The Daily Magic Formula Stock for 10/13/2008 is Fluor Corp. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is 75-100 %.
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Fluor Corporation was incorporated in Delaware on September 11, 2000 prior to a reverse spin-off transaction that separated us from our coal business which now operates as Massey Energy Company. However, through various of our predecessors, we have been in business for more than 100 years. Our principal executive offices are located at 6700 Las Colinas Boulevard, Irving, Texas 75039, telephone number (469) 398-7000.
Our common stock currently trades on the New York Stock Exchange under the ticker symbol "FLR".
Fluor is a holding company that owns the stock of a number of subsidiaries. Acting through these subsidiaries, we are one of the largest professional services firms, providing engineering, procurement and construction management ("EPCM") and project management services on a global basis. We serve a diverse set of industries worldwide including oil and gas, chemical and petrochemicals, transportation, mining and metals, power, life sciences and manufacturing. We are also a primary service provider to the United States federal government. We perform operations and maintenance activities for major industrial clients and, in some cases, operate and maintain their equipment fleet.
Our business is aligned into five principal operating segments. The five segments are Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. Fluor Constructors International, Inc., which is organized and operates separately from our business segments, provides unionized management and construction services in the United States and Canada, both independently and as a subcontractor on projects in each of our segments. Financial information on our segments, as defined under accounting principles generally accepted in the United States, is set forth on page F-31 of this annual report on Form 10-K under the caption "Operating Information by Segment," which is incorporated herein by reference.
As a fully-integrated world class provider of EPCM services, we believe that our business model allows us the opportunity to bring to our clients a compelling business offering that combines excellence in execution, safety, cost containment and experience. In that regard, we believe that our business strategy, which is based on certain of our core competencies, provides us with some significant competitive advantages:
Excellence in Execution As an EPCM company with a proven track record of project completion and client satisfaction, we believe that our ability to engineer, construct and manage complex projects often in geographically challenging locations gives us a distinct competitive advantage. We strive to complete our projects on schedule while meeting or exceeding all client specifications. In an increasingly competitive environment, we are also continually emphasizing cost controls so that our clients achieve not only their performance requirements but also their budgetary needs.
Financial Strength We believe that we are among the most financially sound companies in our sector. We strive to maintain a solid financial condition, placing an emphasis on having a strong balance sheet and an investment grade credit rating. Our financial strength also provides us a valuable competitive advantage in terms of access to bonding capacity and letters of credit which are critical to our business. Our financial strength also allows us to fund our strategic initiatives, pay dividends and pursue opportunities for growth. Finally, as a result of our strong balance sheet, we can better manage unanticipated cash flow variations.
Safety One of our core values and a fundamental business strategy is our constant pursuit of safety. Both for us and our clients, the maintenance of a safe workplace is a key business driver. In the areas in which we provide our services, we have delivered and continue to deliver excellent safety performance, with our safety record being significantly better than the national industry average. In our estimation, a safe job site decreases risks on a project site, assures a proper environment for our employees and enhances their morale, reduces project cost and exposures and generally improves client relations. We believe that our safety record is one of our most distinguishing features.
Global Execution Platform As the largest U.S.-based, publicly-traded EPCM company, we have a global footprint with employees in more than 70 countries and in almost 200 offices. Our global presence allows us to build local relationships that permit us to capitalize better on opportunities near these locations. It also provides comfort to our larger internationally-based customers that we know and understand the markets where they may elect to use our services and allows us to mobilize quickly to those locations where our projects arise.
Market Diversity The company serves multiple markets across a broad spectrum of industries. We feel that our market diversity is a key strength of our company that helps to mitigate the impact of the cyclicality in the markets we serve. Just as important, our concentrated attention on market diversification allows us to achieve more consistent growth and deliver solid returns. We believe that our continued strategy of maintaining a good balance across our entire business portfolio permits us to focus on our more stable business markets while also remaining ready to capitalize on developing our cyclical markets when the timing is appropriate. This strategy also allows us to better weather any downturns in a specific market by emphasizing markets that are strong.
Long Term Client Relationships While we aggressively work towards pursuing and serving new clients, we also believe that the long term relationships we have built with our major clients, often after decades of work with many of them, allow us to better understand and be more responsive to our clients' requirements. These types of relationships also facilitate a better understanding of many of the risks that we might face with a project or a client, thereby allowing us to better anticipate risks, solve problems and manage our risk. We have worked towards an almost alliance-like relationship with many of these clients and, in doing so, we better understand their business needs.
Risk Management We believe that our ability to assess, understand and gauge project risk, especially in difficult locations or circumstances or in a lump sum contracting environment, gives us the ability to selectively enter into markets or accept projects where we feel we can best perform. We have an experienced management team, particularly in risk management and project execution, that helps us to better understand potential risks and, therefore, how to manage them. Our risk management capabilities result in controlled cost and timely performance which in turn leads to clients who are satisfied with the delivered product.
Our services fall into five broad categories: engineering, procurement, construction, maintenance and project management. We offer these services independently as well as on a fully integrated basis. Our services can range from basic consulting activities, often at the early stages of a project, to complete, sole-responsibility, design build contracts.
In the engineering area, our expertise ranges from traditional engineering disciplines such as piping, mechanical, electrical, civil, structural and architectural to advanced engineering specialties including simulation, enterprise integration, integrated automation processes and interactive 3-D modeling. As part of these services, we often provide conceptual design services, which allow us to align each project's function, scope, cost and schedule with the customer's objectives in order to optimize project success. Also included within these services are such activities as feasibility studies, project development planning, technology evaluation, risk management assessment, global siting, constructability reviews, asset optimization and front-end engineering.
