** ***

***Short-terminvestments as of December 31, 2004, consisted of investment grade fixed-incomeauction rate securities classified as available-for-sale. The short-terminvestments are stated at fair value that approximated cost, therefore therewere no unrealized gains or losses related to these securities included inaccumulated other***

 

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***comprehensive income at December 31, 2004. The cost ofsecurities sold was based on the specific identification method. At December31, 2004, short-term investments had contractual maturities generally rangingfrom 24 to 38 years; however, all securities had provisions to be re-priced asto the interest rate or to be sold within 28 days or less. All auction ratesecurities were sold in February 2005 and the proceeds were reinvested in cashequivalents.***

*** ***

***Accounts and unbilled receivables***

 

Accounts receivable at December 30, 2005 and December31, 2004 include allowances for doubtful accounts of $5,811 and $9,419,respectively. Unbilled receivables represent costs incurred under contracts inprocess that have not yet been invoiced to customers and arise from the use ofthe percentage-of-completion method of accounting, cost reimbursement-typecontracts and the timing of billings. Substantially all unbilled receivables atDecember 30, 2005 are expected to be billed and collected within one year.

 

***Credit risk concentration***

 

By policy, we limit the amount of credit exposure toany one financial institution and place investments with financial institutionsevaluated as highly creditworthy. At December 30, 2005, billed and unbilledreceivables from the DoE and the DoD totaled $278,737. Concentrations of creditrisk with respect to other accounts receivable and unbilled receivables arebelieved to be limited due to the number, diversification and character of theobligors and our credit evaluation process. Typically, we have not requiredcollateral for such obligations, but we may place liens against property, plantor equipment constructed if a default occurs.

 

***Goodwill and other intangible assets***

 

Goodwill and other intangible assets are subject toannual impairment tests pursuant to Statement of Financial Accounting Standards(“SFAS”) No. 142,*Goodwill and Other Intangible Assets*.Effective February 1, 2002, in conjunction with fresh-start reporting, we usedthe purchase method of accounting to allocate our reorganization value to ournet assets, with the excess recorded as goodwill on the basis of estimates offair value. For income tax purposes, we have tax deductible goodwill in excessof financial statement goodwill and net operating loss (“NOL”) carryovers forwhich a valuation allowance was established in fresh-start reporting. Asgoodwill is deducted for income tax purposes and as the pre-reorganization NOLcarryovers are utilized, substantially all the resulting tax benefit reducesfinancial statement goodwill. Intangible assets of $37,400 are included inother assets as of December 30, 2005 and consist of minority interest incertain contracts and customer related intangibles acquired from BNFL.  See Note 15, “Acquisition of BNFL’s Interestin Government Services Business”.  Theseintangible assets are being amortized over estimated useful lives ranging fromseven to eight years. The estimated aggregate amortization expense will beapproximately $14,000 in 2006 and approximately $4,000 for each of the nextfour years.

 

***Property and equipment***

 

Property and equipment was stated at estimated fair valueas of February 1, 2002. Subsequent major renewals and improvements arecapitalized at cost, while maintenance and repairs are expensed when incurred.Depreciation of construction and mining equipment is provided based on thestraight-line and accelerated methods, after an allowance for estimated salvagevalue, over estimated lives of 2 to 10 years. Depreciation of buildings isprovided based on the straight-line method over estimated lives of 10 to 15years, and improvements are amortized over the shorter of the asset life orlease term. Depreciation of equipment is provided based on the straight-linemethod over estimated lives of 3 to 12 years. Upon disposition, cost andrelated accumulated depreciation of property and equipment are removed from theaccounts, and the gain or loss is reflected in results of operations.

 

***Billings in excess of cost andestimated earnings on uncompleted contracts***

 

Billings in excess of cost and estimated earnings onuncompleted contracts represent amounts actually billed to clients, and perhapscollected, in excess of costs incurred and profits recognized on a project.Also, we occasionally negotiate advance payments as a contract condition. Theseadvance payments are reflected in billings 

 

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in excess of cost andestimated earnings on uncompleted contracts. Provisions for losses oncontracts, reclamation reserves on mining contracts and reserves for punch-listcosts, demobilization and warranty costs on contracts that have achievedsubstantial completion and reserves for audit and contract closing adjustmentson U.S. government contracts are also included in billings in excess of costand estimated earnings on uncompleted contracts. The following table summarizesthe components of billings in excess of cost and estimated earnings onuncompleted contracts.

 
| ** **                                                                  | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Billings in excess of cost and estimated earnings on  uncompleted contracts |       | $                     | 92,298     |                  | $          | 112,628 |   |
| Estimated costs to complete long-term contracts                             |       | 21,192                |       | 28,371                |       |
| Net liabilities of construction joint ventures                              |       | 72,366                |       | 27,708                |       |
| Other reserves                                                              |       | 53,250                |       | 35,556                |       |
|                                                                        |       | $                     | 239,106    |                  | $          | 204,263 |   |

 

The caption “Netliabilities of construction joint ventures” above, represents our share ofunconsolidated construction joint ventures that had an excess of liabilitiesover assets primarily due to accrued contract losses. See Note 4, “Ventures.”

 

***Restructuringcharges***

 

In connection withrestructuring actions to improve operational efficiency and reduce employmentlevels and excess facilities, we recorded restructuring charges in priorperiods. The remaining restructuring liabilities, primarily relating tobuilding leases for vacated excess facilities, amounted to $4,241, $6,178 and$9,454 as of December 30, 2005, December 31, 2004, and January 2, 2004,respectively. The year-to-year decrease is primarily due to lease payments madeduring the respective periods.

 

***Self-insurance reserves***

 

Self-insurance reserves represent reserves establishedthrough a program under which we self-insure certain business risks. We carrysubstantial premium-paid, traditional insurance for our various business risks;however, we self-insure the lower level deductibles for workers’ compensationand general, automobile and professional liability. Our total self-insurancereserves at December 30, 2005 and December 31, 2004 are $79,234 and $79,429,respectively. The current portion of the self-insurance reserves of $12,301 and$11,484 at December 30, 2005 and December 31, 2004, respectively, is includedin other accrued liabilities.

 

***Foreign currency translation***

 

The functional currency for foreign operations isgenerally the local currency. Translation of assets and liabilities to U.S.dollars is based on exchange rates at the balance sheet date. Translation ofrevenue and expenses to U.S. dollars is based on a weighted-average rate duringthe period. Translation gains or losses, net of income tax effects, arereported as a component of other comprehensive income (loss), except fortranslation gains or losses related to short-term duration construction andengineering projects which are recognized currently. Gains or losses fromforeign currency transactions are included in results of operations.

 

***Income taxes***

 

Deferred income tax assets and liabilities arerecognized for the effects of temporary differences between the carryingamounts and the income tax basis of assets and liabilities using enacted taxrates. A valuation allowance is established when it is more likely than notthat net deferred tax assets will not be realized. Tax credits are generallyrecognized in the year they arise.

 

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***Income per share***

 

Basic income per share is computed by dividing netincome by the weighted-average number of common shares outstanding during theperiod. Diluted income per share is computed similar to basic income per shareexcept that it reflects the potential dilution from dilutive common stockequivalents using the treasury stock method. Outstanding common stockequivalents consist of options and warrants to purchase common stock andrestricted stock. See Note 14, “Capital Stock, Stock Purchase Warrants andStock Compensation Plans.”

 

During the year ended January 2, 2004, the weightedaverage number of anti-dilutive outstanding warrants and options excluded fromthe computation of diluted income per share was 7,749 and 3,270, respectively.During the years ended December 31, 2004 and December 30, 2005, the weightedaverage number of anti-dilutive outstanding warrants and options excluded fromthe computation of diluted earnings per share was not significant.

 

***Stock-based compensation***

 

We have used the intrinsic value method to account forstock-based employee compensation under the recognition and measurementprinciples of Accounting Principles Bulletin (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations for all periods presented. The following table presents the proforma effect on net income and income per share as if we had applied the fairvalue recognition provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.Our stock-based employee compensation plans, together with the assumptions usedto determine fair values, are described in Note 14, “Capital Stock, StockPurchase Warrants and Stock Compensation Plans.”

 
| ** **                                                                                                      | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**      | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                      | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Net income as reported                                                                                          |       | $                     | 58,366     |                  | $          | 51,137              |       | $ | 42,063 |   |
| Deduct:  Stock-based employee compensation expense determined under fair value based method  for all awards (1) |       | (9,650                | )          | (7,010                | )          | (15,923             | )          |
| Add: Stock-based  employee compensation expense recognized                                                      |       | 2,259                 |       | 1,164                 |       | 6,174               |       |
| Tax effects                                                                                                     |       | 2,885                 |       | 2,282                 |       | 3,805               |       |
| Pro forma net income                                                                                            |       | $                     | 53,860     |                  | $          | 47,573              |       | $ | 36,119 |   |
| Income per share:                                                                                               |       |                  |       |                  |       |                |       |
| As reported –  basic                                                                                       |       | $                     | 2.24       |                  | $          | 2.02                |       | $ | 1.68 |   |
| As reported –  diluted                                                                                     |       | 1.93                  |       | 1.86                  |       | 1.66                |       |
| Pro forma –  basic                                                                                         |       | 2.07                  |       | 1.88                  |       | 1.44                |       |
| Pro forma –  diluted                                                                                       |       | 1.78                  |       | 1.73                  |       | 1.43                |       |

 

----

(1)   We present pro forma compensation costassuming all stock options granted will vest with recognition of actualforfeitures as they occur.

 

***Reclassifications***

 

Certain reclassifications have been made to theaccompanying consolidated financial statements for prior years to conform tothe current year presentation. The reclassifications did not impact previouslyreported revenue, operating income, net income, total assets, total liabilitiesor stockholders’ equity.

 

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**3.****     ACCOUNTINGSTANDARDS**

 

***Adoption ofaccounting standards***

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 153, *Exchanges of Non-monetary Assets – An Amendment ofAPB Opinion No. 29*. APB Opinion No. 29 provided an exception to thebasic measurement principle (fair value) for exchanges of similar productiveassets. That exception required that some non-monetary exchanges, althoughcommercially substantive, be recorded on a carryover basis. SFAS No. 153eliminates the exception to fair value for exchanges of similar productiveassets and replaces it with a general exception for exchange transactions thatdo not have commercial substance – that is, transactions that are not expectedto result in significant changes in the cash flows of the reporting entity. Wewere required to adopt SFAS No. 153 in the third quarter of 2005. The adoptionhad no impact on our financial position, results of operations, or cash flows.

 

In March 2005, the FASBissued Interpretation No. 47, *Accounting for ConditionalAsset Retirement Obligations – an interpretation of FASB Statement No. 143 (*“FIN47”*).*FIN 47 clarifies the term conditionalasset retirement obligation as used in SFAS No. 143, *Accountingfor Asset Retirement Obligations,* and requires a liability to berecorded if the fair value of the obligation can be reasonably estimated. Thetypes of asset retirement obligations that are covered by FIN 47 are those forwhich an entity has a legal obligation to perform an asset retirement activity;however the timing and (or) method of settling the obligation are conditionalon a future event that may or may not be within the control of the entity. FIN47 also clarifies when an entity would have sufficient information toreasonably estimate the fair value of an asset retirement obligation. We wererequired to adopt FIN 47 in the fourth quarter of 2005. The adoption had noimpact on our financial position, results of operations or cash flows.

 

***Recently issued accounting standards***

 

InDecember 2004, the FASB issued SFAS No. 123 (Revised), *Share-BasedPayment*. SFAS No. 123-R replaces SFAS No. 123 and supersedes APB OpinionNo. 25. Adoption of SFAS No. 123-R will require us to record a non-cash expensefor our stock compensation plans using the fair value method. Historically wehave recorded our compensation cost in accordance with APB Opinion No. 25,which does not require the recording of an expense for stock options if theywere granted at a price equal to the fair market value of common stock on thegrant date. SFAS No. 123-R is effective for us beginning the first quarter of2006. Based on options outstanding as of December 30, 2005, and estimatedfuture option grants in 2006, we estimate the adoption of SFAS No. 123-R willresult in an additional pre-tax expense of approximately $8.0 million in 2006.

 

In the mining industry,companies may be required to remove overburden and waste materials to accessmineral deposits. The costs of removing overburden and waste materials arereferred to as “stripping costs.” MIBRAG incurs significant stripping costs inits lignite coal mining operations. In March 2005, the Emerging Issues TaskForce (“EITF”) reached a consensus on Issue No. 04-6, *Accountingfor Stripping Costs Incurred during Production in the Mining Industry*.The EITF concluded that stripping costs incurred during the production phase ofa mine are variable production costs that should be included in the cost ofinventory produced during the period that stripping costs are incurred. EITFNo. 04-6 is effective for us in the first quarter of 2006. Based upon MIBRAG’sdeferred stripping costs recorded as of December 30, 2005, the adoption of EITFNo. 04-6 will result in a reduction of our investments in unconsolidatedaffiliates and a reduction of total stockholders’ equity of $83.2 million and$54.1 million, respectively. EITF No. 04-6 provides that any adjustment from adoptionbe recognized as a cumulative effect adjustment to beginning retained earningsin the period of adoption which will not affect our earnings in 2006. MIBRAG’smines are open pit lignite coal mines which cover several square miles and havean estimated remaining life of 40 or more years. Because of the miningprocedures used, MIBRAG generally does not maintain any significant inventoryof mined coal. Accordingly, under EITF No. 04-6 costs of removing overburdenwill be expensed in the period incurred. The execution of the mine plan mayresult in fiscal periods during which costs incurred for the removal ofoverburden will not bear a direct relationship to the revenue derived from thesale of coal. This may result in a degree of variability in the future reportedearnings of MIBRAG.

 

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**4.****     VENTURES**

 

***Construction joint ventures***

 

We participate in unconsolidated construction jointventures that are formed to bid, negotiate and complete specific projects. Theunconsolidated construction joint ventures are reflected in our consolidatedbalance sheets as investments in and advances to construction joint venturesaccounted for under the equity method, and our proportionate share of revenue,cost of revenue and gross profit is included in our consolidated statements ofincome. The size, scope and duration of joint-venture projects vary amongperiods. The tables below present the financial information of ourunconsolidated construction joint ventures in which we do not hold acontrolling interest but do exercise significant influence. At December 30,2005 and December 31, 2004, $72,366 and $27,708, respectively, was included inour consolidated balance sheet under the caption “Billings in excess of costand estimated earnings on uncompleted contracts,” representing our share of theexcess of liabilities over assets primarily due to accrued contract losses ofunconsolidated construction joint ventures.

 
| **Combined financial position of unconsolidated construction joint ventures** | ** **                      | ** ** | ** **                      | ** ** | ** ** |
|-------------------------------------------------------------------------------|---------------------------------|------------|---------------------------------|------------|------------|
| ** **                                                                    | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Current assets                                                                |                            | $          | 298,935                         |       | $          | 265,111 |   |
| Property and equipment, net                                                   |                            | 9,582      |                            | 4,403      |       |
| Current liabilities                                                           |                            | (353,728   | )                               | (254,993   | )          |
| Net assets (liabilities)                                                      |                            | $          | (45,211                         | )          | $          | 14,521 |   |

### ** **

| **Combined results of operations of unconsolidated construction joint ventures**                                         | ** **                      | **Year ended** | ** **                      | **Year ended** | ** **                    | **Year ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|---------------------------------|---------------------|---------------------------------|---------------------|-------------------------------|---------------------|------------|
| ** **                                                                                                               | **December 30, 2005** | ** **          | **December 31, 2004** | ** **          | **January 2, 2004** | ** **          |
| Revenue                                                                                                                  |                            | $                   | 1,060,782                       |                | $                             | 704,729             |       | $ | 702,648 |   |
| Cost of revenue                                                                                                          |                            | (1,153,194          | )                               | (716,755            | )                             | (624,535            | )          |
| Gross profit (loss)                                                                                                      |                            | $                   | (92,412                         | )                   | $                             | (12,026             | )          | $ | 78,113 |   |
|                                                                                                                     |                            |                |                            |                |                          |                |       |
| **Washington  Group International’s share of results of operations of unconsolidated  construction joint ventures** | ** **                      | ** **          | ** **                      | ** **          | ** **                    | ** **          | ** ** |
| Revenue                                                                                                                  |                            | $                   | 477,138                         |                | $                             | 281,890             |       | $ | 271,218 |   |
| Cost of revenue                                                                                                          |                            | (522,233            | )                               | (294,367            | )                             | (239,881            | )          |
| Gross profit (loss)                                                                                                      |                            | $                   | (45,095                         | )                   | $                             | (12,477             | )          | $ | 31,337 |   |

 

During 2004, aconstruction joint venture in which we have a 50 percent interest recognized acontract loss on a $377,700 fixed-price roadway interchange and bridge project.Our share of the loss amounted to $27,500. During the second quarter of 2005,the final design for a major portion of the project was completed. Based on thefinal design and combined with what we believe to be a number of changesdirected by the clients, or the state regulatory agency, the estimated costsincreased significantly due to quantity growth, cost escalation, and additionallabor required. Also, the changes resulted in a later completion date with theattendant costs. We have continued to monitor and evaluate the estimated totalcosts associated with this project and during the third and fourth quarters of2005, experienced further cost increases, primarily associated with subcontractand material cost escalation, higher labor costs, and additional scheduleimpacts. The revisions to estimated costs resulted in a charge to earnings of$72,500 for 2005 and brings our share of the total estimated contract loss to$100,000 as of December 30, 2005.

