The Daily Magic Formula Stock for 09/19/2008 is Foster Wheeler Ltd. According to the Magic Formula Investing Web Site, the ebit yield is 10% and the EBIT ROIC is >100%.
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We operate through two business groups: our Global Engineering and Construction Group , which we refer to as our Global E&C Group, and our Global Power Group .
Our Global E&C Group, which operates worldwide, designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, gas-to-liquids facilities, oil refining, chemical and petrochemical, pharmaceutical and biotechnology facilities and related infrastructure, including power generation and distribution facilities, and gasification facilities. Our Global E&C Group provides engineering, project management and construction management services, and purchases equipment, materials and services from third-party suppliers and contractors.
Our Global E&C Group is also involved in the design of facilities in new or developing market sectors, including carbon capture and storage, solid fuel-fired integrated gasification combined-cycle power plants, coal-to-liquids and biofuels. Our Global E&C Group owns one of the leading refinery residue upgrading technologies and a hydrogen production process used in oil refineries and petrochemical plants. Additionally, our Global E&C Group has experience with, and is able to work with, a wide range of processes owned by others. Our Global E&C Group performs environmental remediation services, together with related technical, engineering, design and regulatory services.
Our Global E&C Group is also involved in the development, engineering, construction, ownership and operation of power generation facilities, from conventional and renewable sources, and of waste-to-energy facilities in Europe. Our Global E&C Group generates revenues from engineering and construction activities pursuant to contracts spanning up to approximately four years in duration and from returns on its equity investments in various production facilities.
Our Global Power Group designs, manufactures and erects steam generating and auxiliary equipment for electric power generating stations and industrial facilities worldwide. Our steam generating equipment includes a full range of technologies, offering independent power producer, utility and industrial clients high-value technology solutions for economically converting a wide range of fuels, including coal, petroleum coke, oil, gas, biomass and municipal solid waste, into steam and power. Our circulating fluidized-bed boiler technology, which we refer to as CFB, is ideally suited to burning a very wide range of fuels, including low-quality fuels, fuels with high moisture content and â€śwaste-typeâ€ť fuels, and we believe is generally recognized as one of the environmentally cleanest solid-fuel steam generating technologies available in the world today. For both our CFB and pulverized coal, which we refer to as PC, boilers, we offer supercritical once-through-unit designs to further improve the energy efficiency and, therefore, the environmental performance of these units. Once-through supercritical boilers operate at higher steam pressures than traditional plants, which results in higher efficiencies and lower emissions, including emissions of carbon dioxide, or CO 2 , which is considered a greenhouse gas.
Further, for the longer term, we are actively developing oxy-combustion technology for both our CFB and PC boilers. We believe that oxy-combustion is one part of a practical solution for capturing and storing the majority of the CO 2 from coal power plants. This technology produces a concentrated stream of CO 2 as part of the boiler combustion process avoiding the need for large and expensive post-combustion CO 2 separation equipment. We also design, manufacture and install auxiliary equipment, which includes feedwater heaters, steam condensers and heat-recovery equipment. Our Global Power Group also offers a full line of new and retrofit nitrogen-oxide, which we refer to as NOx, reduction systems such as selective non-catalytic and catalytic NOx reduction systems as well as complete low-NOx combustion systems. We provide a broad range of site services relating to these products, including construction and erection services, maintenance engineering, plant upgrading and life extensions.
Our Global Power Group also provides research analysis and experimental work in fluid dynamics, heat transfer, combustion and fuel technology, materials engineering and solid mechanics. In addition, our Global Power Group owns and operates cogeneration, independent power production and waste-to-energy facilities, as well as power generation facilities for the process and petrochemical industries. Our Global Power Group generates revenues from engineering activities, equipment supply and construction contracts, operating activities pursuant to the long-term sale of project outputs, such as electricity and steam, operating and maintenance agreements, royalties from licensing our technology, and from returns on its equity investments in various power production facilities.
In addition to these two business groups, which also represent operating segments for financial reporting purposes, we report corporate center expenses and expenses related to certain legacy liabilities, such as asbestos, in the Corporate and Finance Group, which we also treat as an operating segment for financial reporting purposes and which we refer to as the C&F Group.
Please refer to Note 17 to the consolidated financial statements in this annual report on Form 10-K for a discussion of our operating segments and geographic financial information relating to our domestic and foreign operations.
Products and Services
Our Global E&C Groupâ€™s services include:
â€˘ Consulting â€” Our Global E&C Group provides technical and economic analyses and study reports to owners, investors, developers, operators and governments. These services include concept and feasibility studies, market studies, asset assessments, product demand and supply modeling, and technology evaluations.
â€˘ Design and Engineering â€” Our Global E&C Group provides a broad range of engineering and design-related services. Our design and engineering capabilities include process, civil, structural, architectural, mechanical, instrumentation, electrical, and health, safety and environmental management. For each project, we identify the project requirements and then integrate and coordinate the various design elements. Other critical tasks in the design process may include value engineering to optimize costs, risk and hazard reviews, and the assessment of construction, maintenance and operational requirements.
â€˘ Project Management and Project Control â€” Our Global E&C Group offers a wide range of project management and project control services for overseeing engineering, procurement and construction activities. These services include estimating costs, project planning and project cost control. The provision of these services is an integral part of the planning, design and construction phases of projects that we execute directly for clients. We also provide these services to our clients in the role of project management or program management consultant, where we oversee, on our clientâ€™s behalf, the execution by other contractors of all or some of the planning, design and construction phases of a project.
â€˘ Procurement â€” Our procurement activities focus on those projects where we also execute the design and engineering work. We manage the procurement of materials, subcontractors and craft labor. Often, we purchase materials, equipment or services on behalf of our client, where the client will pay for the materials at cost and reimburse us the cost of our services plus a margin or fee.