Our procurement team offers traditional procurement services as well as a new supply chain solutions model that is aimed at improving product quality and performance while also reducing project cost and schedule. Our clients benefit from our global sourcing and supply expertise, global purchasing volume, access, technical knowledge, competitive pricing and attention to service. Our activities include sourcing, material control, buying, procurement management, expediting, supplier quality inspection, logistics and field material management.
In the construction area we mobilize, execute, commission and demobilize projects on a self-perform or subcontracted basis or through construction management as the owner's agent. Generally, we are responsible for the completion of a project, often in difficult locations and under challenging circumstances. We are frequently designated as a program manager, where a client has facilities in multiple locations, complex phases in a single project location, or a large-scale investment in a facility. Depending upon the project, we may be the primary contractor or we may act as a subcontractor to another party.
Under our operations and maintenance contracts, our clients ask us to operate and maintain large, complex facilities for them. We do so through the delivery of total maintenance services, facility management, plant readiness, commissioning, start-up and maintenance technology, small capital projects and turnaround and outage services, on a global basis. Among other things, we can provide key management, staffing and management skills to clients on-site at their facilities. Our operations and maintenance activities can also include routine and outage/turnaround maintenance services, general maintenance and asset management, and restorative, repair, predictive and prevention services.
Project management is required on every project, with the primary responsibility of managing all aspects of the effort to deliver projects on schedule and within budget. Fluor is often hired as the overall program manager on large complex projects where various contractors and subcontractors are involved and multiple activities need to be integrated to ensure the success of the overall project. Project management is responsible for developing project execution plans, detailed schedules, cost forecasts, progress tracking and reporting, and the integration of the engineering, procurement and construction efforts. Project management is accountable to the Client to deliver the safety, functionality and financial performance requirements of the project.
We operate in five basic business segments, as described below:
Oil & Gas
Through our Oil & Gas segment, we have long served the global oil and gas production and processing industries as an integrated service provider offering a full range of design, engineering, procurement, construction and project management services to a broad spectrum of energy-related industries. We serve a number of specific industries including upstream oil and gas production, downstream refining and integrated petrochemicals. While we perform projects that range greatly in size and scope, we believe that one of our distinguishing features is that we are one of the few companies that have the global strength and reach to perform extremely large projects in difficult locations. As the demand for oil and gas continues to increase, and as the locations of large scale oil and gas projects tend to become more challenging geographically, geopolitically or otherwise, we believe that clients will continue to look to us based upon our size, strength and experience. Moreover, as many of our key oil and gas customers continue to recognize that they need to invest and expend resources to meet oil and gas demands, we believe that the company has been and will continue to be extremely well-positioned to capitalize on these growing opportunities.
With each specific project, our role can vary. We may be involved in providing front-end engineering, program management and final design services, construction management services, self-perform construction, or oversight of other contractors and we may also assume responsibility for the procurement of labor, materials, equipment and subcontractors. We have the capacity to design and construct new facilities, upgrade and revamp existing facilities, rebuild facilities following fires and explosions, and expand refineries, pipeline and offshore facility installations. We also provide consulting services ranging from feasibility studies to process assessment to project finance structuring and studies.
In the upstream sector, increasing demand for oil and gas coupled with high oil and gas prices has resulted in the need for our clients to develop new opportunities. Our typical projects in the upstream sector revolve around the production, processing and transporting of oil and gas resources, including the development of major new fields, as well as liquefied natural gas (LNG) projects.
In the downstream sector, demand for refined products is increasing on a global basis and we continue to pursue significant opportunities. Our clients are modernizing and modifying existing refineries to increase capacity and satisfy environmental requirements, and we continue to play a strong role in each of these markets. We also have seen that the ongoing strength of oil and gas prices is facilitating the development of new refineries on a global basis. We also remain focused on markets such as oil sands development, as well as in clean fuels, both domestically and internationally, where an increasing number of countries are implementing stronger environmental policies. As heavier feedstocks become more viable to refine, we employ our strength in technologies to pursue opportunities that facilitate the removal of sulfur from this heavier crude.
In the petrochemicals market, we continue to pursue numerous opportunities, especially those involving the expansion of ethylene and polysilicon production. Particular focus is placed on the Middle Eastern markets near to where the feedstocks are located, and the Chinese market where there is strong need for the petrochemical products.
With our partner Grupo ICA, we maintain a joint venture known as ICA Fluor, through which we continue to participate in the Mexican and Central American oil, gas, power and chemical markets.
Industrial & Infrastructure
The Industrial & Infrastructure segment provides design, engineering, procurement and construction services, with respect to both new construction and refurbishment, to the transportation, mining and metals, life sciences, telecommunications, manufacturing, commercial and institutional development, microelectronics and healthcare sectors. These projects often require state-of-the-art application of our clients' processes and intellectual knowledge. We focus on providing our clients with solutions to reduce and contain cost and to compress delivery schedules. By doing so, we are able to complete our clients' projects on a quicker, more cost efficient basis.
In Transportation, we continue to promote our business model of large complex projects. We provide a broad range of services including consulting, design, planning, financial structuring, engineering and construction management, domestically and internationally. Our service offerings include roads, highways, bridges, rail and airports. As demand for these services increases while at the same time government budgets become increasingly constrained, many of our projects involve the use of so-called public/private partnerships. Under these arrangements, we are able to develop and finance deals in concert with public entities for projects such as toll roads which would not have otherwise been commenced had only public funding been available.
