The Daily Magic Formula Stock for 11/13/2008 is Cameron International Corp. According to the Magic Formula Investing Web Site, the ebit yield is 17% and the EBIT ROIC is 50-75 %.
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Cameron International Corporation (Cameron or the Company) is a leading provider of flow equipment products, systems and services to worldwide oil, gas and process industries. See â€śGlossary of Termsâ€ť at the end of Item 1 for definitions of certain terms used in this section. Any reference to Cameron, its divisions or business units within this paragraph or elsewhere within this Form 10-K as being a leader, leading provider, leading manufacturer, or having a leading position is based on the amount of equipment installed worldwide and available industry data.
The Companyâ€™s operations are organized into three business segments â€“ Drilling & Production Systems (DPS), Valves & Measurement (V&M) and Compression Systems (CS). For additional business segment information for each of the three years in the period ended December 31, 2007, see Note 14 of the Notes to Consolidated Financial Statements, which Notes are incorporated herein by reference in Part II, Item 8 of this Annual Report on Form 10-K.
Cameronâ€™s origin dates back to the mid-1800s with the manufacture of steam engines that provided power for plants and textile or rolling mills. By 1900, with the discovery of oil and gas, Cameronâ€™s predecessors moved into the production of internal combustion engines and gas compressors. Product offerings were added by the Companyâ€™s predecessors through various acquisitions, in particular the acquisitions of The Bessemer Gas Engine Company (gas engines and compressors); Pennsylvania Pump and Compressor (reciprocating air and gas compressors); Ajax Iron Works (compressors); Superior (engines and compressors); Joy Petroleum Equipment Group (valves, couplings and wellheads); Joy Industrial Compressor Group (compressors); and Cameron Iron Works (blowout preventers, ball valves, control equipment and McEvoy-Willis wellhead equipment and choke valves).
Cameron, a Delaware corporation, was incorporated on November 10, 1994. The Company operated as a wholly-owned subsidiary of Cooper Industries, Inc. until June 30, 1995, the effective date of the completion of an exchange offer with Cooper Industriesâ€™ stockholders resulting in the Company becoming a separate stand-alone company. The common stock of Cameron trades on the New York Stock Exchange under the symbol â€śCAMâ€ť. The Companyâ€™s Internet address is www.c-a-m.com . General information about Cameron, including its Corporate Governance Principles, charters for the committees of the Companyâ€™s board of directors, Standards of Conduct, and Codes of Ethics for Management Personnel, including Senior Financial Officers and Directors, can be found in the Ethics and Governance section of the Companyâ€™s website. The Company makes available, free of charge, on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the Exchange Act) as soon as reasonably practicable after the Company electronically files or furnishes them to the Securities and Exchange Commission (the SEC). I nformation filed by the Company with the SEC is also available at www.sec.gov or may be read and copied at the SECâ€™s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information regarding operations of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Since its inception, the Company has completed several acquisitions, including the assets of Ingram Cactus Company in 1996, Orbit Valve International Inc. in 1998, Stewart and Stevensonâ€™s Petroleum Equipment segment and Nutron Industries in 2002, Petreco International Inc. and the PCC Flow Technologies segment of Precision Castparts Corp. (PCC) in 2004, and NuFlo Technologies, Inc. and the On/Off Valve business unit of the Flow Control segment of Dresser, Inc. in 2005. In January 2006, the Company acquired the assets and liabilities of Caldon, Inc. which added a new ultrasonic measurement product line to the existing flow management product line in the V&M segment. Additionally, during 2007, the Company acquired DES Operations Limited, certain assets of Prime Measurement Products, certain assets and liabilities of Paradigm Services, LP, and the Hydromation Deep Bed Filter product line from Filtra-Systems Company.
The Company also sold certain of its business operations, including its Wheeling Machine Products division in 1995, a rotating compressor product line in 1999 and certain Canadian aftermarket operations in 2000.
Markets and Products
Drilling & Production Systems Segment
DPS is one of the worldâ€™s leading providers of systems and equipment used to control pressures, direct flows of oil and gas wells and separate oil and gas from impurities. Its products are employed in a wide variety of operating environments including basic onshore fields, highly complex onshore and offshore environments, deepwater subsea applications and ultra-high temperature geothermal operations.
DPSâ€™s products include surface and subsea production systems, blowout preventers (BOPs), drilling and production control systems, oil and gas separation equipment, gate valves, actuators, chokes, wellheads, drilling riser and aftermarket parts and services. DPSâ€™s products are marketed under the brand names CAMERONÂ®, W-K-MÂ®, MCEVOYÂ® and WILLISÂ®. Additionally, DPS manufactures elastomers, which are used in pressure and flow control equipment and other petroleum industry applications, as well as in the petroleum, petrochemical, rubber molding and plastics industries.
DPS is one of the leading global suppliers of integrated drilling systems for land, offshore, platform and subsea applications. Drilling equipment designed and manufactured by DPS includes ram and annular BOPs, drilling risers, drilling valves, choke and kill manifolds, surface and subsea BOP control systems, multiplexed electro-hydraulic (MUX) control systems and diverter systems. DPS also provides services under CAMCHECâ„˘, an inspection system that allows drilling contractors to inspect drilling riser on their rigs offline, saving time and money on maintenance and unnecessary transportation.