â€˘ Construction/Commissioni ng and Start-up â€” Our Global E&C Group provides construction and construction management services on a worldwide basis. Our construction, commissioning and start-up activities focus on those projects where we have performed most of the associated design and engineering work. Depending on the project, we may function as the primary contractor or as a subcontractor to another firm. On some projects, we function as the construction manager, engaged by the customer to oversee another contractorâ€™s compliance with design specifications and contracting terms. In some instances, we have responsibility for commissioning and plant start-up, or, where the client has responsibility for these activities, we provide experts to work as part of our clientâ€™s team.
â€˘ Operations and Maintenance â€” We provide project management, plant operations and maintenance services, such as repair, renovation, predictive and preventative services and other aftermarket services. In some instances, our contracts may require us to operate a plant, which we have designed and built, for an initial period that may vary from a very short period to up to approximately two years.
The principal products of our Global Power Group are steam generators, commonly referred to as boilers. Our boilers produce steam in a range of conditions and qualities, from low-pressure saturated steam to high quality superheated steam at either sub-critical or supercritical conditions (steam pressures above 3,600 pounds-force per square inch absolute). The steam produced by our boilers can be used to produce electricity in power plants, heat buildings and in the production of many manufactured goods and products, such as paper, chemicals and food products. Our boilers convert the energy of a wide range of solid and liquid fuels, as well as hot process gases, into steam and can be classified into several types: circulating fluidized-bed, pulverized coal, oil and natural gas, grate, heat recovery steam generators and fully assembled package boilers. The two most significant elements of our product portfolio are our CFB and PC boilers.
â€˘ Circulating Fluidized-Bed Boilers â€” Our Global Power Group designs, manufactures and supplies boilers that utilize proprietary CFB technology. We believe that CFB combustion is generally recognized as one of the most efficient, environmentally friendly and versatile ways to generate steam from coal and many other solid fuels and waste products with reduced environmental pollutants. A CFB boiler utilizes air jets at the base of the boiler to blow the fuel particles as they burn, resulting in a very efficient combustion and heat transfer process. The fuel and other added solid materials, such as limestone, are continuously recycled through the furnace to maximize combustion efficiency and capture pollutants, such as the oxides of sulfur, which we refer to as SOx. Due to the efficient mixing of the fuel with the air and other solid materials and the long period of time the fuel remains in the combustion process, the temperature of the process can be greatly reduced below that of a conventional burning process. This has the added benefit of reducing the formation of NOx, which is another pollutant formed in the combustion process. Due to these benefits, additional SOx and NOx control systems are frequently not needed. The application of supercritical steam technology to CFB technology is the latest technical development. By dramatically raising the pressure of the water as it is converted to steam, supercritical steam technology allows the steam to absorb more heat from the combustion process, resulting in a substantial improvement of approximately 5-10% in the efficiency of an electric power plant. We sell our CFB boilers to clients worldwide.
â€˘ Pulverized Coal Boilers â€” Our Global Power Group designs, manufactures and supplies PC boilers. PC boilers are commonly used in large electric coal-fired power plant applications. The coal is pulverized into fine particles and injected through specially designed low emission burners. Our PC boilers control NOx by utilizing advanced low-NOx combustion technology and selective catalytic reduction technology, which we refer to as SCR. PC technology requires pollution control equipment to be installed along with the boiler to capture SOx. We offer our PC boilers with either conventional sub-critical steam technology or more efficient supercritical steam technology for electric power plant applications. We sell our PC boilers to clients worldwide.
â€˘ Auxiliary Equipment and Aftermarket Services â€” Our Global Power Group also manufactures and installs integral components for natural gas, oil and solid fuel-fired power generation facilities, including surface condensers, feedwater heaters, coal pulverizers and NOx reduction systems. The NOx reduction systems include selective catalytic reduction, or SCR, equipment and low NOx combustion systems, and can significantly reduce NOx emissions. These products can be used with a wide range of boilers. Our Global Power Group also supplies replacement components, repair parts, boiler modifications and engineered solutions for boilers worldwide.
We provide a broad range of site services relating to these products, including construction and erection services, maintenance engineering, plant upgrading and life extension, and plant repowering. Our Global Power Group also provides research analysis and experimental work in fluid dynamics, heat transfer, combustion and fuel technology, materials engineering and solid mechanics. In addition, our Global Power Group licenses technology to a limited number of third-parties in select countries.
Industries We Serve
We serve the following industries:
â€˘ Oil and gas;
â€˘ Oil refining;
â€˘ Power generation; and
â€˘ Power plant operation and maintenance.
Customers and Marketing
We market our services and products through a worldwide staff of sales and marketing personnel, and through a network of sales representatives and through partnership or joint venture arrangements with unrelated third-parties. Our businesses are not seasonal and are not dependent on a limited group of clients. Except for one client that accounted for approximately 12% and 13% of our consolidated revenues (inclusive of flow-through revenues) in fiscal years 2007 and 2006, respectively, no other single client accounted for ten percent or more of our consolidated revenues (inclusive of flow-through revenues) in fiscal years 2007, 2006 or 2005. Representative clients include state-owned and multinational oil and gas companies, major petrochemical, chemical, and pharmaceutical companies, national and independent electric power generation companies, and government agencies throughout the world. The majority of our revenues and new business originates outside of the United States.
Licenses, Patents and Trademarks
We own and license patents, trademarks and know-how, which are used in each of our business groups. The life cycles of the patents and trademarks are of varying durations. We are not materially dependent on any particular patent or trademark, although we depend on our ability to protect our intellectual property rights to the technologies and know-how used in our proprietary products. As noted above, we have granted licenses to a limited number of companies in select countries to manufacture stationary boilers and related equipment and certain of our other products. Our principal licensees are located in China, India, Italy, Japan and South Korea. Recurring royalty revenues have historically ranged from approximately $5,000 to $10,000 per year.