Mining and metals has been a particularly strong area of growth. For many years, mining did not receive adequate investment; as commodity prices and business and consumer demand has increased, mining opportunities have similarly increased. The company has traditionally provided the full range of EPCM services to the mining industry. We believe we are one of the few companies with the size and experience to pursue large scale mining projects in difficult locations.
Life Sciences, encompassing primarily the pharmaceuticals and biotechnology industries, remains a key focus of the Industrial & Infrastructure segment. In this area, we provide design, engineering, procurement, construction and construction management services. We also specialize in providing validation and commissioning services where we not only bring new facilities into production but we also keep existing facilities operating. As a fully integrated provider of services to Life Sciences customers, we can provide all the necessary tools to successfully create and complete projects. The ability to do this on a large scale basis, especially in a business where time to market is critical, allows us to better serve our customers and is a key competitive advantage.
In Telecommunications, we provide design, engineering, procurement and construction management services, especially in the European markets.
In Manufacturing, we provide engineering, design, procurement, consulting, construction and construction management services to a wide variety of industries. We have seen particular growth in the consumer electronics arena in areas such as glass manufacturing where a facility can manufacture glass for flat panel monitors, notebook computers and flat screen televisions. Similarly, we have seen opportunities for chip fabrication and microelectronic facilities.
We also continue to pursue projects in the Healthcare market. Potential projects include for-profit and nonprofit healthcare centers as well as university medical centers.
Fluor's Government Group is a provider of engineering, construction, contingency response, management and operations services to the United States government. In the United States, we are primarily focused on the Department of Energy, the Department of Homeland Security and the Department of Defense. Because the U.S. government is the single largest purchaser of outsourced services in the world, with a relatively stable year-to-year budget, it represents an attractive and less cyclical growth opportunity for the company.
Services that we provide to the Department of Energy for their project site in Hanford, Washington include site management, environmental remediation, decommissioning, engineering and construction. We have been very successful in addressing the myriad of environmental and regulatory challenges associated with these types of sites, as evidenced by our successful and timely closure of the Department of Energy's superfund site in Fernald, Ohio. We are leveraging our skills and experience to pursue attractive domestic and international opportunities with the Department of Energy, the National Nuclear Security Administration and the Nuclear Decommissioning Authority (United Kingdom).
Fluor's Government Group provides engineering and construction services, as well as contingency operations support, to the Department of Defense. We support military logistical and infrastructure needs around the world. In combination with our subsidiary, Del-Jen, Inc., we are a leading provider of outsourced services to the federal government. We provide operations and maintenance services at military bases and education and training services to the Department of Labor, particularly through Job Corps programs.
The company is also providing significant support to the Department of Homeland Security. We are particularly involved in supporting the U.S. government's rapid response capabilities to address security issues and disaster relief, the latter primarily through our long-standing relationship with the Federal Emergency Management Agency.
The Global Services segment integrates a variety of customized service capabilities that assist industrial clients in improving the performance of their plants and facilities. Capabilities within Global Services include operations and maintenance activities, small capital project engineering and execution, site equipment and tool services, industrial fleet outsourcing, plant turnaround services, temporary staffing and supply chain solutions.
Support services for large capital projects are provided to clients in concert with other Fluor segments or on a standalone basis. Continuing operations and sustaining small capital project services are frequently executed under multi-year alliance style agreements directly between Global Services and its clients. Clients increasingly demand these services to help achieve substantial operations improvements while they remain focused on their core business functions.
Global Services' activities in the operations and maintenance markets include providing facility start-up and management, plant and facility maintenance, operations support and asset management services to the oil and gas, chemicals, life sciences, mining and metals, power and manufacturing industries. We are a leading supplier of operations and maintenance services, providing our service offerings both domestically and internationally.
Included within Global Services is Plant Performance Services LLC, or P2S SM . P2S is one of the largest specialty, rapid response service providers in the United States, performing small capital engineering and construction, specialty welding, electrical and instrumentation, fabrication, mechanical, turnaround and demolition services.
We also provide Site Services SM and Fleet Outsourcing SM through American Equipment Company, Inc., or AMECOÂ®. AMECO provides integrated construction equipment, tool, and fleet service solutions on a global basis for construction projects and plant sites of both third party clients and clients of the company. AMECO supports large construction projects and plants at locations throughout North and South America, South Africa and the Middle East.
Global Services serves the temporary staffing market through TRS Staffing Solutions, Inc. or TRSÂ®. TRS is a global enterprise of staffing specialists that provides the company and third party clients with recruiting and permanent placement services and the placement of contract technical professionals.
Our supply chain solutions unit provides global procurement resources, processes, systems, market knowledge and volume-leveraged pricing to the company and third parties. We offer reliable project deliveries, innovative performance solutions and project savings to the company and its clients through the combination of industry-leading technologies, our global execution platform and our large spend on goods and services.
MANAGEMENT DISCUSSION FROM LATEST 10K
Results of Operations
Summary of Overall Company Results
Consolidated revenue in 2007 was $16.7 billion compared with $14.1 billion in 2006. This increase is primarily the result of the 56 percent higher volume of work performed in the Oil & Gas segment in 2007 compared with 2006. The company believes that high demand in the global oil and gas industry is driving a long-term cycle of investment that will continue to develop over the next several years. In addition, revenue increased in the Industrial & Infrastructure, Global Services and Power segments while the Government segment experienced a significant decline in revenue in 2007 compared with 2006. The revenue decline in the Government segment was primarily due to the substantial completion of environmental work on a large Department of Energy ("DOE") project and hurricane relief efforts for the Federal Emergency Management Agency ("FEMA") in 2006 and lower embassy and Iraq construction work in 2007. Revenue in the Power segment in 2007 increased significantly compared with 2006 primarily due to work on a coal fired power plant in Texas that was released for full execution in 2007. The company believes that the power market is entering an expansion phase due to higher demand for power generation facilities.