Although the pace of orders for new deepwater drilling rigs moderated in 2007 from the record levels of 2006, as did orders for jackups and land rigs, DPS still had the second largest bookings year ever for its drilling business in 2007. The Company believes it maintained its traditional market share during 2007 and continues to be a primary supplier of BOPâ€™s and related equipment to the drilling industry. As a result of the record high order level during the last two years, the Company has upgraded its existing manufacturing facilities in Beziers, France and Berwick, Louisiana, including the addition of a state-of-the-art riser fabrication and assembly facility in Beziers. The Company also opened a new 48,000-square foot aftermarket facility in Houston during 2007 to provide a full range of machining, welding and testing capabilities.
DPS is also a global market leader in supplying surface production equipment, from conventional to high-pressure, high temperature (HPHT) wellheads and API Christmas trees and chokes used on land or installed on offshore platforms.
The surface business, which has a global base of installed equipment and an aftermarket presence in virtually every major hydrocarbon-producing region around the world, remains the largest revenue contributor to the DPS segment. This business saw increased order levels in 2007 primarily from customers in the European, African and Caspian sea regions, as well as from Asia Pacific and the Middle East. In order to further expand its offerings to customers in the European, North African and Russian markets, the Company has started construction on a new facility in Ploiesti, Romania which is expected to begin operations in the third quarter of 2008 and become fully functional in 2009. Also, additional locations are being added or existing facilities are being expanded in 2008 to address expected demand for surface products in the Caspian Sea region, Kazakhstan and in Mexico.
DPS continues to be a leading provider of subsea wellheads, Christmas trees, manifolds, and production controls to customers worldwide, from basic tree orders to integrated solutions that require systems engineering and project management as well as installation and aftermarket support. DPSâ€™s Subsea Systems organization, created in 2005, has global responsibility for research and development, engineering, sales, manufacturing, installation and aftermarket support for subsea products and systems, and provides customers with integrated solutions to subsea field development requirements under engineering, procurement and construction contracts.
In order to address capacity needs, improve efficiency and lower manufacturing costs in the subsea product line, the Company completed a new state-of-the-art subsea manufacturing, assembly and test plant in Johor, Malaysia in mid-2007. In addition, the Company made various capital investments in its Taubate, Brazil manufacturing facility in 2007 to accommodate increased and expected future project business in the Brazilian markets. The Company also made investments in 2007 to expand capacity in its Leeds, England; Onne, Nigeria; and Berwick, Louisiana facilities.
As petroleum exploration activities have increasingly focused on subsea locations, DPS has directed much of its new product development efforts toward this market. DPSâ€™s patented SpoolTreeâ„˘ horizontal subsea production system, which was introduced in 1993, is used in oil and gas fields with subsea completions that require frequent retrieval of downhole equipment. With the SpoolTree system, well completion and workover activities can be performed without a workover riser or removal of the Christmas tree and under conventional blowout preventer control, thereby reducing the time, equipment and expense needed to perform such activities. DPS advanced its tradition of innovation with the introduction in 2004 of an all-electric, direct current powered subsea production system, CameronDCâ„˘, which is designed to offer greater reliability and provide substantial cost savings to customers. Following intensive testing and review, the first commercial application of the CameronDC system is expected to be deployed in 2008. In March 2007, Cameron acquired DES Operations Limited, an Aberdeen, Scotland-based supplier of production enhancement technology, and developer of the unique Multiple Application Re-injection System (MARSâ„˘), which enables the installation of multiple processing technologies directly onto a subsea completion without disrupting existing flowlines or infrastructure.
DPSâ€™s Flow Control group was formed to focus resources on the choke product line with the goal of enhancing DPSâ€™s performance in this product line. Flow Control manufactures Cameron and Willis brand chokes and Cameron brand actuators for the surface and subsea production and drilling markets as well as drilling choke control panels and surface wellhead safety systems. The Companyâ€™s primary choke manufacturing operations are located in Longford, Ireland, and its primary surface gate valve actuator manufacturing operations are located at the Flow Control plant in Houston, Texas.
During 2006, the Flow Control product line was expanded with the addition of the LEDEENÂ® quarter-turn actuator line, acquired as part of the Dresser On/Off Valve business unit acquisition in late 2005. This product line is manufactured at the Companyâ€™s newly acquired facility in Voghera, Italy. Also, during 2006, the surface choke product line was expanded as Flow Control began producing AOPÂ® brand surface chokes in its Houston, Texas facility. These initiatives, along with the introduction of a new generation compact subsea choke, all contributed to order and revenue gains in 2007 for the Flow Control business.
Petreco Processing Systems provides custom-engineered process packages to operators worldwide for separation of oil, gas, water and solids. Petrecoâ€™s products include electrostatic desalters and dehydrators, hydrocyclones, desanders, gas flotation systems, processing equipment, gas processing equipment and electrochlorinators. These products are marketed under the brand names PETRECOÂ®, VORTOILÂ®, KREBSÂ®, UNICELÂ®, WEMCOÂ®, METROLâ„˘, KCCâ„˘, DEPURATORÂ® and BFCCâ„˘.
DPSâ€™s worldwide aftermarket service program, CAMSERVâ„˘, provides replacement parts for equipment through a comprehensive global network. In recent years, DPS has continued to enhance its aftermarket presence worldwide with new or upgraded facilities in Brazil, Mexico, Angola, Newfoundland, and Onne Port, Nigeria.