We execute our contracts on lump-sum turnkey, fixed-price, target-price with incentives and cost-reimbursable bases. Generally, contracts are awarded on the basis of price, delivery schedule, technical capability and service. On certain contracts our clients may make a down payment at the time a contract is executed and continue to make progress payments until the contract is completed and the work has been accepted as meeting contract guarantees. Our Global Power Groupâ€™s products are custom designed and manufactured, and are not produced for inventory. Our Global E&C Group frequently purchases materials, equipment, and third-party services at cost for clients on a cash neutral/reimbursable basis when providing engineering specification or procurement services. Such â€śflow-throughâ€ť amounts are recorded both as revenues and cost of operating revenues with no profit recognized. Our Global E&C Group does not purchase such materials and equipment for inventory.
We measure our unfilled orders in terms of expected future revenues. Included in future revenues are flow-through revenues, which result when we are performing an engineering or construction contract and purchase materials, equipment or subcontractor services on behalf of our customers on a reimbursable basis with no profit added to the cost of the materials, equipment or subcontractor services. We also measure our unfilled orders in terms of Foster Wheeler scope, which excludes flow-through revenues. As such, Foster Wheeler scope measures the component of backlog with profit potential and represents our services plus fees for reimbursable contracts and total selling price for lump-sum or fixed-price contracts.
Please refer to Item 7, â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations,â€ť for a discussion of the changes in unfilled orders, both in terms of expected future revenues and Foster Wheeler scope. See also Item 1A, â€śRisk Factors â€” Risks Related to Our Operations â€” Projects included in our backlog may be delayed or canceled, which could materially adversely affect our business, financial condition, results of operations and cash flows.â€ť
Use of Raw Materials
We obtain the materials used in our manufacturing and construction operations from both domestic and foreign sources. The procurement of materials, consisting mainly of steel products and manufactured items, is heavily dependent on unrelated third-party foreign sources.
Compliance with Government Regulations
We are subject to certain foreign, federal, state and local environmental, occupational health and product safety laws arising from the countries where we operate. We also purchase materials and equipment from third-parties, and engage subcontractors, who are also subject to these laws and regulations. We believe that all our operations are in material compliance with those laws and we do not anticipate any material capital expenditures or material adverse effect on earnings or cash flows as a result of complying with those laws.
Many companies compete with us in the engineering and construction business. Neither we nor any other single company has a dominant market share of the total design, engineering and construction business servicing the global businesses previously described. Many companies also compete in the global energy business and neither we nor any other single competitor has a dominate market share. Companies that compete with our Global E&C Group include but are not limited to the following: Bechtel Corporation; Chicago Bridge & Iron Company N.V.; Chiyoda Corporation; Fluor Corporation; Jacobs Engineering Group Inc.; JGC Corporation; KBR, Inc.; McDermott International; Saipem S.p.A.; Shaw Group, Inc.; Technip; and Worley Parsons Ltd. Companies that compete with our Global Power Group include but are not limited to the following: Aker Kvaerner ASA; Alstom Power; Austrian Energy & Environment AG.; The Babcock & Wilcox Company; Babcock Power Inc.; Doosan-Babcock; Hitachi, Ltd.; and Mitsubishi Heavy Industries Ltd.
Raymond J. Milchovich
Mr. Milchovich has been our Chairman and Chief Executive Officer since October 2001, and was our President from October 2001 until January 2007, at which time Umberto della Sala was elected our President and Chief Operating Officer. From January 2000 until October 2001, Mr. Milchovich served as the Chairman, President and Chief Executive Officer of Kaiser Aluminum Corporation, which we refer to as Kaiser, and its subsidiary, Kaiser Aluminum & Chemical Corporation, which we refer to as KACC, a leading producer and marketer of aluminum and aluminum fabricated products. He is also a director of Delphi Corporation, a company specializing in mobile electronics and transportation components and systems technology. Mr. Milchovich, who is 58 years old, became a member of our Board of Directors in 2001.
Jack A. Fusco
Mr. Fusco served as the Chairman and Chief Executive Officer of Texas Genco Inc., a wholesale electric power generation company engaged in the ownership and operation of a diverse portfolio of power plants in the state of Texas, from July 2004 to February 2006. From 2002 until July 2004, Mr. Fusco was an exclusive energy investment advisor for Texas Pacific Group. He also served as President, Chief Executive Officer and Director of Orion Power, a New York Stock Exchange listed company, from November 1998 until February 2002. Prior to joining Orion Power, Mr. Fusco was a Vice President at Goldman Sachs Power, an affiliate of Goldman, Sachs & Co. Prior to joining Goldman, Sachs & Co., Mr. Fusco was Executive Director of International Development and Operations for Pacific Gas & Electric's non-regulated subsidiary PG&E Enterprises. Mr. Fusco is also a director of Graphic Packaging Holding Company, a packaging solutions company and whose shares are publicly traded on the New York Stock Exchange. Mr. Fusco, who is 45 years old, became a member of our Board of Directors in 2008.
Edward G. Galante
Mr. Galante served as a Senior Vice President and member of the Management Committee of Exxon Mobil Corporation, the largest publicly traded petroleum and petrochemical enterprise in the world, from August 2001 until his retirement in 2006. From 1999 to August 2001, Mr. Galante was Executive Vice President of ExxonMobil Chemical Company and, from 1997 to 1999, Mr. Galante was Chairman and Managing Director of Esso (Thailand) Public Company Limited. Since 1972, Mr. Galante served in increasingly responsible management positions with Exxon Mobil Corporation. Mr. Galante is also a director of Praxair, Inc., one of the worldâ€™s largest industrial gases companies and whose shares are publicly traded on the New York Stock Exchange. Mr. Galante, who is 57 years old, became a member of our Board of Directors in 2008.