Consolidated revenue in 2006 increased by 7 percent compared with 2005. This increase was the primary result of higher project execution activities in the Oil & Gas, Global Services and Power segments and work performed for support of FEMA for hurricane relief efforts that started in 2005.
Earnings before taxes were $649 million in 2007, $382 million in 2006 and $300 million in 2005. Earnings before taxes for 2007 increased by 70 percent compared with 2006 primarily from the 44 percent overall improvement in business segment operating profit and a significant increase in net interest income from higher cash balances and interest rates in 2007. All business segments, except Government, had improvements in operating profit primarily due to increases in revenue from work performed. Operating Profit in the Government segment improved primarily due to the absence of charges associated with Embassy projects which significantly impacted results in 2006 as discussed below. Incentive and stock-price based compensation expense, that is included in corporate administrative and general expense, was higher in 2007 compared with 2006 and 2005.
Earnings before taxes for 2006 increased by 28 percent compared with 2005. The Oil & Gas and Global Services segments reported higher operating profit benefiting from favorable conditions in oil and gas markets. The Industrial & Infrastructure segment returned to profitability in 2006 on improved project execution performance and the absence of provisions required in 2005 on certain projects in dispute resolution. Partially offsetting these operating profit improvements during 2006 was significantly lower operating profit from the Government segment. Operating profit was reduced primarily due to provisions totaling $183 million on fixed-price projects in the Government segment which largely offset earnings from hurricane relief work for FEMA. The 2006 provisions were for losses on certain fixed-price embassy projects totaling $154 million and the balance for the air base project in Afghanistan due to difficulties with a subcontractor. See further discussion of the embassy and Afghanistan provisions under Government below.
The effective tax rate for 2007 was 17.8 percent which includes the impact of the final resolution with the U.S. Internal Revenue Service ("IRS") of a tax audit relating to tax years 1996 through 2000. The reduction in tax expense associated with the settlement totaled $123 million. The settlement lowered the effective tax rate for 2007 by 19 percentage points. The 2007 effective rate compares with effective rates of 31 percent and 24 percent for 2006 and 2005, respectively. Variability in effective tax rates in recent years and further discussion of the 2007 settlement with the IRS are discussed below under Corporate, Tax and Other Matters.
The company had net earnings of $5.85 per share in 2007 compared with $2.95 per share in 2006 and $2.62 per share in 2005. The significant increase in 2007 earnings per share includes the impact of the $123 million ($1.35 per share) settlement with the IRS discussed above. Thus, earnings per share increased 53 percent in 2007 excluding the impact of the settlement compared with 2006.
Consolidated new awards for 2007 were $22.6 billion, compared with $19.3 billion in 2006, and $12.5 billion in 2005. The Oil & Gas, Global Services and Power segments had increases in new awards during 2007, partially offset by decreases in new awards in the Industrial & Infrastructure and Government segments. The Oil & Gas and Industrial & Infrastructure segments had increases in new awards during 2006, partially offset by lower new awards in the Global Services, Government and Power segments. Approximately 53 percent of consolidated new awards for 2007 were for projects located outside of the United States.
Consolidated backlog at December 31, 2007 of $30.2 billion has more than doubled over the last two years due to strong demand for capital investment in Oil & Gas markets and large awards in Industrial & Infrastructure and Power. As of December 31, 2007, approximately 56 percent of consolidated backlog relates to projects located outside of the United States.
For a more detailed discussion of operating performance of each business segment, corporate administrative and general expense and other items, see Segment Operations and Corporate and Tax Matters below.
Discussion of Critical Accounting Policies
The company's discussion and analysis of its financial condition and results of operations is based upon its Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The company's significant accounting policies are described in the Notes to Consolidated Financial Statements. The preparation of the Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on information available as of the date of the financial statements, and accordingly, actual results in future periods could differ from these estimates. Significant judgments and estimates used in the preparation of the Consolidated Financial Statements apply the following critical accounting policies.
Engineering and Construction Contracts Engineering and construction contract revenue is recognized on the percentage-of-completion method based on contract cost incurred to date compared with total estimated contract cost. This method of revenue recognition requires the company to prepare estimates of cost to complete contracts in progress. In making such estimates, judgments are required to evaluate contingencies such as potential variances in schedule and the cost of materials, labor cost and productivity, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards. Changes in total estimated contract cost and losses, if any, are recognized in the period they are determined. Pre-contract costs are expensed as incurred. The majority of the company's engineering and construction contracts provide for reimbursement of cost plus a fixed or percentage fee. In the highly competitive markets served by the company, there is an increasing trend for cost-reimbursable contracts with incentive-fee arrangements. As of December 31, 2007, 76 percent of the company's backlog is cost reimbursable while 24 percent is for guaranteed maximum, fixed or unit price contracts. In certain instances, the company provides guaranteed completion dates and/or achievement of other performance criteria. Failure to meet schedule or performance guarantees could result in unrealized incentive fees or liquidated damages. In addition, increases in contract cost can result in non-recoverable cost which could exceed revenue realized from the projects.