DPSâ€™s research center, located in Houston, Texas, has ten specially designed test bays to test and evaluate DPSâ€™s products under realistic conditions. These include environmental test chambers to simulate extreme pressures and temperatures, high-strength fixtures for the application of multi-million pound tensile and bending loads, high-pressure gas compressors and test enclosures, a hyperbaric chamber to simulate the external pressures of deepwater environments, and two circulation loops for erosion and flow testing.
DPS primarily markets its products directly to end-users through a worldwide network of sales and marketing employees, supported by agents in some international locations. Due to the technical nature of many of the products, the marketing effort is further supported by a staff of engineering employees.
DPSâ€™s primary customers include oil and gas majors, national oil companies, independent producers, engineering and construction companies, drilling contractors, rental companies and geothermal energy producers.
Valves & Measurement Segment
V&M is a leading provider of valves and measurement systems primarily used to control, direct and measure the flow of oil and gas as they are moved from individual wellheads through flow lines, gathering lines and transmission systems to refineries, petrochemical plants and industrial centers for processing. Equipment used in these environments is generally required to meet demanding standards, including API 6D and the American Society of Mechanical Engineers (ASME).
V&Mâ€™s products include gate valves, ball valves, butterfly valves, OrbitÂ® valves, double block & bleed valves, plug valves, globe valves, check valves, actuators, chokes and aftermarket parts and services. Measurement products include totalizers, turbine meters, flow computers, chart recorders, ultrasonic flow meters and sampling systems.
In November 2004, the Company acquired certain businesses of the PCC Flow Technologies segment of Precision Castparts Corporation. Additionally, in November 2005, the Company completed the acquisition of the On/Off Valve business unit of the Flow Control segment of Dresser, Inc., except for a portion of the business which was acquired in January 2006. These acquisitions significantly expanded the V&M segment, particularly the Engineered Valves and Distributed Valves product lines.
V&Mâ€™s Distributed Valves group manufactures valves which are sold through distributed networks, primarily in North America, for use in oil and gas applications and are marketed under the brand names WKMÂ®, DEMCOÂ®, NUTRONÂ®, TBVÂ®, AOP, THORNHILL CRAVERÂ®, TEXSTEAMÂ® and WHEATLEYÂ®.
The Engineered Valves group of V&M provides large-diameter valves for use in natural gas, liquefied natural gas (LNG), crude oil and refined products transmission lines. Products are marketed under the brand names CAMERONÂ®, GROVEÂ®, RING-OÂ® and TOM WHEATLEYÂ®.
V&Mâ€™s Processed Valves group provides critical service valves for refinery, chemical and petrochemical processing businesses and for associated storage terminal applications, such as liquid products and LNG, through the ORBIT AND GENERALÂ® valve product lines. Other products include TKÂ® and ENTECHÂ® check valves and WKMÂ® and FOSTERÂ® gate valves.
The Measurement Systems group of V&M designs, manufactures and distributes instrumentation for the oil and gas and process control industries to be used for the measurement and control of pressures, temperatures, levels and flows. The four main product lines of this group are NUFLOâ„˘, BARTONÂ®, CALDONÂ® and CLIF MOCKâ„˘.
The V&M segment also provides aftermarket services including OEM parts, repair, field service, asset management and remanufactured product to customers, particularly in support of the installed base of equipment sold under the numerous brands within the expanded V&M businesses. In 2007, V&M acquired Paradigm Services, LP, adding two new field service centers to the Companyâ€™s valve aftermarket business.
V&M markets its equipment and services through a worldwide network of combined sales and marketing employees, distributors and agents in selected international locations. Due to the technical nature of many of the products, the marketing effort is further supported by a staff of engineering employees.
V&Mâ€™s primary customers include oil and gas majors, independent producers, engineering and construction companies, pipeline operators, drilling contractors and major chemical, petrochemical and refining companies.
Compression Systems Segment
CS is a provider of reciprocating and integrally geared centrifugal compression equipment and aftermarket parts and services. Reciprocating compression equipment (Reciprocating Technology) is used throughout the energy industry by gas transmission companies, compression leasing companies, oil and gas producers and independent power producers. Integrally geared centrifugal compressors (Centrifugal Technology) are used by customers around the world in a variety of industries, including air separation, petrochemical and chemical. CSâ€™s products include aftermarket parts and services, integral engine-compressors, separable compressors, turbochargers, integrally geared centrifugal compressors, compressor systems and controls. Its aftermarket services include spare parts, technical services, repairs, overhauls and upgrades.
Sheldon R. Erikson (66)
Chief Executive Officer since January 1995. President from January 1995 to December 2006. Chairman of the Board of Directors since May 1996. Chairman of the Board from 1988 to April 1995 and President and Chief Executive Officer from 1987 to April 1995 of The Western Company of North America.
Jack B. Moore (54)
President and Chief Operating Officer since January 2007. Senior Vice President since July 2005. Vice President from May 2003 to July 2005. President, Drilling and Production Systems from July 2002 to December 2006. Vice President and General Manager, Cameron Western Hemisphere from July 1999 to July 2002. Vice President Western Hemisphere Operations, Vice President Eastern Hemisphere, Vice President Latin American Operations, Director Human Resources, Director Market Research and Director Materials of Baker Hughes Incorporated from 1976 to July 1999.