Eugene D. Atkinson
Mr. Atkinson is the founder and has been the Managing Partner of Atkinson Capital, LLC, an investor in hedge funds, since June 2005. From May 2000 until May 2005, Mr. Atkinson was a Managing Partner with RHJ Industrial Partners, a private equity firm. From 1984 until 1990, Mr. Atkinson was a Limited Partner with The Goldman Sachs Group Inc., a leading global investment banking, securities and investment management firm, and from 1990 until 1999 he served as Chairman of Goldman Sachs (International). Mr. Atkinson, who is 63 years old, became a member of our Board of Directors in 1995. His term will expire at our annual general meeting in 2010.
Diane C. Creel
Ms. Creel has been the Chairman, Chief Executive Officer and President of Ecovation, Inc., a waste stream technology company, since May 2003. From January 1993 until May 2003, Ms. Creel served as Chief Executive Officer and President of Earth Tech Inc., a company which offers water management, environmental and transportation services and is a business unit of Tyco International Ltd. Ms. Creel currently serves on the board of directors of Allegheny Technologies Inc., a company that produces specialty materials for a variety of industries and whose shares are publicly traded on the New York Stock Exchange, and Goodrich Corporation, a company that provides systems and services to the aerospace and defense industry and whose shares are publicly traded on the New York Stock Exchange. Ms. Creel, who is 59 years old, became a member of our Board of Directors in 2004. Her term will expire at our annual general meeting in 2009.
Steven J. Demetriou
Mr. Demetriou has been the Chairman and Chief Executive Officer of Aleris International, Inc., a producer of aluminum rolled products since December 2004. From June 2004 to December 2004, Mr. Demetriou served as President, Chief Executive Officer, and Director of Commonwealth Industries, Inc., a manufacturer of aluminum sheet and flexible aluminum conduit, and from 2001 until June 2004, Mr. Demetriou served as President and Chief Executive Officer of Noveon, Inc., a specialty chemical company. Mr. Demetriou has also held various management and leadership positions with IMC Global Inc., Cytec Industries Inc., and Exxon Mobil Corporation. Mr. Demetriou is also a director of OM Group, Inc., a diversified, global developer, producer and marketer of value-added, metal-based specialty chemicals and advanced materials and whose shares are publicly traded on the New York Stock Exchange. Mr. Demetriou, who is 49 years old, became a member of our Board of Directors in 2008. His term will expire at our annual general meeting in 2010.
Robert C. Flexon
Mr. Flexon has been the Executive Vice President and Chief Operating Officer of NRG Energy, Inc., a wholesale power generation company primarily engaged in the ownership and operation of power generation facilities and the sale of energy, capacity and related products in the United States and internationally and whose shares are publicly traded on the New York Stock Exchange, since March 2008. From March 2004 until March 2008, Mr. Flexon was the Executive Vice President and Chief Financial Officer of NRG Energy, Inc. From 2000 until June 2001, Mr. Flexon served as Vice President, Business Analysis & Controller, and, from October 2001 until March 2004, was Vice President, Work Process Improvement and Business Development of Hercules, Inc., a company engaged in the manufacture of specialty chemicals used in making a variety of products for home, office, and industrial markets and whose shares are publicly traded on the New York Stock Exchange. Mr. Flexon, a certified public accountant, was an Audit Manager with Coopers & Lybrand in the 1980â€™s and held various key accounting-related positions, including General Auditor, with Atlantic Richfield Company from 1987 to 2000. Mr. Flexon, who is 49 years old, became a member of our Board of Directors in 2006. His term will expire at our annual general meeting in 2009.
Ms. Hanbury-Brown is the Managing Director of Golden Seeds LLC, which provides investment capital to early stage, high growth companies. Prior to that, she spent 20 years working in the financial services industry in Sydney, London and New York. The majority of her career was with J.P. Morgan, where she headed several global businesses including Global Head of Futures and Options, Head of International Private Banking, Chief Operating Officer of Global Equities and Head of eCommerce. She is currently a member of the board of directors of Design2Launch and Artemis Woman, both private companies, as well as Count Me In, a not-for-profit organization. Ms. Hanbury-Brown, who is 51 years old, became a member of our Board of Directors in 2004. Her term will expire at our annual general meeting in 2010.
James D. Woods
Mr. Woods has been the Chairman Emeritus and retired Chief Executive Officer of Baker Hughes Incorporated, a provider of products and services to the worldwide oil and gas industry, since January 1997. From April 1987 until January 1997, Mr. Woods served as Chief Executive Officer of Baker Hughes, and, from January 1989 until January 1997, he served as Chairman of Baker Hughes. He is also a director of ESCO Technologies and Complete Production Services, Inc., each of whose shares are publicly traded on the New York Stock Exchange. Mr. Woods, who is 76 years old, became a member of our Board of Directors in 2002. His term will expire at our annual general meeting in 2009.
MANAGEMENT DISCUSSION FROM LATEST 10K
Safe Harbor Statement
This managementâ€™s discussion and analysis of financial condition and results of operations, other sections of this annual report on Form 10-K and other reports and oral statements made by our representatives from time to time may contain forward-looking statements that are based on our assumptions, expectations and projections about Foster Wheeler and the various industries within which we operate. These include statements regarding our expectation about revenues (including as expressed by our backlog), our liquidity, the outcome of litigation and legal proceedings and recoveries from customers for claims, and the costs of current and future asbestos claims and the amount and timing of related insurance recoveries. Such forward-looking statements by their nature involve a degree of risk and uncertainty. We caution that a variety of factors, including but not limited to the factors described under Item 1A, â€śRisk Factorsâ€ť and the following, could cause business conditions and our results to differ materially from what is contained in forward-looking statements:
â€˘ changes in the rate of economic growth in the United States and other major international economies;
â€˘ changes in investment by the oil and gas, oil refining, chemical/petrochemical, and power industries;
â€˘ changes in the financial condition of our customers;
â€˘ changes in regulatory environments;
â€˘ changes in project design or schedules;
â€˘ contract cancellations;
â€˘ changes in our estimates of costs to complete projects;
â€˘ changes in trade, monetary and fiscal policies worldwide;
â€˘ compliance with laws and regulations relating to our global operations;
â€˘ currency fluctuations;
â€˘ war and/or terrorist attacks on facilities either owned or where equipment or services are or may be provided;
â€˘ interruptions to shipping lanes or other methods of transit;
â€˘ outcomes of pending and future litigation, including litigation regarding our liability for damages and insurance coverage for asbestos exposure;
â€˘ protection and validity of our patents and other intellectual property rights;
â€˘ increasing competition by foreign and domestic companies;
â€˘ compliance with our debt covenants;
â€˘ recoverability of claims against our customers and others by us and claims by third-parties against us; and
â€˘ changes in estimates used in our critical accounting policies.
Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in proxy statements, quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission.
We operate through two business groups â€” the Global Engineering & Construction Group, which we refer to as our Global E&C Group, and our Global Power Group. In addition to these two business groups, we also report corporate center expenses and expenses related to certain legacy liabilities, such as asbestos, in the Corporate and Finance Group, which we refer to as the C&F Group.
Since 2007, we have been exploring strategic acquisitions within the engineering and construction industry to complement or expand on our technical capabilities or access to new market segments. We may also decide to explore small size acquisitions within the power industry to complement our product offering. However, there is no assurance that we will consummate any acquisitions.
Fiscal Year 2007 Results
We earned record net income in fiscal year 2007, driven primarily by the strong operating performance from both our Global E&C Group and our Global Power Group. Our net income for fiscal year 2007 was $393,900, which included the following after-tax amounts: gains of $13,500 on the settlement of coverage litigation with certain asbestos insurance carriers and a net charge of $7,400 reflecting the revaluation of our asbestos liability and related asset resulting primarily from increased asbestos defense costs projected through year-end 2022 and for the addition of another year to our rolling 15-year asbestos liability estimate.
Highlights for fiscal year 2007 included the following:
â€˘ Our consolidated operating revenues increased 46.1% to $5,107,200, as compared to fiscal year 2006, reflecting greater business activity in both our Global E&C Group and our Global Power Group.
â€˘ Our consolidated new orders, measured in terms of future revenues, increased 81.6% to $8,882,800, as compared to fiscal year 2006.
â€˘ Our consolidated backlog of unfilled orders, measured in future revenues, as of December 28, 2007 increased 73.4% to $9,420,400, as compared to December 29, 2006.
â€˘ Our consolidated backlog, measured in terms of Foster Wheeler scope (as defined below), as of December 28, 2007 increased 30.3% to $3,294,600, as compared to December 29, 2006.
â€˘ We generated net cash from operations of $425,200 and ended the year with record total cash, restricted cash and short-term investments of $1,069,500.
â€˘ E&C man-hours in backlog (in thousands) as of December 28, 2007 were 13,400, as compared to 11,600 as of December 29, 2006.
Challenges and Drivers
Our primary operating focus continues to be booking quality new business and executing our contracts well. The global markets in which we operate are largely dependent on overall economic growth and the resultant demand for oil and gas, electric power, petrochemicals and refined products. These markets continued to be strong in 2007, which in turn continued to stimulate investment in new and expanded plants by our clients. We expect sustained market demand in 2008. Therefore, attracting and retaining qualified technical personnel to execute the existing backlog of unfilled orders and future bookings will continue to be a management priority.
The Global E&C Groupâ€™s new orders increased 86.0% to $6,874,600 in fiscal year 2007, compared to fiscal year 2006. We expect that capital investments in the markets served by our Global E&C Group, including the chemical, petrochemical, oil refining, liquefied natural gas, which we refer to as LNG, and upstream oil and gas industries, will remain strong in 2008. As a result, we also expect the demand for the services and equipment supplied by engineering and construction contractors such as us to remain strong in 2008.
The Global Power Groupâ€™s new orders increased 67.8% to $2,008,200 in fiscal year 2007, compared to fiscal year 2006. We believe that the global power markets have strengthened and that there are significant growth opportunities in 2008 in the power markets we serve, such as solid fuel-fired boilers, boiler services, boiler environmental products and boiler-related construction services.
We believe that we are well positioned to compete in both our Global E&C Group and Global Power Group markets during 2008. The challenges and drivers for each of our Global E&C Group and our Global Power Group are discussed in more detail in the section entitled, â€śBusiness Segments,â€ť within this Item 7.
Results of Operations:
The increase in operating revenues in fiscal year 2007, compared to fiscal year 2006, reflects our success in meeting the strong market demand in both our Global E&C Group and our Global Power Group (please refer to the section entitled, â€śBusiness Segments,â€ť within this Item 7 and in Note 17 to the consolidated financial statements included in this annual report on Form 10-K for further information). However, $848,300 of the fiscal year 2007 increase results from an increase, versus fiscal year 2006, in flow-through revenues and costs on projects executed by our Global E&C Group. Flow-through revenues and costs result when we are performing an engineering or construction contract and purchase materials, equipment or subcontractor services on behalf of our customer on a reimbursable basis with no profit added to the cost of the materials, equipment or subcontractor services. Flow-through revenues and costs do not impact contract profit or net earnings, but increased amounts of flow-through revenues have the effect of reducing our reported profit margins as a percent of operating revenues.
Operating revenues increased in fiscal year 2006, versus fiscal year 2005, driven by our ability to address the strong market activity in both the Global E&C Group and Global Power Group. Included in the increase of fiscal year 2006 operating revenues, compared to fiscal year 2005, are flow-through revenues of $289,400 from our Global E&C Group.
Contract profit is computed as operating revenues less cost of operating revenues. The increase in contract profit in fiscal year 2007, compared to fiscal year 2006, primarily reflects a significant increase in the volume of revenues, excluding the flow-through revenues described above, and increased margins earned in both our Global E&C Group and our Global Power Group, partially offset by a $30,000 charge on a Global Power Group legacy project.