Claims arising from engineering and construction contracts have been made against the company by clients, and the company has made claims against clients for cost incurred in excess of current contract provisions. The company recognizes certain significant claims for recovery of incurred cost when it is probable that the claim will result in additional contract revenue and when the amount of the claim can be reliably estimated. Recognized claims amounted to $246 million and $200 million at December 31, 2007 and 2006, respectively. Unapproved change orders are accounted for in revenue and cost when it is probable that the cost will be recovered through a change in the contract price. In circumstances where recovery is considered probable, but the revenue cannot be reliably estimated, cost attributable to change orders is deferred pending determination of the impact on contract price.
Backlog in the engineering and construction industry is a measure of the total dollar value of work to be performed on contracts awarded and in progress. Although backlog reflects business that is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, deferrals and revised project scope and cost, both upward and downward.
Engineering and Construction Partnerships and Joint Ventures Certain contracts are executed jointly through partnerships and joint ventures with unrelated third parties. The company accounts for its interests in the operations of these ventures on a proportionate consolidation basis. Under this method of accounting, the company consolidates its proportionate share of venture revenue, cost and operating profit in the Consolidated Statement of Earnings and generally uses the one-line equity method of accounting in the Consolidated Balance Sheet. The most significant application of the proportionate consolidation method is in the Oil & Gas, Industrial & Infrastructure and Government segments.
The company's accounting for project specific joint venture or consortium arrangements is closely integrated with the accounting for the underlying engineering and construction project for which the joint venture was established. The company engages in project specific joint venture or consortium arrangements in the ordinary course of business to share risks and/or to secure specialty skills required for project execution. Frequently, these arrangements are characterized by a 50 percent or less ownership or participation interest that requires only a small initial investment. Execution of a project is generally the single business purpose of these joint venture arrangements. When the company is the primary contractor responsible for execution, the project is accounted for as part of normal operations and included in consolidated revenue using appropriate contract accounting principles.
Financial Accounting Standards Board ("FASB") Interpretation No. 46 (Revised), "Consolidation of Variable Interest Entities" ("FIN 46-R") provides the principles to consider in determining when variable interest entities must be consolidated in the financial statements of the primary beneficiary. In general, a variable interest entity is an entity used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that are not required to provide sufficient financial resources for the entity to support its activities without additional subordinated financial support. FIN 46-R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity.
Contracts that are executed jointly through partnerships and joint ventures are proportionately consolidated in accordance with Emerging Issues Task Force ("EITF") Issue 00-1, "Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures" ("EITF 00-1") and Statement of Position 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts" ("SOP 81-1"). The company evaluates the applicability of FIN 46-R to partnerships and joint ventures at the inception of its participation to ensure its accounting is in accordance with the appropriate standards, and will reevaluate applicability upon the occurrence of certain events.
Deferred Taxes and Tax Contingencies Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the company's financial statements or tax returns. At December 31, 2007, the company had deferred tax assets of $589 million which were partially offset by a valuation allowance of $59 million and further reduced by deferred tax liabilities of $70 million. The valuation allowance reduces certain deferred tax assets to amounts that are more likely than not to be realized. This allowance primarily relates to the deferred tax assets on certain net operating and capital loss carryforwards for U.S. and non-U.S. subsidiaries, certain reserves on investments, and certain foreign tax credit carryforwards. The company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the company's forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the company's effective tax rate on future earnings.
In the first quarter of 2007, the company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), an interpretation of FASB Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS 109"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises' financial statements in accordance with SFAS 109. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Also, the interpretation provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
As a result of the adoption of FIN 48, the company recognized a cumulative-effect adjustment of $45 million, increasing its liability for unrecognized tax benefits, interest and penalties and reducing the January 1, 2007 balance of retained earnings. As of the date of adoption, including the impact of recognizing the increase in liability noted above, the company's unrecognized tax benefits totaled $351 million of which $166 million, if recognized, would affect the company's effective tax rate.
The company recognizes potential interest and penalties related to unrecognized tax benefits within its global operations in income tax expense. As of December 31, 2007, the accrual totaled $26 million for the potential payment of interest and penalties.
Retirement Benefits The company accounts for its defined benefit pension plans in accordance with SFAS No. 87, "Employers' Accounting for Pensions," as amended ("SFAS 87"). As permitted by SFAS 87, changes in retirement plan obligations and assets set aside to pay benefits are not recognized as they occur but are recognized over subsequent periods. Assumptions concerning discount rates, long-term rates of return on plan assets and rates of increase in compensation levels are determined based on the current economic environment in each host country at the end of each respective annual reporting period. The company evaluates the funded status of each of its retirement plans using these current assumptions and determines the appropriate funding level considering applicable regulatory requirements, tax deductibility, reporting considerations and other factors. Assuming no changes in current assumptions, the company expects to fund between $50 million and $75 million for the calendar year 2008, which is expected to satisfy the minimum funding requirement. If the discount rate were reduced by 25 basis points, plan liabilities would increase by approximately $32 million.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"). This statement amends SFAS 87 and requires that the funded status of plans, measured as the difference between plan assets at fair value and the pension benefit obligations, be recognized in the statement of financial position and that various items be recognized in other comprehensive income before they are recognized in periodic pension expense. The statement was adopted in 2006 and resulted in a $180 million after-tax charge to accumulated other comprehensive loss, which reduced shareholders' equity.