Franklin Myers (55)
Senior Vice President and Chief Financial Officer since January 2003. Senior Vice President from July 2001 to January 2003, Senior Vice President and President of the Cooper Energy Services division from August 1998 to July 2001 and Senior Vice President, General Counsel and Secretary from April 1995 to July 1999.
John D. Carne (59)
Senior Vice President since February 2006. Vice President from May 2003 to February 2006. President, Drilling and Production Systems since January 2007. President, Valves and Measurement from April 2002 to December 2006. Director of Operations, Eastern Hemisphere, Cameron Division from 1999 to March 2002. Plant Manager, Leeds, England, Cameron Division from 1996 to 1999. Director of Operations, U.K. & Norway, Cooper Energy Services (U.K.) Ltd. from 1988 to 1996.
William C. Lemmer (63)
Senior Vice President, General Counsel and Secretary since July 2007. Vice President, General Counsel and Secretary from July 1999 to July 2007. Vice President, General Counsel and Secretary of Oryx Energy Company from 1994 to March 1999.
Joseph H. Mongrain (50)
Vice President, Human Resources since June 2006. Director Human Resources, Schlumberger, Data and Consulting from May 2004 to May 2006 and Director, Human Resources, Schlumberger, North and South America from January 2001 to April 2004.
Lorne E. Phillips (36)
Vice President and Treasurer since December 2006. Treasurer from July 2005 to December 2006. General Manager, Canadian Operations from March 2003 to July 2005, Vice President, Marketing and M & A for Cameronâ€™s Valves & Measurement group from June 2002 to March 2003 and Manager, Business Development from July 1999 to June 2002.
Robert J. Rajeski (62)
Vice President since July 2000. President, Compression Systems since October 2002. President, Cooper Turbocompressor division from July 1999 to October 2002 and President, Cooper Energy Services division from July 2001 to October 2002. Vice President and General Manager of Ingersoll-Dresser Pump Co., Engineered Pump division from 1994 to July 1999.
Charles M. Sledge (42)
Vice President and Corporate Controller since July 2001. Senior Vice President, Finance and Treasurer from 1999 to June 2001, and Vice President, Controller from 1996 to 1999, of Stage Stores, Inc., a chain of family apparel stores.
James E. Wright (54)
Vice President and President, Valves and Measurement group since January 2007. President, Distributed and Process Valves divisions from December 2005 to December 2006. Vice President and General Manager, Distributed Products from August 2002 to December 2005. Vice President and General Manager, North America Pipeline and Distributor Products from June 2001 to August 2002 and Vice President Marketing and North American Sales for V&M from August 1998 to June 2001.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
THIRD QUARTER 2008 COMPARED TO THIRD QUARTER 2007
Consolidated Results -
The Companyâ€™s net income for the third quarter of 2008 totaled $166.3 million, or $0.73 per diluted share, compared to $150.7 million, or $0.65 per diluted share, for the third quarter of 2007. The higher level of earnings in each of the Companyâ€™s business segments, particularly in the Drilling and Production Systems segment (DPS), was the primary driver in the 12.3% increase in earnings per share for the three months ended September 30, 2008 compared to the same period in 2007. The income tax provision for the third quarter of 2007 included gains totaling $19.8 million, or $0.09 per share. The reduction in the income tax provision during the third quarter of 2007 included (i) an adjustment of $3.9 million to an international valuation allowance based on estimated usage of certain foreign net operating loss carryforwards, (ii) an adjustment of $5.0 million based on a change in estimated utilization of certain foreign tax credits in the United States, (iii) an adjustment of $5.7 million for resolution of an international contingency relating to transfer pricing, (iv) adjustments to deferred taxes of $1.5 million due to a change in the statutory tax rate in the United Kingdom and (v) adjustments to other tax accruals based on changes in estimated earnings, contingencies and other matters of $3.7 million.
Income before income taxes for the DPS, Valves & Measurement (V&M) and Compression Systems (CS) segments is discussed in more detail below.
Revenues for the third quarter of 2008 totaled $1.5 billion, an increase of $318.6 million, or 26.9%, from $1.2 billion for the third quarter of 2007. Nearly 70% of the increase was related to the DPS segment, which was largely impacted by higher revenues in its drilling and subsea product lines.
During the third quarter of 2008, over 55% of the Companyâ€™s revenue was reflected in entities with functional currencies other than the U.S. dollar. In translating these entitiesâ€™ functional currency income statements to U.S. dollars for consolidation purposes, a decline in the value of the U.S. dollar compared to the applicable functional currency will result in a higher amount of U.S. dollar revenues and costs for the same amount of functional currency revenues and costs. The net effects of the weaker U.S. dollar against these other foreign currencies did not significantly impact the Companyâ€™s revenues for the third quarter of 2008 compared to the third quarter of 2007, except in the V&M segment. A further discussion of revenues by segment may be found below.
