Question

THE SHAW GROUP, INC.* This case includes data from The Shaw Group, Inc. annual report for the year ended August 31, 2010. Note 6 – Property and Equipment: Property and equipment consisted of the following (in thousands):

August 31,

2010 2009

Transportation equipment $10,899 $20,977

Furniture, Fixtures, and software 162,446 146,905

Machinery and Equipment 263,759 219,753

Buildings and improvements 233,353 151,708

Assets acquired under capital leases 3,612 5,561

Land 14,269 12,404

Construction in progress 89,401 79,004

777,739 636,402

Less: accumulated depreication (293,098) (250,796)

Property and equipment, net 484,641 385,606

Assets acquired under capital leases, net of accumulated depreciation, were $1.6 million and $2.0 million at August 31, 2010, and 2009, respectively. If the assets acquired under capital leases transfer title at the end of the lease term or contain a bargain purchase option, the assts are amor- tized over their estimated useful lives; otherwise, the assets are amortized over the respective lease term. Depreciation expense of $59.8 million, $52.3 million, and $43.7 million for the fiscal years ended August 31, 2010, 2009, and 2008, respectively, is included in cost of revenues and general and administrative expenses in the accompanying consolidated statements of operations. At August 31, 2010, construction in progress consisted primarily of deposits on heavy equipment to be used on some of our power projects. At August 31, 2009, construction in progress consisted primarily of cost related to the construction of our module fabrication and assembly facility in Lake Charles, Louisiana. In fiscal year 2009, we recorded an asset impairment charge of $5.5 million for a con- solidated joint venture. The impairment charge reduced the property, plant, and equipment to its salvage value.

Note 9 – Debt and Revolving Lines of Credit (in part): Our debt (including capital lease obligations) consisted of the following (in thousands):

August 31, 2010 August 31, 2009

Short-term Long-term Short-term Long-term

Notes payable on purchases of equipment; 0% to 1.3% interest;

payments discounted at imputed rate of 5.9% interest; due

September 2010 through April 2011 4,079 ------- 10,610 2,146

Notes payable on purchases of equipment; 5.2% to 6.0%

interest; due June 2011 through July 2012, and paid in full

October 2009 -------- --------- 1,188 1,824

Other notes payable --------- ---------- 2,805 2,277

Capital lease obligations 400 979 796 1,380

Subtotal 4,479 979 15,399 7,627

Westinghouse Bonds (see description below) 1,520,674 ------- 1,387,954 --------

Total 1,525,153 979 1,403,353 7,627

The notes payable on purchases of equipment are collateralized by the purchased equip- ment. The carrying amount of the equipment pledged as collateral was approximately $18.8 million at August 31, 2010. Annual scheduled maturities of debt and minimum lease payments under capital lease obligations during each year ending August 31 are as follows (in thousands):

Capital Lease Obligation Debt

2011 $ 475 $ 4,079

2012 399 —

2013 399 1,520,674

2014 266 —

2015 — —

Thereafter ----- --------

Subtotal 1,539 1,524,753

Less: amount representing interest (160) -------

Total 1,379 1,524,753

Note 13 – Operating Leases We lease certain office buildings, fabrication and warehouse facilities, machinery, and equip- ment under various lease arrangements. Leases that do not qualify as capital leases are classi- fied as operating leases and the related lease payments are expensed on a straight-line basis over the lease term, including, as applicable, any free-rent period during which we have the right to use the asset. For leases with renewal options where the renewal is reasonably assured, the lease term, including the renewal period, is used to determine the appropriate lease classification and to compute periodic rental expense. Certain of our operating lease agreements are non-cancelable and expire at various times and require various minimum rentals. The non-cancelable operating leases with initial non- cancelable periods in excess of twelve months that were in effect as of August 31, 2010, require us to make the following estimated future payments:

For the year ending August 31 (in thousands)

2011 $72,805

2012 61,677

2013 51,381

2014 45,791

2015 35,883

Thereafter 91,845

Total Future minimum lease payments $359,382

Future minimum lease payments as of August 31, 2010 have not been reduced by mini- mum non-cancelable sublease rentals aggregating approximately $0.8 million.

In 2002, we entered into a 10-year non-cancelable operating lease for our Corporate Headquarters building in Baton Rouge, Louisiana. In connection with this lease, we pur- chased an option for $12.2 million for the right to acquire additional office space and unde- veloped land for approximately $150 million. The option expires the earlier of January 2012, or upon renewal of the existing Corporate Headquarters lease. The cost of the option is included in other assets. The book value of the option is assessed for impairment annually based on appraisals of the additional office space and undeveloped land subject to the option. If we renew the lease rather than exercise the option, the option value will be expensed over the term of the new Corporate Headquarters building lease. We also enter into lease agreements for equipment needed to fulfill the requirements of specific jobs. Any payments owed or committed under these lease arrangements as of August 31, 2010, are not included as part of total minimum lease payments shown above. The total rental expense for the fiscal years ended August 31, 2010, 2009, and 2008 was approximately $178.8 million, $178.1 million, and $170.6 million, respectively. Deferred rent payable (current and long-term) aggregated $32.0 million and $30.3 million at August 31, 2010 and 2009, repsectively.

Required

a. For August 31, 2010:

1. What was the gross amount for property and equipment?

2. What was the net amount for property and equipment?

3. What was the gross amount for assets acquired under capital leases?

4. What was the net amount for assets acquired under capital leases?

5. How material are assets acquired under capital leases in relation to total property and equipment?

b. How material are capital lease obligations in relation to total debt and revolving lines of credit at August 31, 2010?

c. Operating leases:

1. What was the total future minimum lease payments as of August 31, 2010?

2. Using two-thirds of future minimum lease payments representing principal, what would be the estimate for principal at August 31, 2010?

3. How material are operating leases in relation to capital leases?

Answer 1