The increase in contract profit for fiscal year 2006, compared to fiscal year 2005, primarily reflects the significant increase in volume of revenues described above in both our Global E&C Group and our Global Power Group, and from increased margins earned by our Global E&C Group, partially offset by certain project write-downs in the Global Power Group.
Please refer to the section entitled, â€śBusiness Segments,â€ť within this Item 7 for further information.
SG&A expenses include the costs associated with general management, sales pursuit, including proposal expenses, and research and development costs. The increase in SG&A expenses in fiscal year 2007, compared to fiscal year 2006, results primarily from increases in sales pursuit costs of $10,300, general overhead costs of $7,400 and research and development costs of $3,200. The increases result primarily from the increased volume of business in fiscal year 2007, which drove an increase in the number of technical personnel as well as non-technical support staff and related costs.
The increase in SG&A expenses in fiscal year 2006, compared to fiscal year 2005, results primarily from increases in general overhead costs of $23,800 and research and development costs of $100, which were partially offset by a decrease in sales pursuit costs of $15,300. The increase in general overhead results primarily from $3,200 of severance costs in fiscal year 2006 in our domestic and European Global Power Group businesses, $7,600 of additional non-cash equity-based compensation expense in fiscal year 2006 resulting primarily from the adoption of Statement of Financial Accounting Standard, or SFAS, No. 123R, â€śShare-Based Payment,â€ť a $6,200 increase in personnel costs including an increase in related short-term incentive expense, and $2,800 from costs associated with the wind down of our Canadian operations. The decline in sales pursuit costs reflects, in part, a reduction in the number of major lump-sum turnkey proposals during fiscal year 2006.
Other income in fiscal year 2007 consists primarily of $37,300 in equity method earnings generated from our investments, primarily from our minority ownership interests in build, own, and operate projects in Italy and Chile (as described further in Note 5 to the consolidated financial statements in this annual report on Form 10-K), a $6,600 gain on a real estate investment, a $9,400 gain recognized at our Camden, New Jersey waste-to-energy facility from the State of New Jerseyâ€™s payment on the projectâ€™s debt and $1,500 of investment income.
Other income in fiscal year 2006 consists primarily of $29,300 in equity method earnings generated from our investments, primarily from minority ownership interests in build, own, and operate projects in Italy and Chile (as described further in Note 5 to the consolidated financial statements in this annual report on Form 10-K), a $1,000 gain on the sale of a previously closed manufacturing facility in Dansville, New York, a $9,200 gain recognized at our Camden, New Jersey waste-to-energy facility from the State of New Jerseyâ€™s payment on the projectâ€™s debt and $600 of investment income. In the third quarter of 2006, the majority owners of certain of the Italian projects sold their interests to another third-party. Prior to this sale, our equity in the net earnings of these projects was reported on a pretax basis in other income and the associated taxes were reported in the provision for income taxes because we and the other partners elected pass-through taxation treatment of the projects under local law. As a direct result of the ownership change arising from the sale, the subject entities are now precluded from electing pass-through taxation treatment. As a result, commencing in fiscal year 2006, our equity in the after-tax earnings of these projects is reported in other income. This change reduced other income and the provision for taxes by $8,600 in fiscal year 2006.
Other income in fiscal year 2005 consists primarily of $30,600 in equity method earnings generated from our investments, primarily from minority ownership interests in build, own, and operate projects in Italy and Chile (as described further in Note 5 to the consolidated financial statements in this annual report on Form 10-K), a $1,500 gain recognized in the United Kingdom on the sale of an investment, a $9,000 gain recognized at our Camden, New Jersey waste-to-energy facility from the State of New Jerseyâ€™s payment on the projectâ€™s debt and $1,300 of investment income.
Other deductions in fiscal year 2007 consists primarily of $3,600 of bank fees, $20,500 of legal fees, $800 of consulting fees, $2,600 of foreign exchange losses, $1,500 of tax penalties and accrued penalties on unrecognized tax benefits and a $10,100 provision for dispute resolution and environmental remediation costs.
Other deductions in fiscal year 2006 consists primarily of $7,200 of bank fees, $17,300 of legal fees, $4,800 of consulting fees, $1,700 of foreign exchange losses, a $6,400 provision for dispute resolution and environmental remediation costs and a $4,100 charge for tax penalties, partially offset by $(1,300) of bad debt recovery.
Other deductions in fiscal year 2005 consists primarily of $8,800 of bank fees, $3,500 of which was associated with a prior senior credit facility, $12,800 of legal fees, $2,700 of foreign exchange losses, $4,200 of environmental costs and $1,400 in charges related to the common share purchase warrants offers that we commenced in December 2005, partially offset by $(6,700) of bad debt recovery.
The increase in interest income in fiscal year 2007, compared to fiscal year 2006, resulted primarily from a higher average cash and cash equivalents balance with additional benefits from higher interest rates and investment yields.
The increase in interest income in fiscal year 2006, compared to fiscal year 2005, resulted primarily from a higher average cash and cash equivalents balance.
The decrease in interest expense in fiscal year 2007, compared to fiscal year 2006, reflects the benefits of our debt reduction initiatives completed in the second quarter of 2006.
The decrease in interest expense in fiscal year 2006, compared to fiscal year 2005, reflects the benefits of our debt reduction initiatives completed in the second quarter of 2006 and the latter half of fiscal year 2005.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
The increase in interest income in the first quarter of fiscal year 2008, compared to the corresponding period of fiscal year 2007, resulted primarily from a higher average cash and cash equivalents balance.
The increase in interest expense in the first quarter of fiscal year 2008, compared to the corresponding period of fiscal year 2007, reflects the increased borrowings under our FW Power S.r.L. special-purpose limited recourse project debt as we continue construction of the electric power generating wind farm projects in Italy.