Costs and Expenses
Cost of sales (exclusive of depreciation and amortization) for the third quarter of 2008 totaled $1.1 billion, an increase of $240.7 million, or 29.7%, from $810.2 million for the third quarter of 2007. Cost of sales as a percent of revenues increased from 68.3% for the three months ended September 30, 2007 to 69.8% for the three months ended September 30, 2008. References to margins in this Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations refers to Revenues minus Cost of Sales (exclusive of depreciation and amortization) as shown separately on the Companyâ€™s Consolidated Condensed Results of Operations statement for the three- and nine-month periods ended September 30, 2008 and 2007. The increase in the ratio of cost of sales to revenues was attributable primarily to (i) a 1.1 percentage-point increase in the ratio mainly related to increased volumes and a change in sales mix to more sales of equipment for major subsea projects, which typically carry lower margins as compared to the segmentâ€™s base businesses, (ii) higher costs in relation to revenues in the surface and distributed valves businesses due largely to higher material costs (approximately a 0.5 percentage-point increase), (iii) an increase in the ratio of certain indirect production costs compared to revenues resulting mainly from higher headcount levels and higher overhead costs associated with the expansion of the Companyâ€™s business (approximately a 0.5 percentage-point increase) and (iv) higher foreign currency transaction losses and higher warranty costs (approximately a 0.3 percentage-point combined increase). These increases were partially offset by higher margins for major drilling projects in the third quarter of 2008 as compared to the same period in 2007 (a 0.8 percentage-point decrease in the ratio of cost of sales to revenues).
Selling and administrative expenses for the three months ended September 30, 2008 were $165.3 million as compared to $149.8 million for the three months ended September 30, 2007, an increase of $15.5 million, or 10.4%. As a percentage of revenues, selling and administrative costs declined from 12.6% for the third quarter of 2007 to 11.0% for the third quarter of 2008. Higher employee-related costs associated with increased headcount and higher activity levels needed to support the expansion of the Companyâ€™s business accounted for nearly 60% of the increase with another 28% of the increase attributable to (i) the effects of a weaker U.S. dollar against certain other foreign currencies for the same reasons mentioned above, (ii) the incremental impact of costs from newly acquired operations and (iii) a $1.8 million increase in noncash stock compensation expense.
Depreciation and amortization expense for the third quarter of 2008 was $32.5 million, an increase of $4.5 million from $28.0 million for the third quarter of 2007. The increase is due largely to higher levels of capital spending for machinery and equipment in recent periods.
Interest income totaled $9.7 million for the three months ended September 30, 2008 compared to $6.0 million for the three months ended September 30, 2007. The increase is due primarily to higher levels of invested cash balances during the third quarter of 2008 resulting primarily from the proceeds received from the Companyâ€™s $750.0 million long-term debt offering in June 2008, partially offset by lower short-term interest rates during the third quarter of 2008 as compared to the third quarter of 2007.
Interest expense was $18.4 million for the three months ended September 30, 2008 compared to $5.5 million for the three months ended September 30, 2007, an increase of $12.9 million. The primary reasons for the increase were (i) $12.8 million of additional interest relating to the Companyâ€™s $750.0 million long-term debt offering in June 2008 and (ii) a write-off of certain debt issuance costs totaling $1.9 million associated with the conversion of $106.9 million of the Companyâ€™s 1.5% convertible debentures during the third quarter of 2008. These increases were partially offset by a reduction of $2.5 million in interest costs associated with a third quarter 2008 settlement of an international tax matter.
The income tax provision for the three months ended September 30, 2008 was $81.1 million compared to $48.1 million for the three months ended September 30, 2007. The effective tax rates during the third quarters of 2008 and 2007 were 32.8% and 24.2%, respectively. The tax provision for the third quarter of 2007 was reduced for certain discrete items totaling $19.8 million as described previously. Absent these items, the effective tax rate for the third quarter of 2007 would have been 34.2%. The decrease in the effective tax rate for the third quarter of 2008 as compared to the third quarter of 2007, absent the discrete items in 2007, was due to an increase in the estimated amount of full-year income in lower tax rate jurisdictions in 2008 as compared to 2007.
Segment Results -
DPS segment revenues for the three months ended September 30, 2008 totaled $957.0 million, an increase of $222.7 million, or 30.3%, from $734.3 million for the three months ended September 30, 2007. A 53% increase in subsea equipment sales and a 34% increase in drilling equipment sales accounted for approximately 80% of the increase in the segmentâ€™s total revenues for the third quarter of 2008 compared to the third quarter of 2007. The increase in subsea equipment sales was almost entirely due to increased shipments for major projects offshore Eastern Canada, Western Australia, the North Sea, the Gulf of Mexico and Brazil. Over 60% of the increase in drilling equipment sales was due to shipments associated with major deepwater rig construction projects with the remaining increase largely due to higher shipments of blowout preventers (BOPs) for land and jack-up rigs and higher service and repair work. Surface equipment sales increased 14%, due largely to higher activity levels resulting from robust commodity prices, which drove increases in the Asia Pacific/Middle Eastern region and the United States, as well as the impact of new product line acquisitions, which added over $9.0 million of incremental sales during the third quarter of 2008. Revenues associated with oil, gas and water separation applications increased nearly 10% in the third quarter of 2008 compared to the third quarter of 2007 as various large projects awarded during 2007 reached completion milestones as of September 30, 2008.