The company provides professional services on a global basis in the fields of engineering, procurement, construction and maintenance ("EPCM") and is organized into five business segments: Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. The Oil & Gas segment provides design, engineering, procurement, construction and project management professional services for upstream oil and gas production, downstream refining and certain petrochemical markets. The Industrial & Infrastructure segment provides design, engineering, procurement and construction professional services for transportation projects, mining, life sciences facilities, telecommunications projects, manufacturing facilities, commercial and institutional, microelectronics and healthcare facilities. The Government segment provides engineering, construction, contingency response, management and operations services to the United States government. The Global Services segment includes operations and maintenance activities, small capital project engineering and execution, site equipment and tool services, industrial fleet outsourcing, plant turnaround services, temporary staffing and materials and subcontract procurement. The Power segment provides professional services to the gas fueled, solid fueled, renewables, nuclear and plant betterment marketplaces.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF OPERATIONS
Net earnings for the three and six months ended June 30, 2008 were $209.3 million, or $1.13 per diluted share, and $347.3 million, or $1.88 per diluted share, respectively. These results compare with net earnings of $95.6 million, or $0.53 per diluted share, and $180.2 million, or $1.00 per diluted share, respectively, for the corresponding periods of 2007.
Consolidated revenue for the three and six months ended June 30, 2008 was $5.8 billion and $10.6 billion, respectively, compared to $4.2 billion and $7.9 billion for the corresponding periods in 2007. All segments but Government reported increases in revenue.
The effective tax rate, based on the companyâ€™s actual operating results for the three and six months ended June 30, 2008 was approximately 39 percent, compared to approximately 33 percent and 36 percent, respectively, for the corresponding periods of 2007. The lower effective tax rate for the three and six months ended June 30, 2007 was primarily attributable to the recognition of previously unrecognized tax benefits and the reversal of certain valuation allowances associated with foreign net operating losses.
Consolidated new awards for the three and six months ended June 30, 2008 were $6.4 billion and $12.1 billion, respectively, compared to $5.8 billion and $10.3 billion in the corresponding 2007 periods. The increase in new award activity was primarily attributable to the Oil & Gas and Industrial & Infrastructure segments, partially offset by lower new awards for Power. Approximately 48 percent of consolidated new awards for the six months ended June 30, 2008 were for projects located outside of the United States.
Consolidated backlog at June 30, 2008 of $33.0 billion was approximately 28 percent higher compared to backlog at June 30, 2007 and approximately 9 percent higher than backlog at the end of 2007. As of June 30, 2008, approximately 55 percent of consolidated backlog relates to international projects. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments may occur. Backlog may be increased or decreased to reflect the impact of project cancellations, deferrals or changes to project scope or cost.
OIL & GAS
New awards for the three months ended June 30, 2008 were $3.0 billion, compared to $2.1 billion for the corresponding period of 2007. New awards during the 2008 period included major projects in the United States and Russia. Backlog at June 30, 2008 increased 49 percent to $20.9 billion compared to $14.0 billion at June 30, 2007. The increase in backlog reflects the broad-based strength of the segmentâ€™s various markets, particularly the high world-wide demand for new capacity in oil and gas exploration and refining, as well as for polysilicon.
Total assets in the segment increased to $1.2 billion at June 30, 2008 from $891 million at December 31, 2007 primarily due to the increased level of project execution activities.
INDUSTRIAL & INFRASTRUCTURE
Revenue for the three and six months ended June 30, 2008 increased over the respective prior year periods primarily due to growth in the mining and metals business line. Operating profit for the three and six months ended June 30, 2008 was favorably impacted by substantially improved performance by the mining and metals and manufacturing and life sciences business lines, as well as a pre-tax gain of $79.2 million from the sale of a joint venture interest in a wind power project in the United Kingdom.
New awards for the three months ended June 30, 2008 were $2.4 billion compared to $1.1 billion for the 2007 comparison period. The increase in new awards is largely attributable to the wind power project in the United Kingdom. Backlog increased to $7.1 billion at June 30, 2008 compared to $5.7 billion at June 30, 2007. The increase is attributable to large infrastructure project awards in the fourth quarter of 2007 and the second quarter of 2008.
Revenue for the three and six months ended June 30, 2008 decreased compared to the corresponding periods in the prior year primarily due to reduced contributions from embassy projects and Iraq-related work. The slight improvement in operating profit for the three months ended June 30, 2008 when compared to the same period in 2007 was primarily attributable to embassies. Operating profit for the six months ended June 30, 2008 was 27 percent lower compared to the six months ended June 30, 2007 due to higher contributions from FEMA hurricane relief task orders and Iraq-related work in the 2007 period. In addition, the prior year period included performance incentives earned on the Hanford contract.
Kenneth H. Lockwood - Vice President, Corporate Finance and Investor Relations
Thank you. Welcome to Fluor's second quarter 2008 conference call. With us today on the line are Alan Boeckmann, Fluor's Chairman and Chief Executive Officer; and Mike Stuart, Fluor's Chief Financial Officer.
Our earnings announcement was released this afternoon after the market closed and our 10-Q was also filed today. We have posted a slide presentation on our website, which Alan and Mike will reference during their prepared remarks.
Before getting started, I'd like to read our cautionary statement on slide 2. In discussing certain subjects, we will be making forward-looking statements regarding projected earnings, market outlook, new awards, margins, tax matters and other statements regarding the intent, belief or expectations of Fluor and its management. These forward-looking statements reflect our current analysis of existing trends and information and there is an inherent risk that actual results and experience could differ materially.