 

To date, only a smallportion of the cost increases have been agreed to with the clients andacknowledged with a change order. As of December 30, 2005, the project isapproximately 41 percent complete, measured on a cost-to-cost basis, and isscheduled to be complete in the first half of 2007. Pendingchange orders and claims submitted to the client total approximately $95,400(of which our share is $47,700), an additional $32,300 are in process (of whichour share is $16,150) and we believe more are to follow. We believe there willbe significant recoveries once the claim process is completed. Because we havenot been able to reach agreement on the change orders and claims, recoverieswill be recognized only when it is probable they will result in additionalrevenue 

 

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and the amountscan be reliably estimated. While the entire amount of the current estimatedloss has been recognized, actual results may differ from our estimates.

 

***Unconsolidated affiliates***

 

At December 30, 2005 andDecember 31, 2004, we held ownership interests in unconsolidated affiliatesthat are accounted for under the equity method, the most significant of whichare two incorporated mining ventures: MIBRAG (50 percent) and WestmorelandResources (20 percent). We provide consulting services to MIBRAG and contractmining services to Westmoreland Resources. The tables below present thefinancial information of our unconsolidated affiliates in which we do not holda controlling interest but do exercise significant influence.

 
| **Combined financial position of unconsolidated affiliates** | ** **                      | ** ** | ** **                      | ** ** | ** ** |
|--------------------------------------------------------------|---------------------------------|------------|---------------------------------|------------|------------|
| ** **                                                   | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Current assets                                               |                            | $          | 156,537                         |       | $          | 184,801 |   |
| Property and equipment, net                                  |                            | 530,140    |                            | 615,475    |       |
| Other non-current assets                                     |                            | 622,217    |                            | 686,849    |       |
| Current liabilities                                          |                            | (88,710    | )                               | (98,424    | )          |
| Long-term debt, non-recourse to parents                      |                            | (225,512   | )                               | (257,950   | )          |
| Other non-current liabilities                                |                            | (648,085   | )                               | (769,739   | )          |
| Net assets                                                   |                            | $          | 346,587                         |       | $          | 361,012 |   |

 
| **Combined results of operations of unconsolidated affiliates** | ** **                      | **Year ended** | ** **                      | **Year ended** | ** **                    | **Year ended** | ** ** |
|-----------------------------------------------------------------|---------------------------------|---------------------|---------------------------------|---------------------|-------------------------------|---------------------|------------|
| ** **                                                      | **December 30, 2005** | ** **          | **December 31, 2004** | ** **          | **January 2, 2004** | ** **          |
| Revenue                                                         |                            | $                   | 481,632                         |                | $                             | 457,219             |       | $ | 447,386 |   |
| Costs and expenses                                              |                            | (420,843            | )                               | (401,182            | )                             | (394,847            | )          |
| Gross profit                                                    |                            | $                   | 60,789                          |                | $                             | 56,037              |       | $ | 52,539 |   |

 

In March 2005, the EITFreached a consensus on Issue No. 04-6, *Accounting for StrippingCosts Incurred during Production in the Mining Industry.* EITF No.04-6 is effective for us in the first quarter of 2006 and upon adoption willhave a significant impact on our investment in MIBRAG. See Note 3, “AccountingStandards”.

 

**5.****     SALE OFBUSINESS**

 

On April 18, 2003,we sold the process technology development portion of our petroleum andchemical business (the “Technology Center”) for $17,700 and recognized a gainof $4,946 on the sale reflected as other operating income in 2003. Operatingresults for the Technology Center are included as part of the “Intersegment andother unallocated operating costs” in Note 11, “Operating Segment, Geographicand Customer Information” through the date of the sale. Operatingresults of the Technology Center included in our consolidated results ofoperations for the year ended January 2, 2004 consisted of $9,989 of revenueand a net loss of $590.

 

**6.****     GOODWILL**

 

The followingtable reflects the changes in the carrying value of goodwill from January 2,2004 to December 30, 2005. We reduce goodwill as a result of amortization ofthe excess of tax deductible goodwill over financial statement goodwill and foractual and forecast usage of pre-reorganization NOL carryovers. Goodwill of asubsidiary is assigned each year to the reporting segments to which thesubsidiary was providing service in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*. In addition, asdisclosed in Note 11, “Operating Segment, Geographic and Customer Information,”certain operations were transferred among business units during 2004. Goodwillwas also impacted by the transactions completed with BNFL in the current yearas discussed in Note 15, “Acquisition of BNFL’s Interest in Government ServicesBusiness.”

 

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| **Goodwill  activity by reporting segment**                                                                         | ** ** | ** ** | ** **  | **Industrial/** | ** **         | ** ** | ** ** | ** ** | ** **  | ** ** | ** **      | **Energy &** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|-----------------|--------------------|------------|------------|------------|-------------|------------|-----------------|-----------------------|------------|------------|------------|
| ** **                                                                                                          | **Power**  | ** ** | **Process** | ** **      | **Infrastructure** | ** ** | **Mining** | ** ** | **Defense** | ** ** | **Environment** | ** **            | **Total**  | ** ** |
| Balance at  January 2, 2004                                                                                         |       | $          | 7,247       |            | $                  | 90,081     |       | $          | 50,574      |       | —          |                  | $          | 38,473     |       | $ | 173,528 |   | $ | 359,903 |   |
| Reorganization of  reporting structure                                                                              |       | 7,000      |        | (10,656         | )                  | (1,536     | )          | —     |        | 720        |            | 4,472                 |       | —     |       |
| Adjustment for  amortization of tax goodwill, and utilization of NOL’s                                         |       | (1,588     | )           | (21,493         | )                  | (12,907    | )          | —     |        | (7,327     | )               | (8,771                | )          | (52,086    | )          |
| Balance at  December 31, 2004                                                                                       |       | 12,659     |        | 57,932          |               | 36,131     |       | —     |        | 31,866     |            | 169,229               |       | 307,817    |       |
| Reorganization of  reporting structure                                                                              |       | 1,908      |        | 794             |               | (2,613     | )          | —     |        | (89        | )               | —                |       | —     |       |
| Adjustment for  amortization of tax goodwill, utilization of NOL’s and reduction of tax  contingency liability |       | (2,490     | )           | (33,719         | )                  | (20,247    | )          | —     |        | (11,494    | )               | (13,765               | )          | (81,715    | )          |
| Impact of BNFL  acquisition                                                                                         |       | —     |        | —          |               | —     |       | —     |        | (1,152     | )               | (62,680               | )          | (63,832    | )          |
| Balance at  December 30, 2005                                                                                       |       | $          | 12,077      |            | $                  | 25,007     |       | $          | 13,271      |       | —          |                  | $          | 19,131     |       | $ | 92,784 |   | $ | 162,270 |   |

 

We perform our annual goodwill impairment test for allof our reporting segments as of the end of October in conjunction with ourannual budgeting and forecasting process. There has been no goodwill impairmentduring the years ended December 30, 2005, December 31, 2004, and January 2,2004.

 

**7.****     CREDIT FACILITY**

 

We have a Senior Secured Revolving Credit Facility (the “CreditFacility”) that provides for up to $350,000 in the aggregate of loans and other financialaccommodations allocated pro rata between a tranche A facility and a tranche Bfacility. On June 14, 2005, we amended and restated the Credit Facility toinclude more favorable terms, increase the tranche A to $247,500 from $115,000and decrease the tranche B to $102,500 from $235,000. As amended and restated,the scheduled termination date for both tranche A and tranche B is June 14,2010. The borrowing rate for tranche A is LIBOR plus an additional margin of2.00 percent or, at our option, prime plus an additional margin of 1.00percent, subject in each case to a 0.25 percent reduction upon our obtaining aspecified long-term debt rating. The borrowing rate for tranche B is LIBOR plusan additional margin of 1.75 percent or, at our option, prime plus anadditional margin of 0.75 percent. As of December 30, 2005, the effectiveborrowing rate was 6.39 percent for tranche A and 6.14 percent for tranche B.

 

The CreditFacility also provides for other fees, including commitment and letter ofcredit fees, normal and customary for such credit agreements. Under the currentterms of the agreement, letters of credit are allocated pro rata between thefacilities on the same basis as loans. Letter of credit fees are calculatedusing the applicable LIBOR margins stated above plus an issuance fee which isnegotiated with the issuing bank. Commitment fees are calculated on theremaining borrowing capacity of each tranche after subtracting any outstandingborrowings and letters of credit. The commitment fee is 0.50 percent fortranche A (subject to a 0.25 percent reduction upon our obtaining a specifiedlong-term debt rating) and 1.75 percent (or at our option, prime plus anadditional margin of 0.75 percent) for tranche B. At December 30, 2005, $92,000face amount of letters of credit were issued and outstanding and no borrowingswere outstanding leaving a borrowing capacity of $258,000 under the CreditFacility.

 

The CreditFacility contains financial covenants requiring the maintenance of specifiedfinancial and operating ratios, and specified events of default that aretypical for a credit facility of this size, type and tenor. The Credit Facilityalso contains covenants that limit our ability and the ability of some of oursubsidiaries to incur debt, grant liens, provide guarantees, make investments,merge with or acquire other companies and pay dividends. At December 30, 2005,we were in compliance with all of the financial covenants under the CreditFacility. The Credit Facility is secured by substantially all of the assets ofWashington Group International and our wholly owned domestic subsidiaries.

 

As a result of theJune 14, 2005 amendment to the Credit Facility, $3,588 of deferred financingfees were written off during the year ended December 30, 2005. During the yearended January 2, 2004, $9,831 of

 

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unamortizedfinancing fees associated with a prior credit facility were written off uponthe signing of the Credit Facility.

 

**8.****     TAXES ON INCOME**

 

The components of the U.S. federal, state and foreignincome tax expense (benefit) were as follows:

 
| ** **             | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**      | ** ** |
|------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **             | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Currently payable:     |       |                  |       |                  |       |                |       |
| U.S. federal           |       | $                     | 661        |                  | $          | 611                 |       | $ | 684 |   |
| State                  |       | (216                  | )          | 548                   |       | 1,247               |       |
| Foreign                |       | 4,575                 |       | 3,629                 |       | 4,927               |       |
| Total current expense  |       | 5,020                 |       | 4,788                 |       | 6,858               |       |
| Deferred:              |       |                  |       |                  |       |                |       |
| U.S. federal           |       | 27,896                |       | 37,526                |       | 34,605              |       |
| State                  |       | (3,178                | )          | 4,517                 |       | 4,175               |       |
| Foreign                |       | 168                   |       | (7,306                | )          | 1,250               |       |
| Total deferred expense |       | 24,886                |       | 34,737                |       | 40,030              |       |
| Income tax expense     |       | $                     | 29,906     |                  | $          | 39,525              |       | $ | 46,888 |   |

 

The components of the deferred tax assets andliabilities and the related valuation allowances were as follows:

 
| **Deferred tax assets and liabilities** | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Deferred tax assets:                                        |       |                            |       |                            |       |
| Goodwill                                                    |       | $                               | 21,075     |                            | $          | 18,051 |   |
| Compensation and  benefits                                  |       | 79,293                          |       | 51,946                          |       |
| Depreciation                                                |       | 3,127                           |       | 1,322                           |       |
| Provision for  losses                                       |       | 34,493                          |       | 35,131                          |       |
| Joint ventures                                              |       | 29,514                          |       | 13,101                          |       |
| Revenue  recognition                                        |       | 1,652                           |       | 6,514                           |       |
| Self-insurance  reserves                                    |       | 36,147                          |       | 33,702                          |       |
| Alternative  minimum tax                                    |       | 16,817                          |       | 17,098                          |       |
| Foreign tax  credit                                         |       | 22,557                          |       | 17,461                          |       |
| Net operating  loss carryovers                              |       | 135,981                         |       | 146,487                         |       |
| Valuation  allowances                                       |       | (107,949                        | )          | (131,244                        | )          |
| Other, net                                                  |       | 9,811                           |       | 6,831                           |       |
| Total deferred tax assets                                   |       | 282,518                         |       | 216,400                         |       |
| Deferred tax liability:                                     |       |                            |       |                            |       |
| Investment in  affiliates                                   |       | (48,069                         | )          | (57,578                         | )          |
| Total deferred tax assets, net                              |       | $                               | 234,449    |                            | $          | 158,822 |   |

 

As of December 30, 2005, we have remaining taxgoodwill of $577,907 resulting from prior acquisitions. The amortization ofthis goodwill is deductible over remaining periods ranging from 8.2 to 9.5years. The annual tax amortization will be $61,757 for the next 8 years anddecrease thereafter. At December 30, 2005, we had federal NOL carryovers of$159,411, most of which is subject to an annual limitation of $26,510. Thefederal NOL carryovers expire in years 2020 through 2022. We also have foreignNOL carryovers of $165,527, most of which are not subject to expiration. Theforeign NOL carryovers primarily consist of losses incurred on two constructionprojects in the United Kingdom which were acquired as part of the RE&Cacquisition. We also have $1,690 of foreign tax credits that expire in 2015 and$20,867 of foreign tax credits which currently have no expiration date.

 

II-52

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The $107,949 of valuation allowances reduce thedeferred tax assets associated with foreign tax credits and the NOL carryoversto a level which will, more likely than not, be realized based on estimatedfuture taxable income. As the NOL is used against taxable income or thevaluation allowance is no longer considered necessary, the valuation allowancewill be reduced, substantially all of which will result in a correspondingreduction to financial statement goodwill until such goodwill is reduced tozero. During 2004 and 2005, based on actual and forecasted utilization of NOLcarryovers the valuation allowance was decreased by $17,365 and $27,884,respectively. The tax effect of the change resulted in an additional $11,116deferred tax asset in 2004 and $17,850 in 2005. The combined amounts of $28,481and $45,734 were recorded as reductions to goodwill in 2004 and 2005. Duringthese years, the valuation allowance also had minor adjustments due to foreigncurrency translation and changes in utilization estimates.

 

Years prior to 2002 are closed to examination forfederal tax purposes. We have evaluated the available evidence about bothasserted and unasserted income tax contingencies in our income tax returnsfiled with the Internal Revenue Service (“IRS”), state, local and foreign taxauthorities. We have recorded $5,091 for income tax contingencies whichrepresents our estimate of the amount that is probable and estimable of beingpayable, if successfully challenged by such tax authorities, under theprovisions of SFAS No. 5, *Accounting forContingencies*. During 2005, we settled with the IRS on disputesinvolving tax years 1994 through 1997. The settlement amount was less than hadbeen previously recorded as a contingent liability. In accordance with SFAS No.109, *Accounting for Income Taxes,* thereduction to the liability, which was recorded as of the date of ourreorganization, resulted in a $12,710 reduction of goodwill. We have notreceived either written or oral tax opinions that are contrary to ourassessment of the recorded income tax provision and income tax contingencyaccrual.

 

Income tax expense (benefit) differed from incometaxes at the U.S. federal statutory tax rate of 35.0 percent as follows:

 
| ** **                        | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**      | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                        | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Federal tax rate                  |       | 35.0                  | %          | 35.0                  | %          | 35.0                | %          |
| State tax, net of federal benefit |       | (2.5                  | )          | 3.1                   |       | 3.2                 |       |
| Nondeductible items               |       | 2.5                   |       | 2.1                   |       | 2.8                 |       |
| Domestic reinvestment plan        |       | (4.0                  | )          | —                |       | —              |       |
| Foreign tax                       |       | 0.9                   |       | (2.9                  | )          | 1.3                 |       |
| Effective tax rate                |       | 31.9                  | %          | 37.3                  | %          | 42.3                | %          |

 

Income from workperformed in the Middle East is generally not subject to state income tax. As aresult of our increase in earnings****inthe Middle East, the state tax effective rate is substantially lower than inprevious periods. Also, in preparing the state income tax returns for 2004, werevised our estimate of the impact of foreign earnings not subject to stateincome taxes. The result of this change in estimate was a $2,011 tax benefitrecorded in the year ended December 30, 2005.

 

During the year endedDecember 30, 2005, we implemented a domestic reinvestment plan for dividendsreceived from our interest in MIBRAG. The plan allowed us to take advantage ofa temporary dividend received deduction and generated a $3,846 tax benefit.

 

Foreign taxes for allthree years presented include a benefit for current year losses in certainforeign jurisdictions. A full valuation allowance has been provided against theresulting foreign NOL’s. Non-deductible items were principally comprised ofnon-deductible reorganization expenses, lobbying expenses, and thenon-deductible portion of meals and entertainment expenses.

 

The U.S. government ratified the protocol modifyingthe income tax treaty between the U.S. and the Netherlands in December 2004.The protocol eliminates the five percent Netherlands withholding tax ondividends from Netherlands subsidiaries received after February 1, 2005. Thenet impact of the elimination of the 

 

II-53

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Netherlands withholdingtax on future dividends was a reduction in our deferred tax liability of$3,623, which decreased income tax expense for the year ended December 31,2004.

 

Income beforereorganization items, income taxes and minority interests is comprised of thefollowing:

 
| ** **                                                               | ** ** | **Year ended**        | ** ** | **Year ended,**       | ** ** | **Year ended**      | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                               | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| U.S. source                                                              |       | $                     | (9,004     | )                     | $          | 13,950              |       | $ | 46,018 |   |
| Foreign source                                                           |       | 102,685               |       | 90,681                |       | 69,741              |       |
| Income before  reorganization items, income taxes and minority interests |       | $                     | 93,681     |                  | $          | 104,631             |       | $ | 115,759 |   |

 

**9.****     BENEFIT PLANS**

 

***Pension plans and supplementalretirement plans***

 

We sponsor definedbenefit pension plans and unfunded supplemental retirement plans, whichprimarily cover certain groups of current and former employees of theGovernment Services Business. We utilize actuarial estimates of the pensionobligations for financial reporting purposes and make contributions asnecessary to meet ERISA funding requirements for these plans. Qualified planassets are invested in master pension trusts for the Government ServicesBusiness that invest primarily in publicly traded common stocks, bonds,government securities and cash equivalents.