Income before income taxes totaled $171.5 million for the three months ended September 30, 2008 compared to $132.3 million for the three months ended September 30, 2007, an increase of $39.2 million, or 29.6%. Cost of sales as a percent of revenues increased from 71.0% in the third quarter of 2007 to 72.0% in the third quarter of 2008. The increase in the ratio of cost of sales to revenues was due primarily to (i) a 1.4 percentage-point increase in the ratio, mainly related to increased volumes and a change in sales mix to more sales of equipment for major subsea projects, which typically carry lower margins as compared to the segmentâ€™s base business, and (ii) an increase in the ratio of certain indirect production costs compared to revenues, resulting mainly from higher headcount levels and higher overhead costs associated with the expansion of the segmentâ€™s business, as well as higher foreign currency transaction losses (approximately a 0.8 percentage-point increase). These increases were partially offset by improved margins for major drilling projects which resulted in a 1.3 percentage-point decrease in the ratio.
Selling and administrative expenses for the third quarter of 2008 totaled $79.8 million, an increase of $13.5 million, or 20.4%, from $66.3 million during the comparable period of 2007. Over 60% of the increase was attributable to higher employee-related costs due mainly to increased headcount levels with the remainder due largely to increases in other costs associated with expansion of the segmentâ€™s business.
Depreciation and amortization increased $2.6 million, from $14.3 million for the three months ended September 30, 2007 to $16.9 million for the three months ended September 30, 2008. The increase was primarily the result of higher depreciation expense associated with increased levels of capital spending in recent periods for new machinery and equipment.
Revenues of the V&M segment for the third quarter of 2008 totaled $383.7 million as compared to $329.4 million in the third quarter of 2007, an increase of $54.3 million, or 16.5%. Over 17% of the increase was attributable to the effects of a weaker U.S. dollar against certain other foreign currencies for the same reasons as mentioned under â€śConsolidated Results â€“ Revenuesâ€ť above. Increases in all product lines other than aftermarket contributed to the remaining revenue increase. Absent the effects of a weaker U.S. dollar, sales of process valves were up 25% as a result of increased shipments of valves designed for refining, gas processing, storage and ethanol applications. Sales of engineered valves increased 9% due largely to higher international pipeline construction project activity. Sales of distributed products were up 19% based primarily on the strength of demand in the U.S. and Canadian markets. Additionally, strong demand in the U.S. market and the impact of a product line acquisition resulted in an 18% increase in measurement product sales in the current year.
Income before income taxes totaled $84.7 million for the third quarter of 2008, an increase of $14.0 million, or 19.7%, compared to $70.7 million for the third quarter of 2007. Cost of sales as a percent of revenues increased from 63.5% in the third quarter of 2007 to 65.0% in the third quarter of 2008. The increase in the ratio was due primarily to (i) higher costs in relation to revenues in the distributed valves and certain other product lines due largely to higher material costs (approximately a 1.7 percentage-point increase) and (ii) an increase in indirect manufacturing and production costs in relation to revenues due mainly to higher headcount and activity levels needed to support the expansion of the Companyâ€™s business (approximately a 0.5 percentage-point increase). These increases were partially offset by higher foreign currency transaction gains, which reduced the ratio of cost of sales to revenues by 0.7 percentage-points.
Selling and administrative expenses for the third quarter of 2008 were $41.4 million, a decrease of $0.3 million, or 0.7%, as compared to $41.7 million in the third quarter of 2007. Lower third-party consulting fees and a decline in the provision for bad debts more than offset higher employee-related costs during the three months ended September 30, 2008 as compared to the three months ended September 30, 2007.
Depreciation and amortization increased $0.4 million from $7.7 million in the third quarter of 2007 to $8.1 million in the third quarter of 2008. The increase was due largely to higher depreciation associated with additional capital spending for new machinery and equipment.
CS segment revenues for the three months ended September 30, 2008 totaled $164.0 million, an increase of $41.5 million, or 33.9%, from $122.5 million for the three months ended September 30, 2007. Sales of centrifugal compression equipment were up 63% in the third quarter of 2008, which accounted for nearly three-fourths of the total increase in the segmentâ€™s revenues, while sales in the reciprocating compression equipment line, which accounted for the remaining increase, were up 13% as compared to the third quarter of 2007. Nearly 83% of the increase in centrifugal compression equipment sales was due to (i) a 110% increase in demand for engineered units primarily for machines designed for engineered industrial air applications and (ii) a 36% increase in shipments of plant air equipment due to strong demand across most product lines. The remainder of the increase was due to higher activity levels in the centrifugal aftermarket parts and service business. Higher levels of shipments to customers in Russia and packagers in the U.S. largely contributed to a 38% increase in sales of Ajax units. Sales of Superior compressors declined almost 20% due to large shipments to customers in Eastern Europe during the third quarter of 2007 that did not repeat during the third quarter of 2008.
Income before income taxes for the CS segment totaled $28.4 million for the third quarter of 2008 compared to $19.5 million for the third quarter of 2007, an increase of $8.9 million, or 46.1%. Cost of sales as a percent of revenues remained relatively flat at 68.2% for the third quarter of 2008 compared to 68.1% for the same period in 2007. Higher product-related costs mainly due to increased raw material costs and higher warranty provisions, which increased the ratio of cost of sales to revenues by approximately 0.9 percentage-points in total, were mostly offset by a decrease of 0.8 percentage-points in this ratio due to higher foreign currency transaction gains and the impact of relatively fixed indirect overhead costs in relation to a higher revenue base during the three months ended September 30, 2008 compared to the same period in 2007.