Scott W. Lamb - Vice President of Investor Relations
Good day, everyone and thanks for joining us. Our news release announcing financial results for the quarter was issued this morning and has been posted to our website at fwc.com. The presentation we'll use this morning has also been posted to our website.
Before turning for the discussion, I need to remind you that any comments made today about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ substantially from such forward-looking statements. A discussion of factors that could cause actual results to vary is contained in Foster Wheeler's Annual Report filed with SEC.
The company's Form 10-Q will be filed with the SEC later this morning. Joining us on the call today are Ray Milchovich, Chairman and CEO; Umberto Della Sala, President and Chief Operating Officer and Franco Baseotto, Executive VP, CFO and Treasurer.
Also here in the room with us today, Peter Ganz, Executive VP and General Counsel; Lisa Wood, VP and Controller; Gary Nedelka who is President and CEO of Foster Wheeler North America. Gary manages our Global Power operating units in North America and Asia -- excuse me, and we also have Tony Scerbo who is CFO of our Global Power Business.
After our prepared remarks, we'll have time to take your questions. Now I'll turn the call over to Ray.
Raymond J. Milchovich - Chairman and Chief Executive Officer
Thank you, Scott. Good morning everyone and thank you for joining us. I'll walk us through the prepared materials and ask my colleagues to participate with me along the way and then as Scott mentioned, when we're through with the prepared remarks, we'll be very happy to take all of yours questions.
Let me start with slide three, Q2 '08 highlights. As can be seen Foster Wheeler enjoyed a very strong quarter in Q2. We had new all time quarterly records set in net income with a $160.8 million of net income in the period, $142.5 million on an adjusted basis. That was delivered by delivering $220.4 million of EBITDA and $202.2 million of EBITDA on an adjusted basis, during the period, and we finished the period with $1.3 billion of total cash and cash equivalents. Driving those results, first turning to our Global E&C business, we've got very strong demand and continued commercial and operational excellence being demonstrated inside that business group.
In our Global Power Group, we're benefiting from what has been robust market activity and the systemic improvements in both commercial and operational practices that we spoke to you about during 2006 and 2007.
In terms of new order trends measured in Foster Wheeler Scope, in E&C our average quarter so far in 2008 has been 7% above our average quarter in 2007 and in July the number of man hours booked in E&C was more than 70% higher than the average month of the first-half of 2008. The significance of this is that as we look at our prospect flow in E&C, we are expecting a very strong second-half bookings in E&C and our July experience would suggest we're off to a very good start to accomplish that.
In GPG, our Q2 bookings reflected delays on projects in North America. In July of 2008, however, the contract value of bookings was more than double the average month of first half of 2008 due to the strength of international bookings that are being turned to mitigate the delays that were experiencing in North America.
Moving to slide four. Q2 second consecutive quarter of record net income which is shown on the slide to the right; on an adjusted basis, our net income is 47% above the average quarter of 2007. Our average quarter of 2008 on adjusted net income basis is 37% above the average quarter of 2007 and this is due primarily to the very, very strong business performance in both business groups.
Turning to slide five. Now going by business group. In our Global E&C Group we had record EBITDA in Q2, 24% above the average quarter of 2007. Our Q2 EBITDA margin in E&C on Foster Wheeler Scope revenue was 30.2% versus 23.6% as the average quarter of 2007.
Our average quarter 2008 EBITDA, so far is running 15% above our average quarter of 2007. Our average quarter `08 EBITDA margin measured on Foster Wheeler Scope revenue is 27.3% versus 23.6% for the average quarter of 2007 and obviously running ahead of the general level of guidance that we provided a year ago. This is being delivered from outstanding execution with what we would refer to as base line performance or said in other way, as we look through the performance of the period, this is not margin and/or earnings generated by one time events or specific project incentives, this is just excellent performance across a broad portfolio of contracts. And finally our Q2 '08 included an incremental 6.7 million of earnings for reimbursement of emission rights at our partially owned Italian Power project.
Turning to slide six and focusing that on a Global Power Group. We had record EBITDA in Q2 which almost doubled the average quarter of 2007. Our Q2 EBITDA margin on Foster Wheeler Scope revenue was 15.2% versus 9.8% at the average quarter in 2007. Our average quarter 2008 EBITDA was 91% above our average quarter of 2007. Our average quarter 2008 EBITDA margin on Foster Wheeler Scope at 15.6% versus 9.8% average of 2007, significantly ahead of the general level of guidance that we provided to you in 2007.
This is due to strong performance combined with robust market support for the business and the continuing favorable impact of the commercial and operational improvement initiatives that we spoke to you about that we are implementing in that business in 2006 and 2007.
Finally, Q2 EBITDA in Global Power in the quarter was aided by an incremental 2.3 million of earnings due in part to higher electric tariff rates at a partially owned Chilean Power Project.
Moving to slide 7, and focusing now on new orders and backlog. New orders as measured in Foster Wheeler's Scope, in E&C, our average quarter of 2008 has been 7% above our average quarter 2007. We expect new orders to be very strong in the second half as I mentioned several slides ago. We are off to a good start as is shown by in July, the number of man hours booked was more than 70% higher than the average month in the first half of '08.
Some examples of projects that contributed to that man-hour booking and the significance of strategically of those, I am going to turn to Umberto Della Sala to the outline for you. Umberto?
Umberto Della Sala - President and Chief Operating Officer
Okay Ray. Okay, let me start with the first one which is the EPCm contract for a major international client. It's a grassroots petrochemical complex in South East Asia. These are reimbursable contracts, we are already adding our exact contract to the firm of the FEED for the utilities and the infrastructure and we don't know [indiscernible] full EPCm with foreign degree infrastructure something for the process unit.
The second one is an oil and gas but the FEED for an oil and gas facility expansion is not just what we have done already before the [ph] FEED and really the additional scope which has been worthy for us.
The grassroots defeat [ph] for the grassroots [indiscernible] has been press released [indiscernible]. The refinery expansion in South America, we are already adding our answer -- pre-contract for pre-FEED activities and we rolled over into a full fleet plus early procurement of long deducts [ph]. This again is a reimbursable product.