 

Effective January 1, 2006, all of the GovernmentServices Business’ employees, excluding those employed at U.S.government-owned/contractor-operated sites, were converted to the WashingtonGroup International benefits programs. Accordingly, benefits provided under thepension plans were frozen effective December 31, 2005. Accrued pension benefitsare based on pay and service through December 31, 2005. The freezing ofbenefits under the pension plans resulted in a curtailment gain of $2,224.

 

We use an October 31measurement date for our pension plans.

 

Reconciliation of beginning and ending balances ofbenefit obligations and fair value of plan assets and the funded status of thepension plans are as follows:

 
| ** **                                       | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Change in benefit obligations** | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Benefit obligations at beginning of period       |       | $                               | 83,128     |                            | $          | 72,207 |   |
| Service cost                                     |       | 5,466                           |       | 4,768                           |       |
| Actuarial loss                                   |       | 3,007                           |       | 4,728                           |       |
| Interest cost                                    |       | 4,782                           |       | 4,453                           |       |
| Participant contributions                        |       | 518                             |       | 510                             |       |
| Impact of benefit freeze                         |       | (6,682                          | )          | —                          |       |
| Benefit payments                                 |       | (4,132                          | )          | (3,538                          | )          |
| Benefit obligations at end of period             |       | $                               | 86,087     |                            | $          | 83,128 |   |
| **Change in plan assets**                        |       |                            |       |                            |       |
| Fair value of plan assets at beginning of period |       | $                               | 21,073     |                            | $          | 14,605 |   |
| Actual return on plan assets                     |       | 1,462                           |       | 1,233                           |       |
| Company contributions                            |       | 7,689                           |       | 8,263                           |       |
| Participant contributions                        |       | 518                             |       | 510                             |       |
| Benefit payments                                 |       | (4,132                          | )          | (3,538                          | )          |
| Fair value of plan assets at end of period       |       | $                               | 26,610     |                            | $          | 21,073 |   |

 

II-54

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| ** **                                                  | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Funded status (obligations less fair value of plan  assets) |       | $                     | (59,477    | )                     | $          | (62,055 | ) |
| Unrecognized net actuarial loss                             |       | 5,492                 |       | 12,559                |       |
| Unrecognized prior service cost                             |       | —                |       | 12                    |       |
| Accrued benefit cost                                        |       | (53,985               | )          | (49,484               | )          |
| Contributions made after the measurement date               |       | 621                   |       | 545                   |       |
| Accrued benefit cost at end of period                       |       | $                     | (53,364    | )                     | $          | (48,939 | ) |

 

Amounts recognized in theconsolidated balance sheets for the pension plans are as follows:

 
| ** **                                    | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Accrued benefit liability                     |       | $                     | (59,484    | )                     | $          | (55,986 | ) |
| Intangible asset                              |       | —                |       | 1                     |       |
| Accumulated other comprehensive loss          |       | 6,120                 |       | 4,846                 |       |
| Minority interest in other comprehensive loss |       | —                |       | 2,200                 |       |
| Net amount recognized                         |       | $                     | (53,364    | )                     | $          | (48,939 | ) |

 

We expect to contribute$11,600 to the pension plans in 2006. At December 30, 2005, the benefitobligation for each pension plan exceeded the fair value of plan assets.Pension benefits expected to be paid in each of the next five years and in theaggregate for the next succeeding five years are $3,887, $4,043, $4,228,$4,425, $4,648 and $27,000, respectively, at December 30, 2005.

 

The accumulated benefit obligationfor all defined benefit pension plans was $86,087 and $77,099 at December 30,2005 and December 31, 2004, respectively.

 

The components of netpension costs for the plans are as follows:

 
| ** **                                              | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**           | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **Components of net pension costs** | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Service cost                                            |       | $                               | 5,466      |                            | $          | 4,769                         |       | $ | 3,367 |   |
| Interest cost                                           |       | 4,782                           |       | 4,453                           |       | 4,091                         |       |
| Expected return on assets                               |       | (1,823                          | )          | (1,336                          | )          | (923                          | )          |
| Recognized net actuarial loss                           |       | 386                             |       | 175                             |       | 125                           |       |
| Prior service costs                                     |       | (133                            | )          | —                          |       | —                        |       |
| Net periodic pension costs before curtailment gain      |       | 8,678                           |       | 8,061                           |       | 6,660                         |       |
| Curtailment gain                                        |       | (2,224                          | )          | —                          |       | —                        |       |
| Net periodic pension costs                              |       | $                               | 6,454      |                            | $          | 8,061                         |       | $ | 6,660 |   |

 

The actuarial assumptionsused to determine pension benefit obligations for the plans are as follows:

 
| ** **                | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------|------------|-----------------------|------------|-----------------------|------------|
| Discount rates            |       | 5.8% to 5.9%          |       | 5.5% to 6.0%          |       |
| Compensation increases    |       | —                |       | 4.0                   |       |
| Expected return on assets |       | 8.0                   |       | 8.0                   |       |

 

Experience gains andlosses, as well as the effects of changes in actuarial assumptions and planprovisions, are amortized over the average future service period of employees.

 

II-55

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To determine the overallexpected long-term rate of return on assets, we evaluate the following: (i)expectations of investment performance based on the specific investmentpolicies and strategy for each class of plan assets, (ii) historical rates ofreturn for each significant category of plan assets and (iii) other relevantmarket and company specific factors we believe have historically impactedlong-term rates of return.

 

Separate investmentcommittees manage the assets of the two master trusts, which hold the planassets. In accordance with the investment guidelines, the assets of the fundsare invested in a manner consistent with the fiduciary standards of the ERISA.The investments are made solely in the interest of the participants andbeneficiaries and for the exclusive purpose of providing benefits to the participantsand their beneficiaries. The asset allocation targets for these two mastertrusts are approximately 60 percent in equities and 40 percent in fixed incomesecurities. Actual allocation percentages will vary from the target percentagesbased on short-term fluctuations in cash flows and market fluctuations.

 

The pension plan’sweighted-average asset allocations by asset category are:

 
| **Asset category**      | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| U.S. equity securities       |       | 55                              | %          | 58                              | %          |
| Fixed income debt securities |       | 33                              |       | 34                              |       |
| Non-U.S. equity securities   |       | 6                               |       | 6                               |       |
| Cash and cash equivalents    |       | 6                               |       | 2                               |       |

 

***Post-retirement benefit plans***

 

We provide benefits under company-sponsored retiree health care andlife insurance plans for certain groups of employees, some of which requireretiree contributions and contain other cost sharing features. The retiree lifeinsurance plans provide basic coverage on a noncontributory basis. Inconnection with the transition of certain groups of Government ServicesBusiness’ employees to Washington Group International’s benefit programs,retiree health care and life insurance benefits were terminated for anyoneretiring after December 31, 2005. Accordingly, all benefits provided undercompany-sponsored health care and life insurance plans are frozen. Thetermination of retiree medical and life insurance benefits for anyone retiringafter December 31, 2005 resulted in a curtailment gain of $7,065 during theyear ended December 30, 2005. We reserve the right to amend or terminate thepost-retirement benefits currently provided under the plans and may increaseretirees’ cash contributions at any time.

 

Weuse an October 31 measurement date for our post-retirement benefit plans.

 

Reconciliationof beginning and ending balances of post-retirement benefit obligations andfair value of plan assets and the funded status are as follows:

 
| ** **                                                            | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Change in post-retirement benefit obligations** | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Benefit obligations at beginning of period                            |       | $                               | 59,221     |                            | $          | 54,890 |   |
| Service cost                                                          |       | 613                             |       | 1,911                           |       |
| Interest cost                                                         |       | 2,889                           |       | 3,397                           |       |
| Initial obligation                                                    |       | 575                             |       | —                          |       |
| Impact of benefit freeze                                              |       | (7,065                          | )          | —                          |       |
| Participant contributions                                             |       | 1,235                           |       | 1,201                           |       |
| Benefit payments                                                      |       | (5,824                          | )          | (4,926                          | )          |
| Actuarial (gain) loss                                                 |       | (4,901                          | )          | 2,748                           |       |
| Benefit obligations at end of period                                  |       | $                               | 46,743     |                            | $          | 59,221 |   |

 

II-56

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| ** **                                                  | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Change in plan assets**                    | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Fair value of plan assets at beginning of period            |       | $                               | —     |                            | $          | — |   |
| Company contributions                                       |       | 4,589                           |       | 3,725                           |       |
| Participant contributions                                   |       | 1,235                           |       | 1,201                           |       |
| Benefit payments                                            |       | (5,824                          | )          | (4,926                          | )          |
| Fair value of plan assets at end of period                  |       | $                               | —     |                            | $          | — |   |
| Funded status (obligations less fair value of plan  assets) |       | $                               | (46,743    | )                               | $          | (59,221 | ) |
| Unrecognized net actuarial loss                             |       | 6,345                           |       | 11,073                          |       |
| Accrued benefit cost                                        |       | (40,398                         | )          | (48,148                         | )          |
| Contributions made after the measurement date               |       | 643                             |       | 736                             |       |
| Accrued benefit cost at end of period                       |       | $                               | (39,755    | )                               | $          | (47,412 | ) |

 

We expect to contribute$3,800 to our post-retirement plans in 2006. Post-retirement benefits expectedto be paid in each of the next five years and in the aggregate for the nextsucceeding five years are $3,797, $3,902, $3,938, $3,959, $3,965, and $19,131,respectively, at December 30, 2005.

 

The components of netpost-retirement benefits cost are as follows:

 
| **Components of net  post-retirement benefits (gain) cost** | ** **                      | **Year ended** | ** **                      | **Year ended** | ** **                    | **Year ended** | ** ** |
|-------------------------------------------------------------|---------------------------------|---------------------|---------------------------------|---------------------|-------------------------------|---------------------|------------|
| ** **                                                  | **December 30, 2005** | ** **          | **December 31, 2004** | ** **          | **January 2, 2004** | ** **          |
| Service cost                                                |                            | $                   | 640                             |                | $                             | 1,456               |       | $ | 889 |   |
| Interest cost                                               |                            | 2,889               |                            | 3,397               |                          | 3,119               |       |
| Recognized net actuarial gain                               |                            | 280                 |                            | 306                 |                          | —              |       |
| Recognition of initial obligation                           |                            | —              |                            | 287                 |                          | —              |       |
| Net post-retirement benefits cost before curtailment  gain  |                            | 3,809               |                            | 5,446               |                          | 4,008               |       |
| Curtailment gain                                            |                            | (7,065              | )                               | —              |                          | —              |       |
| Net post-retirement benefits (gain) cost                    |                            | $                   | (3,256                          | )                   | $                             | 5,446               |       | $ | 4,008 |   |

 

Theactuarial assumptions used to determine post-retirement benefit obligations areas follows:

 
| ** **                                                                         | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Discount rates                                                                     |       | 5.7% to 5.9%          |       | 5.25% to 6.25%        |       |
| Health care cost trend rate assumed for next year                                  |       | 10.0%                 |       | 10.0%                 |       |
| Rate to which the cost trend rate is assumed to  decline (the ultimate trend rate) |       | 5.0%                  |       | 5.0%                  |       |
| Year that the rate reaches the ultimate trend rate                                 |       | 2011                  |       | 2010                  |       |

 

Experience gains andlosses, as well as the effects of changes in actuarial assumptions and planprovisions, are amortized over the average future service period of employees.

 

The health care costtrend rate assumption has a significant effect on the amounts reported forhealth care plans. The effect of a 1 percent change in this assumption would beas follows:

 

II-57

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| **Post-retirement benefits**                  | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Effect on total of service and interest cost       |       |                            |       |                            |       |
| 1% point  increase                                 |       | $                               | 305        |                            | $          | 647 |   |
| 1% point  decrease                                 |       | (251                            | )          | (501                            | )          |
| Effect on accumulated projected benefit obligation |       |                            |       |                            |       |
| 1% point  increase                                 |       | 2,787                           |       | 4,565                           |       |
| 1% point  decrease                                 |       | (2,432                          | )          | (3,882                          | )          |
|                                                    |            |                                 |            |                                 |            |  |  |

 

***Deferred compensation plans***

 

We provide nonqualifiedplans for executives. We have a deferred compensation plan which allows fordeferral of salary and incentive compensation beyond amounts allowed under our401(k) plan and a restoration plan that provides matching contributions oncompensation not eligible for matching contributions under our 401(k) plan. Asof December 30, 2005 and December 31, 2004, the accrued benefit amounts are$13,876 and $9,262, respectively, and are included in other non-currentliabilities in the accompanying consolidated balance sheets.

 

***Other retirement plans***

 

We sponsor a number ofdefined contribution retirement plans. Participation in these plans isavailable to substantially all salaried employees and to certain groups ofhourly employees. Our cash contributions to these plans are based on either apercentage of employee contributions or on a specified amount per hourdepending on the provisions of each plan. The net cost of these plans was$24,726, $26,600 and $28,915 for the years ended December 30, 2005, December31, 2004 and January 2, 2004, respectively.

 

***Multiemployer pension plans***

 

We participate in andmake contributions to numerous construction-industry multiemployer pensionplans. Generally, the plans provide defined benefits to substantially allemployees covered by collective bargaining agreements. Under the EmployeeRetirement Income Security Act, a contributor to a multiemployer plan isliable, upon termination or withdrawal from a plan, for its proportionate shareof a plan’s unfunded vested liability. We currently have no intention ofwithdrawing from any of the multiemployer pension plans in which weparticipate. The net cost of these plans was $27,713, $31,290 and $51,566 inthe years ended December 30, 2005, December 31, 2004  and January 2, 2004, respectively.

 

**10.****       TRANSACTIONS WITHAFFILIATES**

 

We purchased goods andservices from companies owned by the chairman of our board of directors asfollows:

 
| ** **                                                       | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**      | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                       | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Capital expenditures                                             |       | $                     | 2,529      |                  | $          | 160                 |       | $ | 25 |   |
| Lease and maintenance of corporate aircraft                      |       | 2,223                 |       | 1,904                 |       | 1,875               |       |
| Parts, rentals, overhauls and repairs of construction  equipment |       | 856                   |       | 1,055                 |       | 1,242               |       |
| Other                                                            |       | 59                    |       | 272                   |       | 3                   |       |
|                                                                  |            |                       |            |                       |            |                     |            |  |  |  |

 

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We mined and sold ballastused in railroad beds to affiliates of the chairman of our board of directorsas follows:

 
| ** **    | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**      | ** ** |
|---------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **    | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Ballast sales |       | $                     | 485        |                  | $          | 681                 |       | $ | 667 |   |
|               |            |                       |            |                       |            |                     |            |  |  |  |

 

Construction materialsand services were purchased by us from firms owned by or affiliated withpersons who were members of our board of directors at the time of purchase asfollows:

 
| ** **                          | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**           | ** ** |
|-------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Construction materials and services |       | $                               | 1,782      |                            | $          | 1,362                         |       | $ | 203 |   |
|                                     |            |                                 |            |                                 |            |                               |            |  |  |  |

 

**11.****  OPERATING SEGMENT,GEOGRAPHIC AND CUSTOMER INFORMATION**

 

We operate through sixbusiness units, each of which comprises a separate reportable business segment:Power, Infrastructure, Mining, Industrial/Process, Defense and Energy &Environment. The reportable segments are separately managed, serve differentmarkets and customers and differ in their expertise, technology and resourcesnecessary to perform their services.

 

Power providesengineering, construction and operations and maintenance services in bothnuclear and fossil power markets for turnkey new power plant construction,plant expansion, retrofit and modification, decontamination anddecommissioning, general planning, siting and licensing and environmentalpermitting.

 

Infrastructure providesdiverse engineering and construction and construction management services forhighways and bridges, airports and seaports, tunnels and tube tunnels, railroadand transit lines, water storage and transport, water treatment, sitedevelopment and hydroelectric facilities. The business unit generally performsas a general contractor or as a joint venture partner with other contractors ondomestic and international projects.

 

Mining providescontract-mining, engineering, resource evaluation, geologic modeling, mineplanning, simulation modeling, equipment selection, production scheduling andoperations management to coal, industrial minerals and metals markets.

 

Industrial/Processprovides engineering, design, procurement, construction services and totalfacilities management for general manufacturing, pharmaceutical andbiotechnology, metals processing, institutional buildings, food and consumerproducts, automotive, aerospace, telecommunications and pulp and paperindustries.

 

Defense provides acomplete range of technical services to the U.S. Department of Defense,including operations and management services, environmental and chemicaldemilitarization services, waste handling and storage, architecturalengineering services and engineering, procurement and construction services forthe armed forces.

 

Energy & Environmentprovides services to the U.S. Department of Energy, which is responsible formaintaining the nation’s nuclear weapons stockpile and performing environmentalcleanup and remediation. The business unit also provides the U.S. governmentwith construction, contract management, supply chain management, qualityassurance, administration and environmental cleanup and restoration services.Energy & Environment also provides safety management consulting and wasteand environmental technology and engineered products, including radioactivewaste containers and technical support services.