Selling and administrative expenses for the three months ended September 30, 2008 totaled $19.8 million, an increase of $3.7 million, or 23.0%, from $16.1 million during the comparable period of 2007. Over two-thirds of the increase was attributable to higher employee-related costs due mainly to increased headcount levels needed to support expansion of the segmentâ€™s business.
Depreciation and amortization increased $0.4 million or 11.5%, from $3.5 million for the third quarter of 2007 to $3.9 million for the third quarter of 2008. The increase was primarily the result of higher levels of capital spending in recent periods.
The Corporate segmentâ€™s loss before income taxes was $37.2 million in the third quarter of 2008 as compared to $23.6 million in the third quarter of 2007.
For the three months ended September 30, 2007, a gain of $3.8 million was recognized in the Corporate segment relating to the changing value of the U.S. dollar in relation to short-term intercompany loans the Company had with various foreign subsidiaries that were denominated in currencies other than the U.S. dollar. No similar size gain was recognized during the three months ended September 30, 2008.
Selling and administrative expenses for the third quarter of 2008 totaled $24.3 million, a decrease of $1.4 million, or 5.4%, from $25.7 million during the comparable period of 2007. The primary reason for the decrease was the absence in 2008 of legal fees incurred during the third quarter of 2007 relating to efforts by the Company during that time to respond to certain regulatory inquiries. This decrease was partially offset by higher noncash stock compensation expense of $1.8 million for the three months ended September 30, 2008 compared to the same period in 2007.
Depreciation and amortization expense totaled $3.6 million for the three months ended September 30, 2008 as compared to $2.5 million for the same period in 2007, an increase of $1.1 million. The increase is due primarily to increased amortization from higher capital spending on the Companyâ€™s enterprise-wide information technology assets as well as additional amortization of certain other acquired intangible assets.
Increases in interest income and interest expense during the third quarter of 2008 as compared to the same period in 2007 are discussed in â€śConsolidated Resultsâ€ť above.
Orders for the third quarter of 2008 increased $1,282.8 million, or 96.5%, from the third quarter of 2007.
Orders in the DPS segment for the third quarter of 2008 totaled $1.9 billion, an increase of 146.5% from $789.2 million in the third quarter of 2007. Orders increased in all product lines during the third quarter of 2008 compared to the same period in 2007. Orders for subsea equipment were up 309% primarily as a result of a large award totaling nearly $850 million during the third quarter of 2008 for a project offshore West Africa. Orders for drilling equipment increased 191%, nearly all of which was due to awards for new deepwater rig construction projects during the third quarter of 2008. Surface equipment orders were up 3% during the third quarter of 2008 as compared to the same period in 2007 as strong demand for aftermarket parts and services in West Africa, the Middle East and the Caspian Sea regions more than offset a decline in demand for new equipment from customers in most of these same regions. Orders for oil, gas and water separation applications were up 51% over the third quarter of 2007 due to awards received for large projects in the third quarter of 2008 from customers in North America and the Asia Pacific/Middle East region.
The V&M segment had orders of $475.4 million in the third quarter of 2008, an increase of 39.3% from $341.3 million in the comparable period of 2007. Distributed product orders were up 68% due to higher activity in the North American markets. Orders in the engineered valves product line increased by 47% due primarily to demand for valves for new international pipeline and subsea flow line construction projects. Orders for measurement products increased by 48% due to strong demand for equipment to be used for nuclear and oil and gas applications. Offsetting these increases, orders in the process product line declined by 10% mainly as a result of a large award received from a customer in the Far East during the third quarter of 2007 that did not repeat during the third quarter of 2008.
Orders in the CS segment for the third quarter of 2008 totaled $191.0 million, a decrease of 3.8% from $198.5 million in the third quarter of 2007. Reciprocating compression equipment orders were down over 9% due mainly to a 44% decline in Ajax unit orders as a result of a large multi-unit order received from a lease fleet operator in the United States during the third quarter of 2007 that did not repeat during the third quarter of 2008. Partially offsetting this decline was an increase of 14% in orders for Superior compressors, primarily from customers in the Asia Pacific region. Centrifugal compression equipment orders increased 1% over the prior year quarter primarily as a result of (i) a 41% increase in awards for plant air equipment due mainly to several multi-unit orders from customers in North America and Europe and (ii) a 34% increase in aftermarket bookings in the third quarter of 2008 as compared to the same period in 2007, due primarily to strong demand for legacy and unit spare parts. These increases were mostly offset by a 14% decrease in demand for engineered units as two large orders were received during the third quarter of 2007 with no similar size orders received during the third quarter of 2008.
R. Scott Amann - Vice President, Investor Relations
Thank you, Rob. Good morning and thanks to all of you for joining us today. This morning you'll hear from Jack Moore, President and Chief Executive Officer of Cameron and Chuck Sledge, Vice President and Chief Financial Officer. Jack and Chuck will offer some commentary on the results for the quarter and we'll then take time to field your questions.
In accordance with the Safe Harbor provisions of the securities laws, we caution you that some of the statements made on this call may be forward-looking in nature and as such, are subject to various factors not under the control of the company. For a more complete description of these factors and the related risks and uncertainties, please refer to Cameron's annual report on Form 10-K, the company's most recent Form 10-Q and the associated news release.