These differences could arise from any number of factors and information concerning these factors that could cause actual results to differ materially from the information that we will give you, is available in our Form 10-K filed on February 29th of 2008 and which is available online or upon request.
The information in this conference call related to projections or other forward-looking statements may be relied upon subject to this cautionary note as of the date of this call. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or for any other reason.
Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these amounts with the comparable GAAP measures are reflected in our earnings release and will be posted on our website at investor.fluor.com.
And finally, just to remind everyone, I also want to point out that all earnings per share figures in today's report and conference call reflect the 2-for-1 stock split that was effective on July 16th.
With that, I'll now turn the call over to Alan Boeckmann, Fluor's Chairman and CEO.
Alan L. Boeckmann - Chairman and Chief Executive Officer
Well, good afternoon everybody and I would like to thank you for joining us on this call. Today, we will be reviewing our results for the second quarter, our market outlook and we will be discussing our guidance for 2008, which we have increased this quarter.
As you've seen from our release, our second quarter was very strong with revenues, earnings, cash, new awards and backlog; all increasing substantially from about a year ago. Most importantly, we are well positioned and we remain confident that strong demand in our key markets in the U.S. and around the world will continue to drive substantial growth for our company.
As you turn to slide 3, I'd like to provide some highlights of our financial performance for this quarter. Our net earnings rose 119% to $209 million. That represents $1.13 per diluted share, and that compares with $96 million or $0.53 per diluted share for the same period last year.
Operating profit for the quarter more than doubled to $392 million compared with $187 million in the second quarter of 2007. All business segments contributed to this positive result by posting solid growth and profit over the last year.
Second quarter results included a pre-tax gain of $79 million, translated into $0.26 per diluted share from the sale of our joint venture interest in the Greater Gabbard offshore wind farm project. Details of this transaction will be released in May.
Our operating margin rose to 6.8% and that was up from 4.4% a year ago, reflecting improvement in all segments, and of course the Greater Gabbard equity sale. Revenue rose by 37% to $5.8 billion, up from $4.2 billion in the second quarter of 2007, driven primarily by significant growth in the oil, gas, and power segments.
Moving to slide 4, we posted another quarterly record for new awards with new project awards for the second quarter totaling $6.4 billion, which compares with $5.8 billion a year ago. The quarter included a $1.8 billion award for the Greater Gabbard offshore wind farm project in the United Kingdom, which will provide carbon neutral renewable electricity for more than 415,000 homes.
Other large awards in the quarter included refinery upgrade projects in the U.S., which had a combined value in excess of $1 billion. Consolidated backlog rose to another new company record of $33 billion. That is up 28% from a year ago and up $1.5 billion over the prior quarter. This represents our 11th consecutive quarterly increase and another new company record.
You turn to slide 5, I'd like to make a few comments on our markets and our key prospects. Overall, we continue to see very strong demand across many of our markets including oil and gas, infrastructure and mining. We're seeing the market for power pick up as well.
Looking first at the Government segment, we will be booking a new award for the first year of our contract of Savannah River in the third quarter, with Fluor's share expected to exceed $300 million per year for the duration of that five year contract. The 90-day transition period there is now complete. Separately, we are awaiting the award of the liquid waste contract of Savannah River which we expect the DOE to announce later this year.
As for LOGCAP IV, past quarter bid activity has been very slow to develop, but we hope to see some measurable activity by year end.
As we move to the Global Services segment, the robust engineering and construction environment is creating very strong demand for their services. These include operations and maintenance, equipment and tools and temporary labor. O&M is very busy servicing long-term plans and expanding our geographical coverage. And this in fact should pickup later again this year once the refiners get back to normal levels of turnaround and maintenance activities. This group is focused on expanding regionally and you can see from our results, our margins continue to be strong.
On slide 6, for Industrial and Infrastructure, the two most active markets here are certainly mining and infrastructure which includes transportation. Touching on mining first, while there weren't any major awards in this particular quarter, there are some very sizable projects slated for the second half of the year. These continue to be driven by investment to expand both copper and iron ore supply and by very strong commodity prices.
We also see viable prospects associated with alumina, gold, tar sands, nickel and uranium. We anticipate strong demand for large capital projects in this market segment, well past the end of the year.
As for infrastructure, as we've discussed in the past, we generally only book one or two large projects per year, given the complexity and their extended development periods. In terms of new infrastructure projects, the Greater Gabbard wind farm was awarded during the second quarter. As we look ahead, key prospects for the balance of this year are focused mainly on design build highway projects in the U.S. Longer term; we continue to see opportunities to deploy our private public partnership business model to help develop key infrastructure programs including both roads and rail lines.
The power market is picking up a bit with some key prospects set to be awarded in the upcoming quarters. As we have recently discussed though, a number of customers are going ahead with plans to construct gas-fired plants, particularly given the inability to secure permits for coal plants. We are now on track to book two gas plants in the U.S. this year and also looking at potential opportunities in Europe.
On the coal side, the EPA has approved the air permit on the Desert Rock project, which is an important and positive step for this project to be sure. As you may have read though the state of New Mexico plans to appeal that decision under our other environmental hurdles that will have to be cleared before this project can move forward, including approval of the environmental impact statements. We are very encouraged by EPA's action.
On the nuclear side, we continue to support the South Texas project as Toshiba and NRG work to complete their construction operating license application. In addition, we continue to position ourselves for other nuclear newbuild opportunities in the U.S. and internationally. We are also seeing some sizable projects develop including and involving renewable energies that include wind, solar, and biomass.
