M&A

Shaw Waits for SEC’s Accounting Decison

Amid a restatement, Shaw waits to find out if its accounting treatment of a put option passes muster with the SEC. The outcome could have a materia...
Stephen TaubAugust 1, 2007

Prompted by comments from the Securities and Exchange Commission, the Shaw Group said it will restate several items in its 2006 annual report, including revisions to its cash flow statement and revenue classifications. In addition, the company said it is currently in discussions with the regulator regarding its accounting for a put option which could delay the filing of its 2007 quarterly reports, and have a material affect on its financial reports.

The company revealed in a regulatory filing that it is discussing with the SEC the methodology used to account for a put option and a commercial relationship agreement (CRA) associated with the company’s investment in Westinghouse. Shaw pointed out that it had recorded the put option at about $273 million and the CRA at $77 million, and both are being amortized on a straight-line basis over a six-year period. The investment in Westinghouse occurred in fiscal 2007, and therefore has no impact on the 2006 financial statements.

Officials explained that at the time of the investment, Shaw, with assistance from its advisors, concluded that there were several acceptable accounting methodologies to record these complex transactions. “The company continues to believe that the accounting treatment it initially utilized is appropriate, but recognizes that significant judgment is required and that other accounting methodologies may also be appropriate,” it added in a press release. Shaw has explained the basis for its conclusions to the SEC staff and is awaiting their response.

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Shaw conceded that if the accounting treatment for the put option and CRA is altered as a result of the SEC analysis, the impact on its financial statements could be material and delay the filing of its quarterly reports for 2007. The company said that it cannot file its 2007 quarterlies until the restated 2006 annual report has been filed.

Regarding the 2006 restatements, the engineering and construction giant noted that one reason for the adjustment is to reclassify items in its cash flow statements, including about $20 million of net cash outflows for 2006, and $11 million for 2005. The items, originally recorded as cash used in financing activities, will be categorized as cash used in operating activities.

Shaw also will reclassify roughly $18 million of 2006 revenues, and $26 million of 2005 revenues, from its energy and chemicals segment to the fabrication and manufacturing segment. In another revision, the company will amend a footnote to the consolidated financial statements which relates to outstanding senior notes. In that case, Shaw will reclassifying cash provided by operating activities from the “parent only” caption to the “guarantor subsidiaries” caption.

Finally, officials said the company will record the previously disclosed $2.6 million pre-tax—or $1.5 million after-tax—charge for a an engineering and construction project involving a petrochemical plant along the U.S. gulf coast. The company also plans to provide additional disclosures primarily relating to segment operating performance. All together, Shaw expects the reporting changes to take at least 30 days.

Several weeks ago, Shaw said it would restate its financial results for the first quarter of fiscal 2007. The adjustment, which is being blamed on incorrect cost estimates related to a domestic chemical industry project, is not material, the company added at the time. Shaw also named Brian Ferraioli its new finance chief, replacing Dirk Wild, who will assume his previous position of senior vice president and operations controller. Shaw also announced that former CFO Robert Belk is returning to the company after a medical leave of absence. Belk will become executive vice president, and tend to various client, investor, banking, and government relationships.