With that, I will now turn things over to Jack.
Jack B. Moore - President and Chief Executive Officer
Thank you, Scott. Good morning everyone. As you have seen Cameron had another record quarter. Earnings came in at $0.73 a share, up 30% versus last year. Revenues over $1.5 billion which were up 27% versus Q3 of '07 and our backlog is at a record $6.2 billion driven by record bookings in subsea, drilling and valve.
Now let's move on to the question that most of all of you have on your mind and that is how current environments in our global economy are going to impact Cameron going forward. And the answer to that requires a bit of dissection into our backlog as well as trying to predict the certainty of customer's conviction to spending on Cameron's products and services.
Let me address the first as this has more visibility. As stated our backlog is at a record $6.2 billion at the end of quarter three. Of this total $4.3 billion or 70% supports projects targeted for deepwater subsea development. Most of you might think that this number seems high relative to what you know about our subsea business. But embedded in this backlog is not only subsea tree system and the equipment we provide for deepwater rigs, but we also provide subsea valves managing and valve division, subsea chokes and actuation from flow control and top side equipment for FPSO from our separation and process valve divisions.
As for our Subsea systems business unit Cameron booked its largest project ever in quarter three for BP Angola for $850 million. This is a first of four identified projects to be awarded under a frame agreement for the Block 31 development. Worldwide we have booked a total of 144 trees to the third quarter and we continue to see great opportunities for projects going forward.
As for the quality this backlog, less then 10% has been identified to rigs without existing contracts. So could we see some of this backlog at risk going forward and the answer is yes. In fact, we have been approached by one of our drilling contractors regarding a possible cancellation. But that is why we have solid contract terms in place, terms that will keep us at a minimum cash neutral.
I wanted to note Cameron customer base that supports the vast majority of our current subsea backlog of companies like Total, BP, Petrobras, BHP, Noble, Apache, British Gas, customers that take a long term view of this industry.
Now for the remaining 1.9 billion, it is spread across our Surface Systems, Valves, Measurement and Compression businesses, with the majority of this backlog supporting requirements for international customers and projects. Approximately one third of this backlog resides within our Surface systems business unit and more than 50% of our Surface wellhead business is with 10 customers, names like ExxonMobil, BP, Shell, Total, PEMEX, Saudi Aramco and Chevron are at the top of the list.
We see no risk with the current backlog for Valves and Measurement which comprise $700 million of the $1.9 billion as well. However after coming off the records booking quarter in Q3, we've begun to see a decline in our short cycle distributed valve bookings business as rig activities corrected downward over the past several weeks.
This is not unexpected, and as you would probably expect we will began to see the impact of the credit crisis on several of our customers spinning plans within our compression markets, especially within our centrifugal product lines which are primarily GDP driven.
However our investment over the past several years in broadening the product line to serve the API, FPSO fuel gas, boosting and process gas markets should dampen the impact on compression order rates going forward. Now, predicting the ultimate impact, global economic crises will have on Cameron's customers, that is difficult to predict at this time, as many of them are still trying to figure this one out as well.
We have seen a good number of independent operators announce CapEx cuts. Most of them, we provide very little product too. But we understand the pressures that reduced activity will place on the service industry margins and their own investment decisions in both technology and infrastructure. So you can expect us to keep a tight reign on spending, work closely with our suppliers to take advantage of lower steel and transportation cost and stay very, very close to our customers.
Let me leave you with one of these points as we entered these uncertain markets before I turn it over the Chuck. We have a record backlog, our customers have been long term view of the industry, 70% of our backlog is outside of North America, our balance sheet and cash position has never been stronger, a great breadth of product systems and service capabilities that customers value, and finally, our people who have managed through times of uncertainty before. Chuck?
Charles M. Sledge - Vice President and Chief Financial Officer
Thanks, Jack. A few additional comments on our results and expectations. We ended the quarter with $1.4 billion in cash, which exceeded our outstanding debt. As Jack mentioned, this financial flexibility positions us well to take advantage of opportunities as they come up in this period of uncertainty. During the quarter we generated $263 million of cash from our operations, $512 million year-to-date. That's up from $167 million through the first nine months of 2007. This increase was driven primarily by a moderation of working capital requirements, particularly inventory.
For the year, free cash flow should be closer to$ 400 million, that's up from last quarter's guidance of $350 million. Our CapEx for the quarter was 64 million. For the year we expect CapEx of about 260.
During the quarter, a $106 million of our 1.5% of convertible debentures were redeemed, or 44% of the total. In addition to repaying the principal amount in cash, we issued 4 million shares to redeem these debentures. Now, these shares were already in our diluted share count.
Before I cover our fourth quarter guidance, a few additional comments on our backlog; all of our backlog represents firm contracts from our customers. We do not book backlog based on Letters of Intent. We are protected by strong cancellation provisions in our project related backlog and we are cash ahead on this backlog. While we can't ignore the risk of cancellation, we believe our backlog should hold up well overall.
Moving on to our fourth quarter guidance; we expect earnings per share of between $0.74 and $0.76. Embedded within this guidance is a 32% tax rate, D&A of $34 million and a share count of $227 million. This guidance does not include any non-cash charges from terminating our U.S. pension plan during the fourth quarter. This non-cash charge should approximate $0.09 per share.
With that Scott, let's open it up for questions.