With regard to scrubbers, the recently announced ruling that overturned Clear Air Interstate Act may potentially impact this market segment, but it's too early to tell. We continue to pursue prospects in both the U.S. and Europe in this area.
Finally, as I turn to oil and gas on slide 7, this segment continues to be extremely active. They had another very strong quarter with $3 billion in new awards, which included prospects and awards in the U.S., Eastern Europe and Asia Pacific and the prospect list for the balance of 2008 is substantial as well.
In downstream, we continue to be active on numerous FEED contracts. As we've mentioned in the past, both cost escalation and environmental issues have caused some short term delays in awards. But most projects are expected to proceed on full EPC awards. We expect the second half of 2008 to be very strong in terms of new bookings for downstream.
As expected, petrochemicals area have slowed somewhat. But we continue to be very busy in the polysilicon area and are making extremely good progress on existing projects. As you know, we're working for a number of major clients around the world and we expect that substantial investment levels will continue to benefit Fluor, given our strong market share and position in this growing area.
Finally in upstream, we continue to track developing opportunities in the Middle East and Russia and Canada. A significant portion of major integrated oil company and national oil company budgets are directed towards new production. Accordingly, many of our current prospects relate to the development of gas resources as well as offshore and onshore production facilities.
So, in summary, from a market perspective, we are seeing continued strength across most of our key markets globally, and this supports our view that 2008 has the potential to set many new company records.
So, with that, let me turn the call over to Mike Steuert, our CFO to review additional details of our operating performance or new awards and other financial information. Mike?
D. Michael Steuert - Senior Vice President and Chief Financial Officer
Thanks Alan and good afternoon to everyone. First, let me provide you with a brief recap of results for each of our operating segments.
Please turn to slide 8 of our presentation. Fluor's Oil & Gas segment reported second quarter revenue of $3.3 billion, up 56% from the second quarter of 2007. Operating profit grew 68% to $169 million. New awards in the second quarter totaled $3 billion including several refinery upgrade projects in United States and Eastern Europe. Ending backlog at June 30, 2008 for oil and gas rose to $20.9 billion, which represents a 49% increase from a year ago.
Moving on to slide 9, Fluor's Industrial Infrastructure segment reported revenue of $912 million for the quarter, up 4% over last year. Operating profit for the second quarter was $121 million, up from $23 million a year ago. The strong operating performance was driven by mining and metals and progress on major infrastructure projects as well as the Greater Gabbard equity sale.
New awards for the quarter were $2.4 billion, of which $1.8 billion was for the Greater Gabbard project. Ending backlog was up 25% to $7.1 billion compared with $5.7 billion a year ago.
Revenue for the Government segment was $300 million for the quarter. This compares with $325 million a year ago. Operating profit was $11 million, an increase of...an increase from $9 million a year ago. Second quarter new awards totaled $87 million and ending backlog was $316 million.
Now turning to slide 10, the Global Services segment reported a 16% increase in revenue, to $696 million. Operating profit for the segment grew by 38%... 37% to $66 million. This is a result of strong growth from both the operations and maintenance and the equipment services business lines. For the quarter, new awards were $673 million and backlog increased to $2.7 billion. Segment continues to win new clients as well as secure multi-year renewal agreements from existing clients.
Horsepower segment reported an 86% increase in revenue to $522 million, up from $280 million last year. Operating profit was $25 million in the quarter, a substantial increase from $6 million a year ago. Revenue and operating profit growth during the quarter were driven by significant progress in major projects including the Oak Grove coal-fired facility in Texas.
Power segment new awards were $206 million and ending backlog for the quarter was $1.9 billion. As Alan mentioned earlier, first consolidated backlog now stands at a record $33 billion, up $1.5 billion over the first quarter. The percentage of fixed price work at our backlog was 26% and about 46% of our backlog is for projects in U.S., with 54% for projects outside of the U.S.
Let me comment for a minute on corporate items on slide 11. Corporate G&A expense for the quarter was $62 million; up from $52 million a year ago, mainly due to an increase in compensation expense resulting from strong operating performance and an increase in the company's stock price which reflects expense associated with various share-based plans. For the full year we expect corporate G&A expense to be in the range of $210 million to $220 million.
We had net interest income of $14 million for the quarter, compared with net interest income of $8 million last year, reflecting returns generated by higher cash balances. The effective tax rate for the quarter was 39%, which was slightly above our expected rate of 38%.
Shifting to the balance sheet, consolidated cash amount for securities balance at June 30th was $2.4 billion, up sharply from $1.9 billion last quarter or $1.5 billion a year ago. This increase was driven by strong cash flow from operations including client advances.
Capital expenditures for the second quarter were $68 million, including equipment for Mico, additions to our computer infrastructure, and upgrades to our systems. We now expect CapEx for the year to be in the range of $260 million to $280 million. On July 16th, as Ken mentioned, Fluor completed a 2-for-1 stock split, as in June 30th there were 18.5 million shares outstanding, whereas Board approved a normal quarterly dividend of $12.5 per share payable on September 5th, 2008. Overall, Fluor continues to have a very strong and robust financial position.
Finally, let me make a few comments about our updated guidance for 2008, as is shown on slide 12. As we have seen throughout the year, demand remains strong for the engineering construction solutions that Fluor provides. We are encouraged by the strength of our financial results to-date, and see substantial opportunities for the balance of the year.
As a result, we are increasing our full year guidance for 2008 earnings per share to a range of $3.65 to $3.80 per share, which is up from the previous range of $3.30 to $3.45 per share. With that, Alan and I will be glad to respond to questions.