 

The accountingpolicies of the segments are the same as those described in the summary ofsignificant accounting policies. We evaluate performance and allocate resourcesbased on segment assets, gross profit and equity in income of unconsolidatedaffiliates.  Effective January 3, 2004, certain divisionsof the Industrial/Process 

 

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business unit were transferred to the Infrastructure and Energy businessunits to more closely align the divisions to the markets of the respectivebusiness unit.  The prior periodoperating results for the transferred divisions have been reclassified betweenbusiness units to conform to the current period organization.

 
| ** **                                                | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**           | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| **Revenue**                                               |       |                            |       |                            |       |                          |       |
| Power                                                     |       | $                               | 766,131    |                            | $          | 633,981                       |       | $ | 511,788 |   |
| Infrastructure                                            |       | 665,215                         |       | 891,081                         |       | 585,847                       |       |
| Mining                                                    |       | 171,071                         |       | 109,780                         |       | 84,150                        |       |
| Industrial/Process                                        |       | 424,646                         |       | 394,739                         |       | 430,341                       |       |
| Defense                                                   |       | 555,754                         |       | 495,295                         |       | 506,092                       |       |
| Energy & Environment                                  |       | 602,784                         |       | 396,570                         |       | 385,497                       |       |
| Intersegment, eliminations and other                      |       | 2,853                           |       | (6,064                          | )          | (2,564                        | )          |
| Total revenue                                             |       | $                               | 3,188,454  |                            | $          | 2,915,382                     |       | $ | 2,501,151 |   |
| **Gross profit (loss)**                                   |       |                            |       |                            |       |                          |       |
| Power                                                     |       | $                               | 78,748     |                            | $          | 34,493                        |       | $ | 38,595 |   |
| Infrastructure                                            |       | (80,190                         | )          | (17,117                         | )          | 31,600                        |       |
| Mining                                                    |       | 1,416                           |       | 7,848                           |       | 4,581                         |       |
| Industrial/Process                                        |       | 2,964                           |       | 17,151                          |       | 1,965                         |       |
| Defense                                                   |       | 60,283                          |       | 40,156                          |       | 49,836                        |       |
| Energy & Environment                                  |       | 66,991                          |       | 73,567                          |       | 70,232                        |       |
| Intersegment and other unallocated operating costs        |       | 191                             |       | (6,067                          | )          | (20,460                       | )          |
| Total gross profit                                        |       | $                               | 130,403    |                            | $          | 150,031                       |       | $ | 176,349 |   |
| **Equity in income (loss) of unconsolidated  affiliates** |       |                            |       |                            |       |                          |       |
| Power                                                     |       | $                               | 197        |                            | $          | 260                           |       | $ | 417 |   |
| Infrastructure                                            |       | 1,084                           |       | 892                             |       | 730                           |       |
| Mining                                                    |       | 27,205                          |       | 25,551                          |       | 25,740                        |       |
| Industrial/Process                                        |       | 588                             |       | 696                             |       | 512                           |       |
| Defense                                                   |       | —                          |       | —                          |       | —                        |       |
| Energy & Environment                                  |       | 522                             |       | (482                            | )          | (1,880                        | )          |
| Intersegment and other                                    |       | —                          |       | —                          |       | —                        |       |
| Total equity in income of unconsolidated affiliates       |       | $                               | 29,596     |                            | $          | 26,917                        |       | $ | 25,519 |   |
| **Operating income (loss)**                               |       |                            |       |                            |       |                          |       |
| Power                                                     |       | $                               | 78,946     |                            | $          | 34,753                        |       | $ | 39,012 |   |
| Infrastructure                                            |       | (79,105                         | )          | (16,225                         | )          | 32,330                        |       |
| Mining                                                    |       | 28,621                          |       | 33,399                          |       | 33,521                        |       |
| Industrial/Process                                        |       | 3,552                           |       | 17,847                          |       | 2,477                         |       |
| Defense                                                   |       | 60,283                          |       | 40,156                          |       | 49,836                        |       |
| Energy & Environment                                  |       | 67,512                          |       | 73,085                          |       | 69,867                        |       |
| Intersegment and other unallocated operating costs        |       | 191                             |       | (4,624                          | )          | (18,993                       | )          |
| General and administrative expenses, corporate            |       | (60,482                         | )          | (60,404                         | )          | (57,520                       | )          |
| Total operating income                                    |       | $                               | 99,518     |                            | $          | 117,987                       |       | $ | 150,530 |   |
| **Capital expenditures**                                  |       |                            |       |                            |       |                          |       |
| Power                                                     |       | $                               | 1,279      |                            | $          | —                        |       | $ | 34 |   |
| Infrastructure                                            |       | 9,757                           |       | 20,022                          |       | 3,651                         |       |
| Mining                                                    |       | 38,698                          |       | 9,947                           |       | 3,715                         |       |
| Industrial/Process                                        |       | 447                             |       | 206                             |       | 303                           |       |
| Defense                                                   |       | (8                              | )          | 8                               |       | —                        |       |
| Energy & Environment                                  |       | 5,616                           |       | 1,507                           |       | 671                           |       |
| Corporate and other                                       |       | 9,638                           |       | 3,527                           |       | 3,839                         |       |
| Total capital expenditures                                |       | $                               | 65,427     |                            | $          | 35,217                        |       | $ | 12,213 |   |
| **Depreciation**                                          |       |                            |       |                            |       |                          |       |
| Power                                                     |       | $                               | 288        |                            | $          | 108                           |       | $ | 149 |   |
| Infrastructure                                            |       | 5,652                           |       | 5,906                           |       | 15,461                        |       |
| Mining                                                    |       | 8,500                           |       | 5,913                           |       | 6,314                         |       |
| Industrial/Process                                        |       | 688                             |       | 743                             |       | 1,168                         |       |
| Defense                                                   |       | 39                              |       | 59                              |       | 103                           |       |
| Energy & Environment                                  |       | 1,334                           |       | 1,258                           |       | 1,667                         |       |
| Corporate and other                                       |       | 5,379                           |       | 4,727                           |       | 6,507                         |       |
| Total depreciation                                        |       | $                               | 21,880     |                            | $          | 18,714                        |       | $ | 31,369 |   |

 

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| **Assets as of** | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Power                      |       | $                               | 179,147    |                            | $          | 88,672 |   |
| Infrastructure             |       | 197,613                         |       | 255,704                         |       |
| Mining                     |       | 247,633                         |       | 216,911                         |       |
| Industrial/Process         |       | 141,543                         |       | 141,674                         |       |
| Defense                    |       | 104,463                         |       | 112,990                         |       |
| Energy & Environment   |       | 246,624                         |       | 280,381                         |       |
| Corporate and other (a)    |       | 532,082                         |       | 491,874                         |       |
| Total assets               |       | $                               | 1,649,105  |                            | $          | 1,588,206 |   |

 

----

(a)   Corporate andother assets principally consist of cash and cash equivalents and deferred taxassets.

 

***Investments in unconsolidatedaffiliates***

 

At December 30, 2005 andDecember 31, 2004, we had $172,448 and $179,347, respectively, in investmentsaccounted for by the equity method, primarily consisting of MIBRAG. Theseinvestments were held and reported primarily as part of the Mining businessunit.

 

***Geographic areas***

 

Geographic data regardingour revenue is shown below. Revenues are attributed to geographic locationsbased upon the primary location of work performed. Geographical disclosures oflong-lived assets are impracticable to prepare.

 
| ** **               | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**           | ** ** |
|--------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **Geographic data** | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Revenue:                 |       |                            |       |                            |       |                          |       |
| United States            |       | $                               | 2,498,613  |                            | $          | 2,145,175                     |       | $ | 2,259,826 |   |
| Iraq                     |       | 380,628                         |       | 492,430                         |       | 39,129                        |       |
| Other international      |       | 309,213                         |       | 277,777                         |       | 202,196                       |       |
| Total revenue            |       | $                               | 3,188,454  |                            | $          | 2,915,382                     |       | $ | 2,501,151 |   |

 

Revenue from otherinternational operations in all periods presented was in numerous geographicareas without significant concentration.

 

***Major customers***

 

Ten percent or more ofour total revenue was derived from contracts and subcontracts performed by thePower, Infrastructure, Industrial/Process, Defense, and Energy &Environment business units to the following customers for the periodspresented:

 
| ** **                  | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**      | ** ** |
|-----------------------------|------------|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                  | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| U.S. Department  of Energy  |       | $                     | 617,988    |                  | $          | 409,700             |       | $ | 340,027 |   |
| U.S. Department  of Defense |       | 927,372               |       | 1,086,034             |       | 605,942             |       |
| Raytheon Company            |       | —                |       | —                |       | 129,296             |       |
|                             |            |                       |            |                       |            |                     |            |  |  |  |

 

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**12.****  CONTINGENCIES ANDCOMMITMENTS**

 

***Contract related matters***

 

We have cost-type contracts with the U.S. governmentthat require the use of estimated annual rates for indirect costs. Theestimated rates are analyzed periodically and adjusted based on changes in thelevel of indirect costs we expect to incur and the volume of work we expect toperform. The cumulative effect of changes to estimated rates is recorded in theperiod of the change. Additionally, the allowable indirect costs for U.S.government cost-type contracts are subject to adjustment upon audit by the U.S.government. To the extent that these audits result in determinations that costsclaimed as reimbursable are not allowable costs, or were not allocated inaccordance with federal regulations, we could be required to reimburse thegovernment for amounts previously received. Audits by the U.S. government ofindirect costs are substantially complete through 2002. Audits of 2003 and 2004indirect costs are in process.

 

U.S. government Cost Accounting Standards and otherregulations also require that accounting changes, as defined, be evaluated forpotential impact to the amount of indirect costs allocated to governmentcontracts and that cost impact statements be submitted to the U.S. governmentfor audit. We have prepared and submitted cost impact statements for 1989through 1998 that have been audited by the U.S. government. We are currentlynegotiating the resolution of certain proposed audit adjustments to the costimpact statements. We are also in the process of preparing cost impactstatements for 1999 through 2005.

 

While we have recorded reserves for amounts we believeare owed to the U.S. government under cost-type contracts, actual results maydiffer from our estimates. We believe that the results of the indirect costaudits, the resolution of the proposed audit adjustments related to the 1989through 1998 cost impact statements, and the final submission and audit of costimpact statements for 1999 through 2005 will not have a material adverse effecton our financial position, results of operations or cash flows.

 

***Letters of credit***

 

Inthe normal course of business, we cause letters of credit to be issued inconnection with contract performance obligations that are not required to bereflected in the accompanying consolidated balance sheets. We are obligated toreimburse the issuer of such letters of credit for any payments madethereunder. At December 30, 2005 and December 31, 2004, $119,030 and $157,881,respectively, in face amount of letters of credit were outstanding. We havepledged cash and cash equivalents as collateral for our reimbursementobligations with respect to $27,000 in face amount of letters of credit thatwere outstanding at December 30, 2005 not related to the Credit Facility. AtDecember 30, 2005, $92,030 of the outstanding letters of credit were issued andoutstanding under the Credit Facility.

 

***Long-term leases***

 

Total rental andlong-term lease payments for real estate and equipment charged to operationswere $76,754 for the year ended December 30, 2005, $55,053 for the year endedDecember 31, 2004, and $51,724 for the year ended January 2, 2004. Futureminimum rental payments under operating leases, some of which contain renewalor escalation clauses, with remaining noncancelable terms in excess of one yearat December 30, 2005 were as follows:

 

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| **Year ending** | ** ** | **Real estate** | ** ** | **Equipment** | ** ** | **Total** | ** ** |
|----------------------|------------|----------------------|------------|---------------|------------|-----------|------------|
| December 29, 2006    |       | $                    | 28,819     |          | $          | 4,502     |       | $ | 33,321 |   |
| December 28, 2007    |       | 23,535               |       | 3,730         |       | 27,265    |       |
| January 2, 2009      |       | 12,547               |       | 1,989         |       | 14,536    |       |
| January 1, 2010      |       | 10,542               |       | 1,540         |       | 12,082    |       |
| December 31, 2011    |       | 8,620                |       | 999           |       | 9,619     |       |
| Thereafter           |       | 26,618               |       | 377           |       | 26,995    |       |
| Total                |       | $                    | 110,681    |          | $          | 13,137    |       | $ | 123,818 |   |

 

Future minimum leasepayments as of December 30, 2005 have not been reduced by minimumnon-cancelable sublease rentals aggregating $3,119.

 

***Indemnities***

 

In connection witha prior sale of a business, we guaranteed certain indemnity provisions relatingto environmental conditions that obligate us to pay the buyer up to a maximumof $3,500 for environmental losses they incur over $5,000 until October 2007.We are also responsible for environmental losses through October 2012 thatexceed $1,300 related to a specified parcel of the sold property. We believethat the indemnification provisions will not have a material adverse effect onour financial position, results of operations or cash flows.

 

***Guarantees***

 

In the ordinarycourse of business, the company enters into various agreements providingfinancial or performance assurances to clients on behalf of certainunconsolidated subsidiaries, joint ventures, and other jointly executedcontracts. These agreements are entered into primarily to support the projectexecution commitments of these entities. The maximum potential payment amountof an outstanding performance guarantee is the remaining cost of work to beperformed by or on behalf of third parties under engineering and constructioncontracts. At December 30, 2005, approximately $1,280,000 of work representingeither our partners’ proportionate share, or work that our partners aredirectly responsible for, had yet to be completed. Amounts that may be requiredto be paid in excess of estimated costs to complete contracts in progress arenot estimable. For cost reimbursable contracts, amounts that may become payablepursuant to guarantee provisions are normally recoverable from the client forwork performed under the contract. For lump sum or fixed price contracts, thisamount is the cost to complete the contracted work less amounts remaining to bebilled to the client under the contract. Remaining billable amounts could begreater or less than the cost to complete. In those cases where costs exceedthe remaining amounts payable under the contract the company may have recourseto third parties, such as owners, co-venturers, subcontractors or vendors, forclaims.

 

We alsoparticipate, from time to time, in consortiums or “line item” joint ventureagreements under which each partner is responsible for performing certaindiscrete items of the total scope of contracted work. The revenue for thesediscrete items is defined in the contract with the project owner and eachventure partner bears the profitability risk associated with its own work.Generally, partners in these types of arrangements are jointly and severallyliable for completion of the total project under the terms of the contact withthe project owner. There is not a single set of books and records for this typeof arrangement. Each partner accounts for its items of work individually as itwould for any self-performed contract. We account for our portion of thesecontracts as a project in our accounting system and include receivables and payablesassociated with our work on our balance sheet.

 

During the fourthquarter of 2005, we entered into a line item joint venture arrangement pursuantto which we have jointly and severally guaranteed the performance of the jointventure. Under the arrangements, we would be required to perform on theguarantee in the event our partner was not able to complete their portion ofthe construction contract through its expected completion in 2008. Our maximumexposure under this performance guarantee at the time we entered into thearrangement was estimated to be approximately $170,000 but will be 

 

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reduced over thecontract term upon execution of the contract scope. We have recorded theestimated fair value of this guarantee in the amount of $3,200 as a liabilitywith a corresponding asset as of December 30, 2005.

 

***Off-balance sheetarrangements***

 

During 2005, we entered intotwo forward foreign currency contracts to hedge contracts to acquire equipmentdenominated in Canadian dollars and South African Rand. At December 30, 2005,we had forward foreign exchange contracts to sell U.S. dollars and buy Canadiandollars and to sell U.S. dollars and buy South African Rand. The notional valueof the Canadian dollar contracts was $24,100 and the duration was less than 11months. The notional value of the South African Rand contracts was $8,800 andthe duration was 6 months. The estimated fair value of the contracts was notsignificant as of December 30, 2005.

 

***Legal matters***

 

***Litigation and Investigation related to USAID EgyptianProjects. *** In 2002, the Inspector General for theU.S. Agency for International Development (“USAID”) requested documentationabout and made inquiries into the contractual relationships between one of ourU.S. joint ventures and a local construction company in Egypt. The focus of theinquiry was whether the structure of our business relationship with theEgyptian company violated USAID contract regulations with respect to source,origin, and nationality requirements. In January 2004, we entered into anagreement with USAID whereby we agreed to undertake certain compliance andtraining measures and USAID agreed that we are presently eligible for USAIDcontracts, including host-country projects, and not under threat of suspensionor debarment arising out of matters covered by the USAID inquiry. Wesatisfactorily completed that training effective November 22, 2004, and, as aresult, are currently in good standing to bid on all USAID projects.

 

In March 2003, we werenotified by the Department of Justice (“DOJ”) that the U.S. government (the “Government”)was considering civil litigation against us for potential violations of theUSAID source, origin, and nationality regulations in connection with five ofour USAID-financed host-country projects located in Egypt beginning in theearly 1990s. Following that notification, we responded to inquiries from theDOJ and otherwise cooperated with the Government’s investigation. In November2004, the Government filed an action in the U.S. District Court for theDistrict of Idaho against us and the companies referred to above with respectto the Egyptian projects (the “Idaho Action”). The Idaho Action was broughtunder the Federal False Claims Act, the Federal Foreign Assistance Act of 1961,and common law theories of payment by mistake and unjust enrichment. The complaintseeks damages and civil penalties for violations of the statutes and assertsthat the Government is entitled to a refund of all amounts paid to us and theother defendants under the specified contracts. The Government alleges thatapproximately $373,000 was paid under those contracts. We deny any liability inthe action and contest the Government’s damage allegations and its entitlementto any recovery.