A new facility for a major international pharma client in Europe, we already added in our ends a contract to complete the basic design and to -- for -- to endorse the basic design, and we competitively bid for the EPCm and we were successful.
Now this is a combination of lumpsum services plus the reimbursable portion.
The refinery upgrade in Europe for a major international company, we had... we just completed the feed and we rolled over into EPCM, again reimbursable contract. Chemical plant revamp in Europe; this is a FEED, it's a lumpsum service and the contract already provides for rollover into full EPCM.
Raymond J. Milchovich - Chairman and Chief Executive Officer
Thank you Umberto. In terms of backlog in Foster Wheeler Scope in E&C, our Q2 was up 26% versus the year ago quarter and as I previously mentioned, we're tracking a number of large perspective bookings in the second half of '08 to support our earnings growth expectation in E&C in 2009.
Turning now to page... or to slide 8, GPG, new orders in backlog. Our new orders as measured in Foster Wheeler Scope, Q2 was below our 2007 average quarter due to delays on some North American prospects. We are aiming to offset such delays by booking additional contracts outside of North America where we have long had a very strong presence and by pursuing other prospects alternatively in North America.
In July, our contract value of new orders booked in GPG was more than double the average monthly contract value during the first six months of the year and some specific examples that benefited us in July I'm going to turn to Gary Nedelka to discuss. Gary?
Gary Nedelka - President and Chief Executive Officer, Foster Wheeler North America
Thank you Ray. As you indicated, the recently released contracts in July include an 84 megawatt thermal CFB in Sweden that will burn a refuse-derived fuel therefore being a waste energy plant.
We also secured and awarded in Korea for Hanwa Engineering and Construction Corporation for two 50 megawatt CFB plants. And finally in Argentina, we've secured an order for two 120 megawatt electric CFBs burning a local coal in that country.
Raymond J. Milchovich - Chairman and Chief Executive Officer
Thank you Gary. In terms of backlog in Foster Wheeler Scope in GPG, Q2 was up 10% versus the year ago level, existing backlog as we enter the second half of the year is expected to support what we expect to be all time record EBITDA generation in GPG.
Moving on to slide 9. In terms of consolidated new orders in Foster Wheeler Scope what you see here in both graphs for both Global Engineering & Construction and Global Power is the data that supports the assertions made on the previous page and what I will remind you of in bold of the bottom is both these business groups had strong bookings in July of '08.
Turning to slide 10. The backlog in terms of Foster Wheeler Scope that those bookings lead us to you see the data below for both Engineering and Construction and Global Power and I will remind you that both those business groups built backlog in July of 2008.
Turning to slide 11; the results in terms of cash with regard to our second quarter performance, we had all time record cash position. Our cash increased 10% from our Q1 of '08 period and 23% from Q4 of 2007.
If I turn to slide 12, Q2 2008 key put takeaways. First, Foster Wheeler is on track for record setting income in 2008 with record level of performance in each business group.
In our global E&C group, demand and serve markets continues to be very robust. We expect to have very strong bookings in the second half of 2008. We expect EBITDA and scope margins for full year 2008 to be in the range of 25% to 27%. Capacity growth will continue in the business, and we intend to build a base for earnings growth in that group in 2009.
Turning to our GPG group; they are currently benefiting from what has been strong global demand and we expect to generate record EBITDA for GPG in 2008. We expect EBITDA scope margins for full year 2008 to be materially above those that we enjoyed in 2007.
As has been previously mentioned, we are aiming to offset delays in North American prospects that so far had been primarily regulatory driven by continuing to book contracts in other parts of the world and by pursuing alternative opportunities in North America. The fuel flexibility of the CFB continues to provide a significant competitor advantage especially for customers using biomass and other opportunity fuels.
Our EBITDA growth in 2009 in GPG will depend on how the North American market develops, and our continued success on booking contracts outside North America.
Turning to slide 13; no doubt a number of you who have seen an additional press release that we issued this morning announcing my notification to the Board of Directors that I am planning to retire. I would like to set the context for and explain further that press release and the actions planned at the Company.
First of all this is a normal retirement. This is something that I have been contemplating personally for some period of time. It's something that I've been discussing with my Board and it's something that we have been planning for me personally and for the benefit of the business. The Board has been very active with me and other members of senior leadership in the development of a succession plan so that we can keep the best interest of the company and the management team sound as we go through this transition.
I am under contract until August of '09, but I have stressed to the Board and to the management team that I've got complete flexibility to work with the Board and my successor to complete a robust succession.
The CEO practice leader at Heidrick & Struggles in New York is leading the external search. They are prepared to go to the market actively today and are fully prepared to do so and we're very, very hopeful that this search period can be very quick and that my successor can be named in a relatively short period of time.
As we go through this transition, I'll just remind everyone that we have an exceptionally strong President and COO in Umberto Della Sala who earlier this year signed an employment agreement that has him under contract with Foster Wheeler through the year 2011.
Umberto has indicated to the Board that his intention is to remain in that position and I will remind everyone that all operations of the company report directly to Umberto.
I'll also remind you that Foster Wheeler has in place an exceptionally strong management team, all key commercial and operational management in the subsidiaries are long-term Foster Wheeler employees.
The fundamentals are unchanged. We have a strong Board of Directors, we've added a number of very strong people to our Board over the last 18 months, and I believe that our Board is functioning today at its highest level. We have a strong and experienced management team in place as I've mentioned, we have strong business conditions and we expect very strong performance out of our businesses in '08 and are building for continued earnings growth in '09. And finally, it's going to be business as usual here at Foster Wheeler post this announcement, and I expect to continue leading this company in the same focused, intense and high performing manner that we've done over the last number of years until my successor is named and until a very robust transition takes place.
At this point, we will be happy to entertain any questions.