 

Further, on March 23,2005, we filed a Motion to Enforce the Confirmation Order in the BankruptcyCourt in Nevada, and a Motion to Dismiss or Stay the Action in the Idaho Courtpending resolution of the proceedings in the Bankruptcy Court. The Motion toDismiss still is pending before the Idaho Court. In the filings in theBankruptcy Court, we have sought dismissal of the Government’s claims pursuantto the Confirmation Order (and other relevant orders of the Bankruptcy Court)because of the Government’s failure to give appropriate notice or otherwisepreserve those claims. On August 30, 2005, the Bankruptcy Court granted ourMotion to Enforce the Confirmation Order, in total, ruling that all of theGovernment’s claims (as set forth in the complaint in the Idaho Action) arebarred. On November 9, 2005, the Bankruptcy Court confirmed its decision with awritten order and detailed findings of fact. The Government has appealed theBankruptcy Court’s order, and that appeal is proceeding through the briefingstage. While we are confident in our legal position, the outcome of the appealcannot be reasonably predicted.

 

Our joint venture for oneof the five projects referred to above brought arbitration proceedings beforean arbitral tribunal in Egypt in which it has asserted an affirmative claim foradditional compensation for the construction of water and wastewater treatmentfacilities in Egypt. The project owner, an Egyptian government agency, assertedin a counterclaim that by reason of alleged violations of the USAID source,origin, and nationality regulations, 

 

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and alleged violations ofEgyptian law, our joint venture should forfeit its claim, pay damages of approximately $6,000 and the owner’scosts of defending against the joint venture’s claims in arbitration. We havedenied liability on the project owner’s counterclaim. Our affirmative claimsand counterclaim have been fully presented to the arbitration panel. We areawaiting the panel’s decision.

 

Based on our assessmentof the above-described matters, we recorded a charge of $8,200 in the yearended December 31, 2004. Additional loss, if any, is not estimable.

 

***Tar Creek Litigation.*** From the springof 1996 through the spring of 2001, we were the environmental remediationcontractor for the U.S. Army Corps of Engineers (the “USACOE”), with respect toremediation at the Tar Creek Superfund site, at a former mining area innortheast Oklahoma. The USACOE contracted with the U.S. Environmental ProtectionAgency (the “EPA”) to remove lead contaminated soil in residential areas frommore than 2,000 sites and replace it with clean fill material. InFebruary 2000, various federal investigators working with the U.S.Attorney’s Office for the Northern District of Oklahoma executed searchwarrants and seized records at the Tar Creek project site. Allegations made atthe time included claims that the project falsified truck load tickets andclaimed compensation for more loads than actually were hauled, or indicatedthat full loads were hauled when partial loads actually were carried, as wellas claims that the project sought compensation for truckers and injured workerswho were directed to remain at the job site, but not to work. In October 2004,the Government advised us that the criminal investigation was concluded inSeptember without any criminal prosecution.

 

Through claims filed inour bankruptcy proceedings and conversations with lawyers from the CivilDivision of the U.S. DOJ, we learned that a*qui tam* lawsuit was filed against us under the Federal False ClaimsAct, by private citizens (the “Relators”), alleging fraudulent or false claimsby us for payments received in connection with the Tar Creek remediationproject.

 

In March 2004, theDOJ declined to intervene in this civil lawsuit, with the exception of fourclaims, which were stayed. The Relators filed an amended complaint inMarch 2004, which eliminated the four claims that were reserved to theGovernment. Also, in April 2004, we received a letter from the EPA’sSuspension and Debarment Division seeking information regarding the*qui tam* allegations in order for the EPAto determine whether we presently are a responsible contractor.

 

In June 2005, we reachedan agreement in principle with the EPA’s Suspension and Debarment Division toresolve the potential debarment matter. Under the proposed resolution, weagreed to continue to implement and to explore ways to enhance certaincompany-wide corporate compliance programs and the EPA has agreed that it willnot pursue any suspension or debarment related to the*qui tam* allegations.

 

In December 2005, weentered into a settlement agreement with the Government and the Relatorsresolving the stayed claims and the *qui tam*lawsuit.Under the terms of the agreement, we paid the Government $1,000 and theRelators received a $2,500 allowed unsecured claim in our bankruptcyreorganization. On December 23, 2005, the court dismissed the stayed claims andthe *qui tam*lawsuit. Theagreement with the EPA’s Suspension and Debarment Division also becameeffective upon the resolution of the civil matter.

 

***New Orleans Levee Failure Class Action Litigation*.**From July 1999 through May 2005, we performed demolition, site preparation, andenvironmental remediation services for the USACOE on the east bank of the InnerHarbor Navigation Canal (the “Industrial Canal”) in New Orleans, Louisiana (“TaskOrder 26”). All the work performed by us and our subcontractors was directed,supervised and approved by the USACOE.

 

On August 29, 2005,Hurricane Katrina devastated New Orleans. The storm surge created by thehurricane flooded the east bank of the Industrial Canal and overtopped theIndustrial Canal levee floodwall, flooding the Lower Ninth Ward and other partsof the City.

 

Between September 19,2005 and January 3, 2006, seven personal injury and property damage classaction lawsuits were filed in Louisiana state and federal court naming us asone of numerous defendants including The 

 

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City of New Orleans andThe Board of Commissioners for the Orleans Parish Levee District and itsinsurer St. Paul Fire and Marine Insurance Company. Plaintiffs claim thatdefendants were negligent in their design, construction and maintenance of theNew Orleans levees and assert their claims under the Federal Class ActionFairness Act of 2005, 28 U.S.C. 12(d)(2). The alleged class of plaintiffs areall residents and property owners of the Parishes of Orleans and Jefferson inthe State of Louisiana “who incurred damages arising out of the breach andfailure of the hurricane protection levees and floodwalls along the 17thStreet Canal, the London Avenue Canal, and the Industrial Canal...in the wakeof Hurricane Katrina.”

 

In all of the lawsuits todate, the only specific allegation against us is that we “contracted to leveland clear abandoned industrial sites along the Industrial Canal between thefloodwall and the canal” and plaintiffs believe “the use of heavy vehiclesand/or other heavy construction equipment along the Industrial Canal betweenthe floodwall and the canal damaged the levee and/or floodwall and causedand/or contributed [to] the...breach in the levee and/or floodwall.” Plaintiffsallege damages as high as $200 billion and demand attorneys’ fees and costs. Wehave substantial liability insurance coverage in the event we are found to haveany liability in this matter. While we cannot predict the adequacy of thecoverage with certainty, we believe it to be adequate to cover any potentialliability which could be imposed on us as a result of these class actions.

 

We deny any liability forthe hurricane and flood damage and are vigorously defending these lawsuits. Wedid not design, construct, repair or maintain any of the New Orleans levees orfloodwalls that failed during or after Hurricane Katrina. None of theactivities performed by us damaged the Industrial Canal or floodwall. We willpursue all contractual and equitable rights of indemnity and contribution andleverage all available challenges against class certification. Based on thestatus and nature of this matter, we cannot make an estimate of potential loss,if any.

 

***General Litigation.*** In addition to theforegoing, there are other claims, lawsuits, disputes with third parties,investigations and administrative proceedings against us relating to matters inthe ordinary course of our business activities that we do not expect to have amaterial adverse effect on our financial position, results of operations orcash flows. Government contracts are subject to specific procurementregulations, contract provisions and a variety of other requirements relatingto the formation, administration, performance and accounting for thesecontracts. As a result of our government contracting, claims for civil orcriminal fraud may be brought by the Government for violations of thoseregulations, requirements, and statutes.

 

**13.****  COMPREHENSIVEINCOME (LOSS)**

 

Comprehensive income(loss) for the years ended January 2, 2004, December 31, 2004, and December 30,2005 was as follows:

 
| ** **                                         | ** ** | **Before-tax** | ** ** | **Tax (expense)** | ** ** | **Net-of-tax** | ** ** |
|----------------------------------------------------|------------|----------------|------------|------------------------|------------|----------------|------------|
| **Year ended January 2, 2004** | ** ** | **amount**     | ** ** | **or benefit**    | ** ** | **amount**     | ** ** |
| Foreign currency translation adjustments           |       | $              | 24,376     |                   | $          | (8,532         | )          | $ | 15,844 |   |
| Minimum pension liability adjustment and other     |       | (1,890         | )          | 736                    |       | (1,154         | )          |
| Other comprehensive income                         |       | $              | 22,486     |                   | $          | (7,796         | )          | $ | 14,690 |   |
| **Year ended December 31, 2004**                   |       |           |       |                   |       |           |       |
| Foreign currency translation adjustments           |       | $              | 14,381     |                   | $          | (5,033         | )          | $ | 9,348 |   |
| Minimum pension liability adjustment and other     |       | (1,645         | )          | 654                    |       | (991           | )          |
| Other comprehensive income                         |       | $              | 12,736     |                   | $          | (4,379         | )          | $ | 8,357 |   |
| **Year ended December 30, 2005**                   |       |           |       |                   |       |           |       |
| Foreign currency translation adjustments           |       | $              | (23,951    | )                      | $          | 8,383          |       | $ | (15,568 | ) |
| Minimum pension liability adjustment and other     |       | (1,009         | )          | 406                    |       | (603           | )          |
| Other comprehensive loss                           |       | $              | (24,960    | )                      | $          | 8,789          |       | $ | (16,171 | ) |

 

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The accumulated balancesrelated to each component of other comprehensive income (loss) were as follows:

 
| ** **                        | ** ** | ** **   | ** ** | **Minimum**    | ** ** | ** **    | ** ** | **Accumulated**   | ** ** |
|-----------------------------------|------------|--------------|------------|----------------|------------|---------------|------------|-------------------|------------|
| ** **                        | ** ** | **Foreign**  | ** ** | **pension**    | ** ** | ** **    | ** ** | **other**         | ** ** |
| ** **                        | ** ** | **currency** | ** ** | **liability**  | ** ** | ** **    | ** ** | **comprehensive** | ** ** |
| ** **                        | ** ** | **items**    | ** ** | **adjustment** | ** ** | **Other (a)** | ** ** | **income (loss)** | ** ** |
| Balance at January 3, 2003        |       | $            | 9,652      |           | $          | (603          | )          | —            |       | $ | 9,049 |   |
| Other comprehensive income        |       | 15,844       |       | (1,154         | )          | —        |       | 14,690            |       |
| Balance at January 2, 2004        |       | 25,496       |       | (1,757         | )          | —        |       | 23,739            |       |
| Other comprehensive income        |       | 9,348        |       | (1,198         | )          | $             | 207        |              | 8,357      |   |
| Balance at December 31, 2004      |       | 34,844       |       | (2,955         | )          | 207           |       | 32,096            |       |
| Other comprehensive income (loss) |       | (15,568      | )          | (777           | )          | 174           |       | (16,171           | )          |
| Balance at December 30, 2005      |       | $            | 19,276     |           | $          | (3,732        | )          | $                 | 381        |   | $ | 15,925 |   |

 

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(a)   Other includesunrealized net gains on securities and the change in fair value of forwardforeign currency contracts.

 

**14.****  CAPITAL STOCK,STOCK PURCHASE WARRANTS AND STOCK COMPENSATION PLANS**

 

***Capital stock***

 

Pursuant to ourcertificate of incorporation, we have the authority to issue 100,000 shares ofcommon stock and 10,000 shares of preferred stock. Preferred stock can beissued at any time or from time to time in one or more series with suchdesignations, powers, preferences and rights, qualifications, limitations andrestrictions thereon as determined by our board of directors.

 

***Stock purchase warrants***

 

In connection with ourPlan of Reorganization, warrants to purchase shares of common stock were issuedto unsecured creditors in three tranches. The following table summarizes thewarrant activity during the years ended January 2, 2004, December 31, 2004 andDecember 30, 2005, and through the expiration date of January 25, 2006.

 

**Stock Purchase Warrants Outstanding**

 
| ** **                                | ** ** | **Tranche A** | ** ** | **Tranche B** | ** ** | **Tranche C** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|-----------|------------|
| Issued in January 25, 2002 reorganization |       | 3,086         |       | 3,527         |       | 1,907         |       | 8,520     |       |
| Exercise price per share                  |       | $             | 28.50      |          | $          | 31.74         |       | $         | 33.51      |   |   |   |
| Year ended December 31, 2004              |       |          |       |          |       |          |       |      |       |
| Exercised                                 |       | (35           | )          | (41           | )          | (22           | )          | (98       | )          |
| Returned as part  of legal settlement     |       | (16           | )          | (18           | )          | (10           | )          | (44       | )          |
| Outstanding at December 31, 2004          |       | 3,035         |       | 3,468         |       | 1,875         |       | 8,378     |       |
| Year ended December 30, 2005              |       |          |       |          |       |          |       |      |       |
| Exercised                                 |       | (217          | )          | (159          | )          | (45           | )          | (421      | )          |
| Purchased                                 |       | (1,217        | )          | (1,529        | )          | (709          | )          | (3,455    | )          |
| Returned as part  of legal settlement     |       | (4            | )          | (4            | )          | (2            | )          | (10       | )          |
| Outstanding at December 30, 2005          |       | 1,597         |       | 1,776         |       | 1,119         |       | 4,492     |       |
| Subsequent to December 30, 2005           |       |          |       |          |       |          |       |      |       |
| Exercised                                 |       | (872          | )          | (805          | )          | (585          | )          | (2,262    | )          |
| Purchased                                 |       | (656          | )          | (890          | )          | (492          | )          | (2,038    | )          |
| Expired                                   |       | (69           | )          | (81           | )          | (42           | )          | (192      | )          |
| Outstanding at January 25, 2006           |       | —        |       | —        |       | —        |       | —    |       |
|                                           |            |               |            |               |            |               |            |           |            |  |  |  |

 

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During 2005, our board ofdirectors authorized a stock/warrant buy back program up to $125,000 underwhich we purchased and cancelled 3,455 warrants at a cost of $73,606. Asreflected above, subsequent to December 30, 2005, we purchased an additional2,038 warrants at a cost of $34,932; 2,262 warrants were exercised at a totalexercise price of $70,027; and the remaining 192 warrants expired on January25, 2006. Also under the common stock/warrant buy back program, we havepurchased 245 shares of common stock for $14,319 subsequent to December 30,2005.

 

***Stock compensation plans andlong-term incentive program***

 

Washington GroupInternational, Inc.’s Equity and Performance Incentive Plan (the “2002 Plan”)became effective January 25, 2002 in connection with our reorganization. On May9, 2003, our stockholders approved an amended and restated version of the 2002Plan. The 2002 Plan allows our board of directors to award various types ofrights related to our stock, including options to purchase stock, appreciationrights, performance units, performance shares, restricted stock, deferred stockor other awards to directors, officers and key employees. The 2002 Plan has afixed limit of 6,002 shares. Awards are subject to terms and conditionsdetermined by our board of directors. All stock options issued under the 2002Plan must have an exercise price equal to or greater than the fair value of ourcommon stock on the date the stock option is granted. Re-pricing of stockoptions is prohibited without stockholder approval. As of December 30, 2005,only option rights and performance units have been awarded under the 2002 Plan.

 

On May 7, 2004, our stockholders approved theWashington Group International Inc. 2004 Equity Incentive Plan (the “2004 Plan”),which provides for additional shares under the long-term incentive program (“LTIP”).The 2004 Plan allows our board of directors to award various types of rightsrelated to our stock, including options to purchase stock, appreciation rights,restricted stock, and deferred stock. Persons eligible to receive awards underthe 2004 Plan include officers, key employees and directors of the company. The2004 Plan provides a fixed limit of 2,400 shares of which no more than 400 maybe issued in connection with awards other than stock options and appreciationrights. All stock options issued under the 2004 Plan must have an exerciseprice equal to or greater than the fair value of our common stock on the datethe stock option is granted. Repricing of stock options is prohibited withoutstockholder approval. As of December 30, 2005, only option rights, restrictedstock, and deferred stock have been awarded under the 2004 Plan.

 

Our long-term incentiveprogram (“LTIP”) is designed to provide long-term incentives to executives toincrease stockholder value. The LTIP consists of nonqualified fixed-price stockoptions, restricted stock and performance unit awards granted under the 2002Plan and the 2004 Plan, annually. The LTIP links a portion of compensation tostockholder value and utilizes vesting periods to encourage participatingexecutives to continue in our employ. The size and timing of awards aredetermined by the compensation committee of the board of directors.

 

From January 25, 2002through December 30, 2005, officers, key employees and our board of directors(other than the chairman) were granted nonqualified stock options to purchase3,713 shares of common stock, with terms of ten years and exercise prices basedon the market prices on the dates of grant, ranging from $13.40 to $53.79 pershare. Stock options to purchase 235 shares of common stock have been forfeiteddue to employment terminations. Options granted in 2002 vested one-third on thedate of grant, one-third on the first anniversary of the date of grant and thefinal third on the second anniversary of the date of grant. Options grantedafter 2002 vest one-third on the first anniversary of the date of grant,one-third on the second anniversary of the date of grant and the final third onthe third anniversary of the date of grant. The vesting period for futuregrants will be determined by the compensation committee of our board ofdirectors.

 

On January 25, 2002, thechairman of our board of directors, Mr. Dennis R. Washington, was granted stockoptions to purchase shares of common stock in three tranches. The first tranchewas to expire five years from the date of grant. The remaining tranches were toexpire four years from the date of grant. One-third of each tranche vested onthe date of grant, an additional one-third of each tranche vested on the firstanniversary of the date of grant and the final third of each tranche vested onthe second anniversary of the date of grant. As consideration for an additionalthree years of service as chairman of our board of directors, Mr. Washington’sstock options were 

 

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amended inNovember 2003 extending the expiration dates on all three tranches to ten yearsfrom the original date of grant, or January 25, 2012. As a result of thisextension, we recorded compensation expense of $784 and $6,174 during the yearsended December 31, 2004 and January 2, 2004, respectively, as generaladministrative expenses and as an increase to additional paid-in capital. Thenumber of shares and respective exercise prices for each tranche are asfollows:

 
| ** ** | ** ** | **Number of shares** | ** ** | **Exercise price per share** | ** ** |
|------------|------------|----------------------|------------|------------------------------|------------|
| Tranche A  |       | 1,389                |       | $                            | 24.00      |   |
| Tranche B  |       | 882                  |       | $                            | 31.74      |   |
| Tranche C  |       | 953                  |       | $                            | 33.51      |   |

 

Beginning in 2005,officers and key employees received annual grants of restricted stock under the2004 Plan. During 2005, 141 shares of restricted stock were granted. Therestricted stock is not transferable until the third anniversary of the date ofgrant, when the restrictions will lapse and the stock will be freely tradable.The restricted period for future grants, generally, will be at least threeyears, but may be longer as determined by the compensation committee of ourboard of directors.

 

Option and restrictedstock award activity under our stock plans is summarized as follows:

 
| ** **                           | ** ** | **Outstanding at**           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **    | ** ** | **Outstanding at**     | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|-------------|------------|---------------|------------|---------------|------------|-----------------------------|------------|
| **Number of options**      | ** ** | **beginning of period** | ** ** | **Granted** | ** ** | **Forfeited** | ** ** | **Exercised** | ** ** | **end of period** | ** ** |
| Year ended December 30, 2005         |       | 6,005                             |       | 405         |       | (84           | )          | (836          | )          | 5,490                       |       |
| Year ended December 31, 2004         |       | 5,563                             |       | 837         |       | (66           | )          | (329          | )          | 6,005                       |       |
| Year ended January 2, 2004           |       | 5,033                             |       | 652         |       | (76           | )          | (46           | )          | 5,563                       |       |
|                                 |       |                              |       |        |       |          |       |          |       |                        |       |
| **Weighted-average exercise prices** |       |                              |       |        |       |          |       |          |       |                        |       |
| Year ended December 30, 2005         |       | $                                 | 27.17      |        | $          | 42.61         |       | $             | 33.99      |                        | $          | 21.96 |   | $ | 29.00 |   |
| Year ended December 31, 2004         |       | 25.52                             |       | 34.82       |       | 21.30         |       | 21.62         |       | 27.17                       |       |
| Year ended January 2, 2004           |       | 26.62                             |       | 16.18       |       | 19.47         |       | 23.13         |       | 25.52                       |       |
|                                      |            |                                   |            |             |            |               |            |               |            |                             |            |  |  |  |  |  |

** **
| ** **                                                                     | ** ** | **Exercisable at**     | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Weighted-average exercise price of vested options** | ** ** | **end of period** | ** ** |
| Year ended December 30, 2005                                                   |       | $                           | 27.62      |   |
| Year ended December 31, 2004                                                   |       | 26.62                       |       |
| Year ended January 2, 2004                                                     |       | 26.67                       |       |
|                                                                                |            |                             |            |  |

 
| ** **                                    | ** ** | **Outstanding at**           | ** ** | ** **  | ** ** | ** **    | ** ** | **Outstanding at**     | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-------------|------------|---------------|------------|-----------------------------|------------|
| **Shares of restricted stock** | ** ** | **beginning of period** | ** ** | **Granted** | ** ** | **Forfeited** | ** ** | **end of period** | ** ** |
| Year ended December 30, 2005                  |       | —                            |       | 141         |       | (7            | )          | 134                         |       |

 
| ** **                                           | ** ** | **Restricted** | ** ** | **Options Exercisable**        | ** ** | **Stock**  | ** ** | **Shares available** | ** ** |
|------------------------------------------------------|------------|----------------|------------|-------------------------------------|------------|------------|------------|---------------------------|------------|
| **Number of options and awards** | ** ** | **Stock**      | ** ** | **at end of period** | ** ** | **Awards** | ** ** | **for grant**        | ** ** |
| Year ended December 30, 2005                         |       | 134            |       | 4,418                               |       | 25         |       | 1,537                     |       |
| Year ended December 31, 2004                         |       | —         |       | 4,777                               |       | 16         |       | 2,006                     |       |
| Year ended January 2, 2004                           |       | —         |       | 3,323                               |       | —     |       | 393                       |       |

 

On February 28,2006, an additional 377 options to purchase common shares were granted at anexercise price of $58.37 per share.  Inaddition, 125 shares of restricted shares were awarded to key employees underthe 2004 Plan.

 

Beginning in 2003,performance units are awarded annually and mature at the end of their three-yearperformance period. The value of each performance unit will be calculated atthe end of the three-year 

 

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performance periodto which it relates, based on performance results relative to predeterminedcorporate financial goals. At the end of each three-year period, the value ofmature performance units generally will be paid in cash provided the thresholdperformance metrics have been achieved. Certain executives who are subject tostock ownership guidelines may elect to have the value of mature performanceunits paid in stock to the extent necessary to satisfy those guidelines. Duringthe years ended December 30, 2005, December 31, 2004 and January 2, 2004,$12,683, $6,316 and $2,563, respectively, was recorded as compensation expenserelated to the performance units.

 

***Stock-basedcompensation***

 

We adopted thedisclosure-only provisions of SFAS No. 123. Accordingly, compensation cost hasbeen recorded based only on the intrinsic value of the options granted. Werecognized $2,259, $1,164 and $6,174 of compensation cost during the yearsended December 30, 2005, December 31, 2004 and January 2, 2004, respectively,for stock-based compensation awards. If we had elected to recognizecompensation cost based on the fair value of the options granted at grant dateas prescribed by SFAS No. 123, net income would have been adjusted to the proforma amounts as disclosed in Note 2, “Significant Accounting Policies.”

 

The Black-Scholesoption valuation model was used to estimate the fair value of the options forpurposes of the pro forma presentation set forth in Note 2, “SignificantAccounting Policies.”

 

The following assumptionswere used in the valuation and no dividends were assumed:

 
| ** **                                         | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**           | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Average expected life (years)                      |       | 5                               |       | 6                               |       | 6                             |       |
| Expected volatility                                |       | 36.6                            | %          | 39.9                            | %          | 40.2                          | %          |
| Risk-free interest rate                            |       | 3.7                             | %          | 4.0                             | %          | 4.6                           | %          |
| Weighted-average fair value:                       |       |                            |       |                            |       |                          |       |
| Exercise price  greater than market price at grant |       | $                               | —     |                            | $          | —                        |       | $ | — |   |
| Exercise price  equal to market price at grant     |       | 16.23                           |       | 15.93                           |       | 7.48                          |       |
| Exercise price  less than market price at grant    |       | —                          |       | —                          |       | —                        |       |
|                                                    |            |                                 |            |                                 |            |                               |            |  |  |  |

 

The assumptions used inthe Black-Scholes option valuation model are highly subjective, particularly asto stock price volatility of the underlying stock, and can materially affectthe resulting valuation.

 

The following tablesummarizes information regarding options that were outstanding at December 30,2005:

 
| ** **           | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|----------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **           | ** ** | ** **              | ** ** | ** **              | ** ** | **Weighted-average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **              | ** ** | **Weighted-average**    | ** ** | **remaining** | ** ** | ** ** | ** ** | **Weighted-average** | ** ** |
| **Price range** | ** ** | **Number**              | ** ** | **exercise price** | ** ** | **contractual life (years)** | ** ** | **Number** | ** ** | **exercise price** | ** ** |
| Below $24.00         |       | 570                     |       | $                       | 16.80      |   | 6.91 |   | 391 |   | $ | 17.24 |   |
| $24.00-$29.01        |       | 1,961                   |       | 24.01                   |       | 6.08 |   | 1,957 |   | 24.00 |   |
| $29.02-$33.51        |       | 1,837                   |       | 32.66                   |       | 6.07 |   | 1,835 |   | 32.66 |   |
| Above $33.51         |       | 1,122                   |       | 37.94                   |       | 8.48 |   | 235 |   | 35.62 |   |
|                      |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

***Stockholderrights plan***

 

On November 18,2005, we announced that our board of directors had voted to terminate ourstockholder rights plan. To terminate the plan, the stockholder rights wereredeemed for $0.01 per right payable December 30, 2005 to shareholders ofrecord as of December 2, 2005. The distribution totaled $268.

 

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**15.****  ACQUISITIONOF BNFL’S INTEREST IN GOVERNMENT SERVICES BUSINESS**

 

On August 25,2004, we entered into an agreement to acquire BNFL’s 40 percent economicinterest in a portion of the Government Services Business (the “InitialAcquisition”). The Initial Acquisition was conditioned upon compliance withcertain regulatory approvals, of which the final condition was satisfied onApril 7, 2005 (the “Effective Date”). Under the terms of the InitialAcquisition, we controlled the Government Services Business and agreed to payBNFL 40 percent of net future profits from certain existing contracts and onfuture contracts, if any, at certain DoE sites and one DoD site (the “40%Legacy Contracts”), and 10 percent of profits from all other existingoperations and future contracts with the DoE through September 30, 2012 (the “10%Contracts”). BNFL would not share in any losses related to 10% Contracts ifthey occurred in the future, but retained its portion of liabilities incurred priorto July 31, 2004.

 

For accounting purposes, theInitial Acquisition was bifurcated between the 40% Legacy Contracts and the 10%Contracts. Prior to the acquisition, BNFL had a 40 percent economic interest inthe 40% Legacy Contracts and continued to receive 40 percent of the net profitsfrom such contracts. In substance there was no change in the economicrelationship of the parties and therefore payments to BNFL for their share ofearnings from the 40% Legacy Contracts were not deemed to be consideration forthe acquisition of a minority interest. Payments to BNFL for the 10% Contractswere deemed to be consideration for the acquisition of a minority interest andwere recorded using the purchase method of accounting. Pursuant to purchasemethod accounting, the acquired assets and assumed liabilities were recorded atestimated fair value. The fair value of assets acquired exceeded liabilitiesassumed resulting in $7,148 of contingent consideration. Other significantadjustments related to the Initial Acquisition included: (i) elimination ofBNFL’s minority interest of $46,135; (ii) elimination of $64,066 of goodwill;(iii) recording a receivable of $24,613 from BNFL for its portion of pensionliabilities retained.

 

Prior to the Effective Date,all payments made to BNFL related to their interest in the Government ServicesBusiness were classified on our consolidated statement of income as minorityinterest in income of consolidated subsidiaries and were reflected as afinancing activity on our consolidated statement of cash flows as distributionsto minority interests. BNFL’s minority interest in the Government ServicesBusiness during the years ended January 2, 2004 and December 31, 2004, and thefirst quarter of 2005 amounted to $28,803, $28,161 and $5,596, respectively.

 

Subsequent to the EffectiveDate, BNFL’s share of the earnings related to the 40% Legacy Contracts havebeen classified as cost of revenue on our consolidated statement of income andas an operating activity on our consolidated statement of cash flows. From theEffective Date through December 30, 2005, $29,767 has been recorded as cost ofrevenue related to the 40% Legacy Contracts. BNFL’s share of profits related tothe 10% Contracts subsequent to the Effective Date have been treated as considerationfor the acquisition of a minority interest and recorded as a $1,475 reductionto the contingent consideration.

 

Effective December 30, 2005,BNFL and Washington Group International entered into a Termination Agreement toaccelerate, in the form of a $36,200 lump sum payment, the payment of allamounts due or to become due under the Initial Acquisition, to terminate allrights and responsibilities under the Initial Acquisition, and to mutuallyrelease each other from any and all claims. The $36,200 payment was made priorto December 30, 2005. Pursuant to the Termination Agreement, the risks andrewards associated with the 40% Legacy Contracts transferred to WashingtonGroup resulting in the acquisition of BNFL’s interest in such contracts. The TerminationAgreement also fixed the amount of consideration to be paid related to the 10%Contracts. Based on these factors, the Termination Agreement has been accountedfor as an acquisition of a minority interest using the purchase method. Theconsideration, including cash paid and liabilities assumed, has been allocatedto the acquired assets based on estimated fair values. To assist us indetermining the value of separately identifiable intangible assets, we obtainedan independent valuation. The table below summarizes the purchase considerationand assets acquired.

 

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| Consideration:                                           |   |    |   |
|----------------------------------------------------------|--------|---------|--------|
| Lump sum cash  payment                                   |   | $       | 36,200 |   |
| Liabilities  assumed                                     |   | 14,969  |   |
| Liabilities  settled, including contingent consideration |   | (13,534 | )      |
| Total purchase consideration                             |   | $       | 37,635 |   |
| Assets acquired:                                         |   |    |   |
| Contract  amortizable intangible asset (backlog)         |   | $       | 28,800 |   |
| Customer  relationship amortizable intangible asset      |   | 8,600   |   |
| Goodwill                                                 |   | 235     |   |
| Total assets acquired                                    |   | $       | 37,635 |   |

 

Thecontract intangible asset will be amortized over an estimated life of eightyears proportionately to the estimated contract earnings as of the acquisitiondate to be generated from the contract backlog acquired. The customerrelationship intangible will be amortized over an estimated life of seven yearsusing the straight-line method. The $37,400 of intangibles acquired areclassified as “Other assets” in the accompanying consolidated balance sheets asof December 30, 2005.

 

Thefollowing table presents the unaudited, pro forma consolidated results ofoperations for the years ended December 30, 2005 and December 31, 2004, as ifthe Termination Agreement had occurred at the beginning of fiscal year 2004.The pro forma results are not necessarily indicative of results of operationsthat would have occurred had the Termination Agreement occurred at thebeginning of fiscal year 2004 or of future results of operations.

 
| ** **         | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** |
|--------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Pro Forma** | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Revenue            |       | $                               | 3,188,454  |                            | $          | 2,915,382 |   |
| Net income         |       | 71,322                          |       | 60,711                          |       |
| Income per share:  |       |                            |       |                            |       |
| Basic              |       | 2.74                            |       | 2.40                            |       |
| Diluted            |       | 2.36                            |       | 2.21                            |       |
|                    |            |                                 |            |                                 |            |  |  |

 

**16.****  FINANCIAL INSTRUMENTS**

 

The estimated fairvalues of financial instruments at December 30, 2005 and December 31, 2004 weredetermined, using available market information and valuation methodologiesbelieved to be appropriate. However, judgment is necessary in interpretingmarket data to develop the estimates of fair values. Accordingly, the estimatespresented herein are not necessarily indicative of the amounts that we couldrealize in a current market exchange. The use of different market assumptionsand/or estimation methodologies could have a material effect on the estimatedfair value amounts.

 

The carryingamounts and estimated fair values of certain financial instruments at December30, 2005 and December 31, 2004 were as follows:

 
| ** **                | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                | ** ** | **Carrying**          | ** ** | **Fair**              | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                | ** ** | **Amount**            | ** ** | **Value**             | ** ** | **Amount** | ** ** | **Value** | ** ** |
| **Financial assets**      |       |                  |       |                  |       |   |   |   |   |
| Customer retentions       |       | $                     | 22,849     |                  | $          | 22,140 |   | $ | 14,973 |   | $ | 14,587 |   |
| **Financial liabilities** |       |                  |       |                  |       |   |   |   |   |
| Subcontract retentions    |       | $                     | 32,127     |                  | $          | 31,130 |   | $ | 30,154 |   | $ | 29,377 |   |

 

II-72

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The fair value ofcustomer retentions and subcontract retentions was estimated by discountingexpected cash flows at rates currently available to us for instruments withsimilar risks and maturities. The fair value of other financial instrumentsincluding cash and cash equivalents, short-term investments, accountsreceivable excluding customer retentions, unbilled receivables and accounts andsubcontracts payable excluding retentions approximate cost because of theimmediate or short-term maturity. The estimated fair value of the forward foreign currency contracts wasnot significant as of December 30, 2005.

 

II-73

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**QUARTERLY FINANCIAL DATA**

*(In millions except per sharedata)*

**UNAUDITED**

 

Selected quarterlyfinancial data for the years ended December 30, 2005 and December 31, 2004 ispresented below.

 
| ** **                        | ** ** | **April 1,** | ** ** | **July 1,** | ** ** | **September 30,** | ** ** | **December 30,** | ** ** |
|-----------------------------------|------------|-------------------|------------|------------------|------------|------------------------|------------|-----------------------|------------|
| **2005 Quarters ended** | ** ** | **2005**          | ** ** | **2005**         | ** ** | **2005**               | ** ** | **2005**              | ** ** |
| Revenue                           |       | $                 | 700.9      |             | $          | 773.2                  |       | $                     | 815.0      |   | $ | 899.4 |   |
| Gross profit                      |       | 46.1              |       | 3.6              |       | 43.7                   |       | 37.1                  |       |
| Net income (loss)                 |       | 17.2              |       | (0.6             | )          | 20.3                   |       | 21.5                  |       |
| Income (loss) per share:          |       |              |       |             |       |                   |       |                  |       |
| Basic                             |       | .68               |       | (.02             | )          | .77                    |       | .81                   |       |
| Diluted                           |       | .60               |       | (.02             | )          | .65                    |       | .70                   |       |
| Market price:                     |       |              |       |             |       |                   |       |                  |       |
| High                              |       | $                 | 47.31      |             | $          | 52.79                  |       | $                     | 54.60      |   | $ | 54.35 |   |
| Low                               |       | 38.00             |       | 40.78            |       | 48.72                  |       | 47.47                 |       |

 
| ** **                        | ** ** | **April 2,** | ** ** | **July 2,** | ** ** | **October 1,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-------------------|------------|------------------|------------|---------------------|------------|-----------------------|------------|
| **2004 Quarters ended** | ** ** | **2004**          | ** ** | **2004**         | ** ** | **2004**            | ** ** | **2004**              | ** ** |
| Revenue                           |       | $                 | 754.2      |             | $          | 684.5               |       | $                     | 715.3      |   | $ | 761.4 |   |
| Gross profit                      |       | 37.4              |       | 37.7             |       | 39.0                |       | 35.9                  |       |
| Reorganization items              |       | —            |       | 1.2              |       | —              |       | —                |       |
| Net income                        |       | 13.1              |       | 13.3             |       | 12.2                |       | 12.5                  |       |
| Income per share:                 |       |              |       |             |       |                |       |                  |       |
| Basic                             |       | .52               |       | .53              |       | .48                 |       | .49                   |       |
| Diluted                           |       | .47               |       | .49              |       | .45                 |       | .45                   |       |
| Market price:                     |       |              |       |             |       |                |       |                  |       |
| High                              |       | $                 | 40.20      |             | $          | 38.40               |       | $                     | 36.50      |   | $ | 41.34 |   |
| Low                               |       | 32.57             |       | 31.47            |       | 30.75               |       | 31.40                 |       |

### ** **

II-74

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**ITEM 9. ****                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

During the yearsended December 30, 2005 and December 31, 2004, there were no changes in, ordisagreements with, accountants on accounting and financial disclosure matters.

 

**ITEM 9A.****       CONTROLSAND PROCEDURES**

 

***Evaluationof our Disclosure Controls and disclosure of changes to Internal Control overFinancial Reporting.***

 

We maintain a setof disclosure controls and procedures designed to ensure that informationrequired to be disclosed by us in reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in SEC rules and forms. As of the date of thefinancial statements, an evaluation was carried out under the supervision andwith the participation of our management, including the Chief Executive Officer(“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of ourdisclosure controls and procedures. Based on that evaluation, the CEO and CFOhave concluded that our disclosure controls and procedures are effective.

 

•                  ***CEO and CFO certificates***

 

Attached asExhibits 31.1 and 31.2 to this report on Form 10-K are two certifications, oneeach by the CEO and the CFO. They are required in accordance with Rule 13a-14of the Exchange Act. This Item 9A, *Controls and Procedures,*includes the information concerning the controls evaluation referred to in thecertifications and should be read in conjunction with the certifications.

 

•                  ***Disclosure controls***

 

“Disclosure Controls” arecontrols and procedures that are designed to reasonably ensure that informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934, such as this report on Form 10-K, is recorded, processed, summarizedand reported within the time periods specified in the SEC rules and forms.Disclosure Controls are also designed to ensure that information required to bedisclosed is accumulated and communicated to our management, including our CEOand CFO.

 

•                  ***Internal control over financial reporting***

 

Our DisclosureControls include components of our “Internal Control over Financial Reporting.”Internal Control over Financial Reporting is a process designed by, or underthe supervision of our principal executive and principal financial officers,and effected by our board of directors, management and other personnel, toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles and includes those policies andprocedures that:

 

•                  Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of our assets;

•                  Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with authorizations of our management and directors; and

•                  Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton the financial statements.

 

II-75

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•                  ***Limitations on the effectiveness of controls***

 

Our management, including the CEOand CFO, does not expect that our Disclosure Controls and/or our InternalControl over Financial Reporting will prevent or detect all error or fraud. Asystem of controls is able to provide only reasonable, not complete, assurancethat the control objectives are being met, no matter how extensive thosecontrol systems may be. Also, control systems must be established consideringthe benefits of a control system relative to its costs. Because of theseinherent limitations that exist in all control systems, no evaluation ofcontrols can provide absolute assurance that all errors or fraud, if any, havebeen detected. The inherent limitations in control systems include varioushuman and system factors that may include errors in judgment or interpretationregarding events or circumstances or inadvertent error. Additionally, controlscan be circumvented by the acts of a single person, by collusion on the part oftwo or more people or by management override of the control. Over time,controls can also become ineffective as conditions, circumstances, policies,technologies, level of compliance and people change. Because of such inherentlimitations, in any cost-effective control system over financial information,misstatements may occur due to error or fraud and may not be detected.

 

•                  ***Scope of evaluation of Disclosure Controls***

 

The evaluation of our DisclosureControls performed by our CEO and CFO included obtaining an understanding ofthe design and objectives of the controls, the implementation of those controlsand the results of the controls on this report on Form 10-K. We haveestablished a Disclosure Committee whose duty is to perform procedures toevaluate the Disclosure Controls and provide the CEO and CFO with the resultsof their evaluation as part of the information considered by the CEO and CFO intheir evaluation of Disclosure Controls. In the course of the evaluation ofDisclosure Controls, we reviewed the controls that are in place to record,process, summarize and report, on a timely basis, matters that requiredisclosure in our reports filed under the Securities Exchange Act of 1934. Wealso considered the adequacy of the items disclosed in this report on Form10-K.

 

•                  ***Conclusions***

 

Based upon the evaluation of ourDisclosure Controls described above, our CEO and CFO have concluded that,subject to the limitations described above, our Disclosure Controls areeffective to provide reasonable assurance that material information relating toWashington Group International and its consolidated subsidiaries is made knownto management, including the CEO and CFO, so that required disclosures havebeen included in this report on Form 10-K.

 

We have also reviewed ourInternal Control Over Financial Reporting during the most recent fiscalquarter, and our CEO and CFO have concluded that there have been no changesthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

***Management’sAnnual Report on Internal Control Over Financial Reporting***

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Under the supervision and with the participation of ourmanagement, including our CEO and our CFO, we conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in *Internal Control — Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on our evaluation under the framework in *InternalControl — Integrated Framework*, our management concluded that ourInternal Control Over Financial Reporting was effective as of December 30,2005.

 

II-76

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Our independentregistered public accountants, Deloitte & Touche LLP, have audited ourmanagement’s assessment of internal control over financial reporting as ofDecember 30, 2005, as stated in their attestation report which is includedherein.

 

II-77

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Tothe Board of Directors and Stockholders of Washington Group International, Inc.

 

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control Over FinancialReporting, that Washington Group International, Inc. and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December30, 2005, based on criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financialreporting is a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performingsimilar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as ofDecember 30, 2005, is fairly stated, in all material respects, based on thecriteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of December 30, 2005, based on the criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.

 

II-78

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We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated financial statements and financial statement schedule as of andfor the year ended December 30, 2005 of the Company and our report datedFebruary 28, 2006 expressed an unqualified opinion on those financialstatements and financial statementschedule.

 

 
| /s/ DELOITTE  & TOUCHE LLP |   |
|--------------------------------|--------|
| Deloitte & Touche LLP      |
| Boise, Idaho                   |
| February 28, 2006              |

 

II-79

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**ITEM 9B.  OTHERINFORMATION**

 

None.

 

II-80

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**PART III**

 

**ITEM 10.****       DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The informationcalled for by this Item will be set forth under the captions “Directors” and****“Executive Officers” in our definitive proxy statement forour annual meeting of stockholders, to be filed not later than April 14, 2006,and is incorporated herein by this reference.

 

**ITEM 11.****       EXECUTIVECOMPENSATION**

 

The informationcalled for by this Item will be set forth under the caption “Report of theCompensation Committee on Executive Compensation for 2005” in our definitiveproxy statement for our annual meeting of stockholders, to be filed not laterthan April 14, 2006, and is incorporated herein by this reference.

 

**ITEM 12.****       SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

***Securitiesauthorized for issuance under equity compensation plans***

 
| ** **                                                  | ** ** | **(a)**                     | ** ** | **(b)**                  | ** ** | **(c)**                            | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | ** **                  | ** ** | ** **               | ** ** | **Number of securities remaining** | ** ** |
| ** **                                                  | ** ** | **Number of securities to** | ** ** | **Weighted-average**     | ** ** | **available for future issuance**  | ** ** |
| ** **                                                  | ** ** | **be issued upon exercise** | ** ** | **exercise price of**    | ** ** | **under equity compensation**      | ** ** |
| ** **                                                  | ** ** | **of outstanding options,** | ** ** | **outstanding options,** | ** ** | **plans (excluding securities**    | ** ** |
| **Plan category**                                           | ** ** | **warrants and rights**     | ** ** | **warrants and rights**  | ** ** | **reflected in column (a))**       | ** ** |
| Equity compensation  plans approved by security holders     |       | 5,489,749                   |       | $                        | 29.00      |                               | 1,536,983  |   |
| Equity  compensation plans not approved by security holders |       | —                      |       | —                   |       | —                             |       |
| Total                                                       |       | 5,489,749                   |       | $                        | 29.00      |                               | 1,536,983  |   |

 

Additional informationcalled for by this Item will be set forth under the caption “Security Ownershipof Certain Beneficial Owners and Management” in our definitive proxy statementfor our annual meeting of stockholders, to be filed not later than April 14,2006, and is incorporated herein by this reference.

 

**ITEM 13.****       CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The informationcalled for by this Item will be set forth under the caption “CertainRelationships and Related Transactions” in our definitive proxy statement forour annual meeting of stockholders, to be filed not later than April 14, 2006,and is incorporated herein by this reference.

 

**ITEM 14.****       PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The informationcalled for by this Item will be set forth under the caption “PrincipalAccountant Fees and Services” in our definitive proxy statement for our annualmeeting of stockholders, to be filed not later than April 14, 2006, and isincorporated herein by this reference.

 

III-1

----

 

**PART IV**

 

**ITEM 15.****       EXHIBITS,FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K**

 
| (a)    | *Documents  filed as a part of this Form 10-K.*  |                                                                             |
|--------|-------------------------------------------------------|----------------------------------------------------------------------------------|
|   |                                                  |                                                                             |   |
|   |                                                  |                                                                             |   |
|   | 1.                                                    | The Consolidated  Financial Statements, together with the report thereon of      |   |
|   |                                                  | Deloitte &  Touche LLP, are included in Part II, Item 8 of this report       |   |
|   |                                                  |                                                                             |   |
|   |                                                  | Report of  Independent Registered Public Accounting Firm                         |   |
|   |                                                  |                                                                             |   |
|   |                                                  | Consolidated  Statements of Income for the years ended December 30, 2005,        |   |
|   |                                                  | December 31,  2004 and January 2, 2004                                           |   |
|   |                                                  |                                                                             |   |
|   |                                                  | Consolidated  Statements of Comprehensive Income for the years ended             |   |
|   |                                                  | December 30,  2005, December 31, 2004 and January 2, 2004,                       |   |
|   |                                                  |                                                                             |   |
|   |                                                  | Consolidated Balance  Sheets as of December 30, 2005 and December 31, 2004       |   |
|   |                                                  |                                                                             |   |
|   |                                                  | Consolidated  Statements of Cash Flows for the years ended December 30, 2005,    |   |
|   |                                                  | December 31,  2004 and January 2, 2004                                           |   |
|   |                                                  |                                                                             |   |
|   |                                                  | Consolidated  Statements of Stockholders’ Equity for the years ended        |   |
|   |                                                  | December 30,  2005, December 31, 2004 and January 2, 2004                        |   |
|   |                                                  |                                                                             |   |
|   |                                                  | Notes to  Consolidated Financial Statements                                      |   |
|   |                                                  |                                                                             |   |
|   | 2.                                                    | Schedule II. Valuation,  Qualifying and Reserve Accounts                         |   |
|   |                                                  |                                                                             |   |
|   |                                                  | Financial  statement schedules not listed above are omitted because they are not |   |
|   |                                                  | required or are  not applicable, or the required information is presented in the |   |
|   |                                                  | financial  statements including the notes thereto. Captions and column headings  |   |
|   |                                                  | have been  omitted where not applicable.                                         |   |
|   |                                                  |                                                                             |   |
|   | 3.                                                    | Exhibits                                                                         |   |
|   |                                                  |                                                                             |   |
|   |                                                  | The exhibits to  this report are listed in the Exhibit Index set forth below.    |   |

 

IV-1

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, we have dulycaused this Form 10-K to be signed on our behalf by the undersigned, thereuntoduly authorized on March 2, 2006.

 
| Washington Group  International, Inc. |
|---------------------------------------|
|                                  |
| By                                    | /s/ George H.  Juetten |   |
|                                  | George H.  Juetten, Executive Vice President and Chief Financial Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Form 10-K has beensigned below on March 2, 2006 by the following persons on our behalf in the capacitiesindicated.

 

 
| /s/ Stephen G. Hanks              |   | Chief Executive Officer and President and Director   |
|-----------------------------------|--------|------------------------------------------------------|
|                              |   | (Principal Executive Officer)                        |
|                              |   |                                                 |
|                              |   | Executive Vice President and Chief Financial Officer |
| /s/ George H. Juetten             |   | (Principal Financial Officer)                        |
|                              |   |                                                 |
|                              |   | Vice President and Controller                        |
| /s/ Jerry K. Lemon                |   | (Principal Accounting Officer)                       |
|                              |   |                                                 |
| /s/ Dennis R. Washington*         |   | Chairman and Director                                |
|                              |   |                                                 |
| /s/ John R. Alm*                  |   | Director                                             |
|                              |   |                                                 |
| /s/ David H. Batchelder*          |   | Director                                             |
|                              |   |                                                 |
| /s/ Michael R. D’Appolonia * |   | Director                                             |
|                              |   |                                                 |
| /s/ C. Scott Greer*               |   | Director                                             |
|                              |   |                                                 |
| /s/ William H. Mallender*         |   | Director                                             |
|                              |   |                                                 |
| /s/ Michael P. Monaco*            |   | Director                                             |
|                              |   |                                                 |
| /s/ Cordell Reed*                 |   | Director                                             |
|                              |   |                                                 |
| /s/ Gail E. Hamilton*             |   | Director                                             |
|                              |   |                                                 |
| /s/ Dennis K. Williams*           |   | Director                                             |

 

----

*Craig G. Taylor, bysigning his name hereto, does hereby sign this Form 10-K on behalf of each ofthe above-named directors of Washington Group International, Inc., pursuant topowers of attorney executed on behalf of each such officer and director.

 
| By     | /s/ Craig G.  Taylor               |   |
|--------|------------------------------------|--------|
|   | Craig G. Taylor,  Attorney-in-fact |

 

----

 

**WASHINGTONGROUP INTERNATIONAL, INC.**

**SCHEDULE II.  VALUATION, QUALIFYING AND RESERVE ACCOUNTS**

***(Inthousands)***

 

**Allowancefor Doubtful Accounts Receivable Deducted in the Balance Sheet from AccountsReceivable**

 
| ** **                   | ** ** | **Balance at**     | ** ** | **Provisions** | ** ** | ** ** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
|------------------------------|------------|--------------------|------------|----------------|------------|------------|------------|----------------|------------|----------------|------------|
| ** **                   | ** ** | **Beginning**      | ** ** | **Charged to** | ** ** | ** ** | ** ** | ** **     | ** ** | **End of**     | ** ** |
| **Period Ended**        | ** ** | **of Period** | ** ** | **Operations** | ** ** | **Other**  | ** ** | **Deductions** | ** ** | **Period**     | ** ** |
| Year ended January 2, 2004   |       | $                  | (19,414    | )              | $          | (5,321     | )          | —         |       | $              | 11,216     |   | $ | (13,519 | ) |
| Year ended December 31, 2004 |       | (13,519            | )          | (3,707         | )          | —     |       | 7,807          |       | (9,419         | )          |
| Year ended December 30, 2005 |       | (9,419             | )          | (1,188         | )          |       |       | 4,796          |       | (5,811         | )          |
|                              |            |                    |            |                |            |            |            |                |            |                |            |  |  |  |  |

 

**DeferredIncome Tax Asset Valuation Allowance Deducted in the Balance Sheet**

**fromDeferred Income Tax Assets**

 
| ** **                   | ** ** | **Balance at** | ** ** | **Provisions**      | ** ** | ** ** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
|------------------------------|------------|---------------------|------------|---------------------|------------|------------|------------|----------------|------------|---------------------|------------|
| ** **                   | ** ** | **Beginning**       | ** ** | **Charged to** | ** ** | ** ** | ** ** | ** **     | ** ** | **End of**     | ** ** |
| **Period Ended**        | ** ** | **of Period**  | ** ** | **Operations**      | ** ** | **Other**  | ** ** | **Deductions** | ** ** | **Period**          | ** ** |
| Year ended January 2, 2004   |       | $                   | (48,512    | )                   | —     |       | $          | (102,587       | (a)        | $                   | 1,124      |   | $ | (149,975 | ) |
| Year ended December 31, 2004 |       | (149,975            | )          | —              |       | 18,731     | (b)        | —         |       | (131,244            | )          |
| Year ended December 30, 2005 |       | (131,244            | )          | (1,098              | )          | 24,393     | (c)        | —         |       | (107,949            | )          |
|                              |            |                     |            |                     |            |            |            |                |            |                     |            |  |  |  |  |

 

----

(a)   Otheradjustments to the deferred income tax valuation allowance during the yearended January 2, 2004 include a $97,227 increase related to NOL retained afterthe cancellation of debt and increase of $5,360 primarily related to foreignexchange gains on foreign NOL carryovers.

 

(b)   Otheradjustments to the deferred income tax valuation allowance during the yearended December 31, 2004 primarily relate to actual and forecasted utilizationof NOL carryovers.

 

(c)   Otheradjustments to the deferred income tax valuation allowances during the yearended December 30, 2005 primarily relate to actual and forecasted utilizationof NOL carryovers.

 

S-1

----

 

**WASHINGTON GROUP INTERNATIONAL, INC.**

**EXHIBIT INDEX**

** **
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.1         |       | Stock  Purchase Agreement dated as of April 14, 2000, among Raytheon Company,  Raytheon Engineers & Constructors International, Inc. and Washington  Group International, Inc. (“Washington Group International”) (filed as  Exhibit 2 to Washington Group International’s Form 10-Q Quarterly Report for  the quarter ended March 3, 2000, and incorporated herein by reference). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2.1       |       | Second Amended Joint Plan of Reorganization of Washington Group  International, et. al. (filed as Exhibit 99.1 to Washington Group  International’s Form 8-K Current Report filed on August 2, 2001, and  incorporated herein by reference).                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2.2       |       | Modification to Second Amended Joint Plan of Reorganization of  Washington Group International, et. al. (filed as Exhibit 99.1 to Washington  Group International’s Form 8-K Current Report filed on August 31, 2001, and  incorporated herein by reference).                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2.3       |       | Second Modification to Second Amended Joint Plan of Reorganization of  Washington Group International, et. al. (filed as Exhibit 2.3 to Washington  Group International’s Form 8-K Current Report filed on January 4, 2002, and  incorporated herein by reference).                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2.4       |       | Third Modification to Second Amended Joint Plan of Reorganization of  Washington Group International, et. al. (filed as Exhibit 2.4 to Washington  Group International’s Form 8-K Current Report filed on January 4, 2002 and  incorporated herein by reference).                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1         |       | Amended and Restated Certificate of Incorporation of Washington Group  International (filed as Appendix B to Washington Group International’s Form  14A Definitive Proxy Statement filed on March 20, 2004, and incorporated  herein by reference).                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2         |       | Amended and Restated Bylaws of Washington Group International as of  May 7, 2004 (filed as Exhibit 3.2 of Washington Group International’s Form  10-K Annual Report for year ended December 31, 2004, and incorporated herein  by reference).                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1         |       | Specimen certificate of Washington Group International’s common stock  (filed as Exhibit 4.1 to Washington Group International’s Form 10-Q Quarterly  Report for quarter ended June 28, 2002, and incorporated herein by  reference).                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2         |       | Specimen certificate of Washington Group International’s Tranche A  Warrants (filed as Exhibit 4.2 to Washington Group International’s Form 10-Q  Quarterly Report for quarter ended June 28, 2002, and incorporated herein by  reference).                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3         |       | Specimen certificate of Washington Group International’s Tranche B  Warrants (filed as Exhibit 4.3 to Washington Group International’s Form 10-Q  Quarterly Report for quarter ended June 28, 2002, and incorporated herein by  reference).                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.4         |       | Specimen certificate of Washington Group International’s Tranche C  Warrants (filed as Exhibit 4.4 to Washington Group International’s Form 10-Q  Quarterly Report for quarter ended June 28, 2002, and incorporated herein by  reference).                                                                                                                                                 |

 

E-1

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| 4.5    |   | Warrant Agreement dated as of January 25, 2002, between Washington  Group International and Wells Fargo Bank, N.A., as warrant agent (filed as  Exhibit 4.3 to Washington Group International’s Form 8-K Current Report filed  on February 8, 2002, and incorporated herein by reference).                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6    |   | Rights Agreement dated as of June 21, 2002, by and between Washington  Group International and Wells Fargo Bank, N.A., as rights agent (filed as  Exhibit 4.1 to Washington Group International’s Registration Statement on  Form 8-A filed on June 24, 2002, and incorporated herein by reference).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1   |   | Pledge and Security Agreement dated as of January 24, 2002, among  Washington Group International, certain subsidiaries of Washington Group  International identified therein and Credit Suisse First Boston, as administrative  agent (filed as Exhibit 10.2 to Washington Group International’s Form 8-K  Current Report filed on February 8, 2002, and incorporated herein by  reference).                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2   |   | Shareholders  Agreement dated December 18, 1993, among Morrison Knudsen BV, a wholly-owned  subsidiary of Washington Group International, Lambique Beheer BV and Ergon  Overseas Holdings Limited (filed as Exhibit 10.6 to Washington Group  International’s Form 10-K Annual Report for fiscal year ended November 30,  1997, and incorporated herein by reference).                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3   |   | Asset Purchase Agreement dated as of June 25, 1998, between CBS  Corporation and WGNH Acquisition, LLC related to the acquisition of the  Westinghouse Energy Systems Business Unit from CBS Corporation (filed as  Exhibit 10.10 to Washington Group International’s Form 10-K Annual Report for  fiscal year ended November 30, 1998, and incorporated herein by reference).                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4   |   | Asset Purchase Agreement dated as of June 25, 1998, between CBS  Corporation and WGNH Acquisition, LLC related to the acquisition of the  Westinghouse Government and Environmental Services Company business from CBS  Corporation (filed as Exhibit 10.11 to Washington Group International’s Form  10-K Annual Report for fiscal year ended November 30, 1998, and incorporated  herein by reference).       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5   |   | Second Amended and Restated Consortium Agreement between Washington  Group International’s wholly-owned subsidiary, Washington Group  International, Inc., an Ohio corporation, and BNFL-USA Group, Inc., effective  as of July 31, 2004 (filed as Exhibit 10.1 to Washington Group  International’s Form 10-Q Quarterly Report for quarter ended October 1, 2004,  and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6   |   | Termination Agreement of December 30, 2005, among  Washington Group International, Inc., British Nuclear Fuels plc, and BNFL USA  Group Inc.*                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7   |   | Asset  Purchase Agreement dated as of October 25, 2002, between Westinghouse  Government Services Company LLC and Curtiss-Wright Electro-Mechanical  Corporation (filed as Exhibit 99.2 to Washington Group International’s Form  8-K/A Amended Current Report filed on November 1, 2002, and incorporated  herein by reference).                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8   |   | Trust and Disbursing Agreement dated as of January 25, 2002, among  Washington Group International, the Official Unsecured Creditors’ Committee  and Wells Fargo Bank, N.A., as disbursing agent (filed as Exhibit 10.4 to  Washington Group International’s Form 8-K Current Report filed on February 8,  2002, and incorporated herein by reference).                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9   |   | Settlement Agreement dated as of January 23, 2002,  among Washington Group International, Raytheon Company and Raytheon Engineers  & Constructors International, Inc. (filed as Exhibit 10.5 to Washington  Group International’s Form 8-K Current Report filed on February 8, 2002, and  incorporated herein by reference).                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10  |   | Asset Purchase Agreement dated as of April 17, 2003,  between The Shaw Group Inc. and Washington Group International related to the  sale of Washington Group International’s Petrochemical Technology                                                                                                                                                                                                          |

 

E-2

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|    |   | Center in  Cambridge, Massachusetts, to Stone & Webster, Inc., a subsidiary of The  Shaw Group Inc. of Baton Rouge, Louisiana (filed as Exhibit 10.1 to  Washington Group International’s Form 10-Q Quarterly Report for quarter ended  July 4, 2003, and incorporated herein by reference).                                                                                                                                                                                                                                                            |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11.1 |   | Amended and Restated Credit Agreement dated as of October 9, 2003,  among Washington Group International, Inc., the lenders and issuers party  thereto, Credit Suisse First Boston, as administrative agent, sole lead  arranger and book manager, LaSalle Bank National Association, as  documentation agent, and ABLECO Finance LLC, as syndication agent (filed as  Exhibit 10.1 to Washington Group International’s Form 8-K Current Report  filed on October 13, 2003, and incorporated herein by reference).                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11.2 |   | Amendment No. 1, dated as of March 19, 2004, to the Amended and  Restated Credit Agreement dated as of October 9, 2003, among Washington Group  International, Inc., the lenders and issuers party thereto, Credit Suisse  First Boston, as administrative agent, sole lead arranger and book manager,  and LaSalle Bank National Association, as documentation agent (filed as  Exhibit 10.3 to Washington Group International’s Form 10-Q Quarterly Report  for the quarter ended April 2, 2004, and incorporated herein by reference).                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11.3 |   | Amendment No. 2, dated as of July 22, 2004, to the Amended and  Restated Credit Agreement of October 9, 2003, as amended by Amendment No. 1  dated as of March 19, 2004, among Washington Group International, Inc., the  lenders and issuers party thereto, and Credit Suisse First Boston, as  administrative agent for the Lenders and Issuers thereunder (filed as Exhibit  10.2 to Washington Group International’s Form 10-Q Quarterly Report for the  quarter ended July 2, 2004, and incorporated herein by reference).                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11.4 |   | Amendment  Agreement among Washington Group International, Inc., the lenders and issuers  party thereto, Credit Suisse, as administrative agent, and the other parties  thereto, including the Second Amended and Restated Credit Agreement, dated as  of June 14, 2005, among Washington Group International, Inc., the lenders and  issuers party thereto, and Credit Suisse, as administrative agent (filed as  Exhibit 10.1 to Washington Group International’s Form 8-K Current Report  filed on June 17, 2005, and incorporated herein by reference). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12   |   | Joinder Agreement dated as of October 9, 2003, delivered by  subsidiaries of Washington Group International, Inc. and acknowledged and  agreed by Credit Suisse First Boston (filed as Exhibit 10.2 to Washington  Group International’s Form 8-K Current report filed on October 13, 2003, and  incorporated herein by reference).                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.13   |   | Intercreditor  Agreement as of July 31, 2004, among Credit Suisse First Boston, BNFL USA  Group, Inc., Washington Group International, Inc. (an Ohio corporation)  (“Washington Group (Ohio)”) and various affiliates of Washington (Ohio)  (filed as Exhibit 10.2 to Washington Group International’s Form 10-Q  Quarterly Report for quarter ended October 1, 2004, and incorporated herein  by reference).                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.14   |   | Security  Agreement as of July 31, 2004, among Washington Group (Ohio), various  affiliates of Washington Group (Ohio) listed therein as Debtors, and BNFL USA  Group, Inc. (filed as Exhibit 10.3 to Washington Group International’s Form  10-Q Quarterly Report for quarter ended October 1, 2004, and incorporated  herein by reference).                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15   |   | Warrant Cash Substitution Agreement dated as of January 10, 2006, by  and among Washington Group International, Inc., the Plan Committee, formerly  the Unsecured Creditors’ Committee, and Wells Fargo Bank, N.A., as trust and  disbursing agent.*                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.16.1 |   | Washington Group International, Inc. Equity and Performance Incentive  Plan, Amended and Restated as of November 9, 2002 (filed as Appendix E to  Washington Group International’s Form Def 14A Definitive Proxy Statement  filed on April 8, 2003, and incorporated herein by reference).#                                                                                                                                                                                                                                                                 |

 

E-3

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| 10.16.2 |   | Washington Group International, Inc. Equity and Performance Incentive  Plan, Amended and Restated as of August 14, 2003 (filed as Exhibit 10.13.2 to  Washington Group International’s Form 10-K Annual Report for the year ended  January 2, 2004, and incorporated herein by reference). #                                                                                                  |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.16.3 |   | Amendment No. 1, effective as of February 13, 2004, to the Washington  Group International, Inc. Equity and Performance Incentive Plan as Amended  and Restated as of August 14, 2003 (filed as Exhibit 10.2 to Washington Group  International’s Form 10-Q Quarterly Report for the quarter ended April 2,  2004, and incorporated herein by reference).#                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.16.4 |   | Amendment No. 2, effective as of May 20, 2005, to  the Washington Group International, Inc. Equity and Performance Incentive  Plan as Amended and Restated as of August 14, 2003 (filed as Exhibit 10.2 to  Washington Group International’s Form 8-K Current Report filed on May 25,  2005, and incorporated herein by reference).                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.17   |   | Form of Washington Group International, Inc. Equity and Performance  Incentive Plan Performance Unit Participation Agreement.*#                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.18   |   | Washington Group International, Inc. Equity and  Performance Incentive Plan -  California (filed as Exhibit 10.8 to Washington Group International’s Form  8-K Current Report filed on February 8, 2002, and incorporated herein by  reference). #                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.19   |   | Letter Agreement dated as of November 15, 2001, between Washington  Group International and Dennis R. Washington (filed as Exhibit 10.9 to  Washington Group International’s Form 8-K Current Report filed on February 8,  2002, and incorporated herein by reference). #                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.20   |   | Letter Agreement of January 21, 2004, effective as of November 14,  2003, between Washington Group International and Dennis R. Washington (filed  as Exhibit 10.17 to Form 10-K Annual Report for the year ended January 2,  2004, and incorporated herein by reference).                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.21   |   | Form of Indemnification Agreement (filed as Exhibit 10.10 to  Washington Group International’s Form 8-K Current Report filed on February 8,  2002, and incorporated herein by reference). # A schedule listing the  directors and officers with whom Washington Group International has entered  into such agreements is filed herewith. # *                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.22   |   | Washington Group International Key Executive Disability Insurance  Plan (filed as Exhibit 10.12 to Old MK’s Form 10-K Annual Report for year  ended December 31, 1992, and incorporated herein by reference). #                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.23.1 |   | Form of Washington Group International’s Retention Agreement (filed  as Exhibit 10.21 to Washington Group International’s Form 10-K Annual Report  for fiscal year ended November 30, 2001, and incorporated herein by  reference). # A schedule listing the Executive Officers with whom Washington  Group International has entered into such agreements is filed herewith.*           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.23.2 |   | Form of Amendment to Washington Group International’s Retention  Agreement (filed as Exhibit 10.18.2 to Washington Group International’s Form  10-K Annual Report for fiscal year ended January 3, 2003, and incorporated  herein by reference). # A schedule listing Executive Officers with whom  Washington Group International has entered into such amendments is filed  herewith.* |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.24.1 |   | Washington Group International, Inc. Short-Term Incentive Plan (filed  as Appendix D to Washington Group International’s Form Def 14A Proxy  Statement filed on April 8, 2003, and incorporated herein by reference). #                                                                                                                                                                       |

 

E-4

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| 10.24.2 |   | Amendment 1 to Washington Group International, Inc. Short-Term  Incentive Plan (filed as Exhibit 10.3 to Washington Group International’s  Form 8-K Current Report filed on February 15, 2005, and incorporated herein  by reference).#                                                                                     |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 10.25   |   | Washington Group International, Inc. Restoration Plan effective as of  January 1, 2003, amended and restated as of August 14, 2003 (filed as Exhibit  10.3 to Washington Group International’s Form 10-Q Quarterly Report for  quarter ended October 3, 2003, and incorporated herein by reference). #                      |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 10.26   |   | Washington  Group International, Inc. Voluntary Deferred Compensation Plan effective as  of January 1, 2003, amended and restated as of August 14, 2003 (filed as  Exhibit 10.4 to Washington Group International’s Form 10-Q Quarterly Report  for quarter ended October 3, 2003, and incorporated herein by reference). # |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 10.27   |   | Description of Washington Group International Executive Financial  Counseling Program adopted on February 14, 2003 (filed as Exhibit 10.23 to  Washington Group International’s Form 10-K Annual Report for fiscal year  ended January 3, 2003, and incorporated herein by reference). #                                    |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 10.28.1 |   | Washington Group International, Inc. 2004 Equity Incentive Plan  effective as of May 7, 2004 (filed as Exhibit 10.1 to Washington Group International’s  Form 10-Q Quarterly Report for quarter ended July 2, 2004, and incorporated  herein by reference).#                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 10.28.2 |   | Amendment No. 1, effective as of May 20, 2005, to the Washington  Group International, Inc. 2004 Equity Incentive Plan effective as of May 7,  2004 (filed as Exhibit 10.1 to Washington Group International’s Form 8-K  Current Report filed on May 25, 2005, and incorporated herein by reference).#                      |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 10.29   |   | Form of Washington Group International, Inc. 2004 Equity Incentive Plan Option Rights Agreement (filed as Exhibit  10.1 to Washington Group International’s Form 8-K Current Report filed on  February 15, 2005, and incorporated herein by reference).#                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 10.30   |   | Form of Washington Group International, Inc. 2004 Equity Incentive Plan Restricted Share Agreement (filed as Exhibit  10.2 to Washington Group International’s Form 8-K Current Report filed on  February 15, 2005, and incorporated herein by reference).#                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 10.31   |   | Executive Life Insurance Agreement effective as of January 1, 2005,  between Washington Group International, Inc., and Stephen G. Hanks # *                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 10.32   |   | Executive Life Insurance Agreement effective as of January 1, 2005,  between Washington Group International, Inc., and Thomas H. Zarges # *                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 21.*    |   | Subsidiaries  of Washington Group International.                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 23.1*   |   | Consent  of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 23.2*   |   | Consent  of Deloitte & Touche GmbH.                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 24.*    |   | Powers of Attorney.                                                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 31.1*   |   | Certification of the Principal Executive Officer of Washington Group  International pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                             |
| 31.2*   |   | Certification of the Principal Financial Officer of Washington Group  International, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  |

 

E-5

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| 32.1† |   | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                     |
| 99.1*      |   | Financial  Statement of Mitteldeutsche Braunkohlengesellschaft mbH (MIBRAG) for the year  ended December 31, 2005.       |

 

----

#                    Management contract or compensatory plan

*             Filed herewith

†  Furnished herewith

 

E-6

----