form10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
|
(Mark
One)
|
|
|
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the Quarterly Period Ended September 30, 2008
|
|
OR
|
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 1-13884
Cameron
International Corporation
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
76-0451843
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
|
|
|
|
|
1333
West Loop South, Suite 1700, Houston, Texas
|
77027
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
713/513-3300
(Registrant’s
Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and
Former Fiscal Year, if Changed Since Last Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes R No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one)
Large
accelerated filer R Accelerated
filer £
Non-accelerated filer £ Smaller
reporting company £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No R
Number of
shares outstanding of issuer’s common stock as of October 23, 2008 was
219,517,296.
|
PART I
— FINANCIAL INFORMATION
|
3
|
|
Item
1. Financial Statements
|
3
|
|
Consolidated
Condensed Results of Operations
|
3
|
|
Consolidated
Condensed Balance Sheets
|
4
|
|
Consolidated
Condensed Statements of Cash Flows
|
5
|
|
Notes
to Consolidated Condensed Financial Statements
|
6
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
14
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
28
|
|
Item
4. Controls and Procedures
|
30
|
|
PART II
— OTHER INFORMATION
|
30
|
|
Item
1. Legal Proceedings
|
30
|
|
Item
1A. Risk Factors
|
32
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
32
|
|
Item
3. Defaults Upon Senior Securities
|
33
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
33
|
|
Item
5. Other Information
|
33
|
|
Item
6. Exhibits
|
33
|
|
SIGNATURES
|
34
|
PART
I — FINANCIAL INFORMATION
CAMERON
INTERNATIONAL CORPORATION
(dollars
and shares in thousands, except per share data)
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
REVENUES
|
|
$ |
1,504,733 |
|
|
$ |
1,186,173 |
|
|
$ |
4,324,621 |
|
|
$ |
3,322,266 |
|
|
COSTS
AND EXPENSES
Cost
of sales (exclusive of depreciation and amortization shown separately
below)
|
|
|
1,050,826 |
|
|
|
810,159 |
|
|
|
3,079,429 |
|
|
|
2,296,206 |
|
|
Selling
and administrative expenses
|
|
|
165,308 |
|
|
|
149,763 |
|
|
|
484,509 |
|
|
|
419,092 |
|
|
Depreciation
and amortization
|
|
|
32,496 |
|
|
|
27,975 |
|
|
|
95,711 |
|
|
|
80,960 |
|
|
Interest
income
|
|
|
(9,692 |
) |
|
|
(6,021 |
) |
|
|
(22,236 |
) |
|
|
(23,289 |
) |
|
Interest
expense
|
|
|
18,366 |
|
|
|
5,454 |
|
|
|
30,523 |
|
|
|
18,259 |
|
|
Total
costs and expenses
|
|
|
1,257,304 |
|
|
|
987,330 |
|
|
|
3,667,936 |
|
|
|
2,791,228 |
|
|
Income
before income taxes
|
|
|
247,429 |
|
|
|
198,843 |
|
|
|
656,685 |
|
|
|
531,038 |
|
|
Income
tax provision
|
|
|
(81,128 |
) |
|
|
(48,120 |
) |
|
|
(212,090 |
) |
|
|
(156,083 |
) |
|
Net
income
|
|
$ |
166,301 |
|
|
$ |
150,723 |
|
|
$ |
444,595 |
|
|
$ |
374,955 |
|
|
Earnings per common
share:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.76 |
|
|
$ |
0.69 |
|
|
$ |
2.05 |
|
|
$ |
1.71 |
|
|
Diluted
|
|
$ |
0.73 |
|
|
$ |
0.65 |
|
|
$ |
1.93 |
|
|
$ |
1.63 |
|
|
Shares used in
computing earnings per common share:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
218,478 |
|
|
|
217,838 |
|
|
|
217,286 |
|
|
|
219,530 |
|
|
Diluted
|
|
|
229,219 |
|
|
|
230,810 |
|
|
|
230,953 |
|
|
|
230,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Prior
year earnings per common share and shares used in computing earnings per
common share amounts have been revised to reflect the 2-for-1 stock split
effective December 28, 2007.
|
The
accompanying notes are an integral part of these statements.
CAMERON
INTERNATIONAL CORPORATION
(dollars
in thousands, except shares and per share data)
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,435,517 |
|
|
$ |
739,916 |
|
|
Receivables,
net
|
|
|
967,904 |
|
|
|
797,471 |
|
|
Inventories,
net
|
|
|
1,407,393 |
|
|
|
1,413,403 |
|
|
Other
|
|
|
144,773 |
|
|
|
121,141 |
|
|
Total
current assets
|
|
|
3,955,587 |
|
|
|
3,071,931 |
|
|
Plant
and equipment, net
|
|
|
884,145 |
|
|
|
821,104 |
|
|
Goodwill
|
|
|
694,429 |
|
|
|
647,819 |
|
|
Other
assets
|
|
|
199,613 |
|
|
|
189,965 |
|
|
TOTAL
ASSETS
|
|
$ |
5,733,774 |
|
|
$ |
4,730,819 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
154,975 |
|
|
$ |
8,766 |
|
|
Accounts
payable and accrued liabilities
|
|
|
1,728,685 |
|
|
|
1,677,054 |
|
|
Accrued
income taxes
|
|
|
76,541 |
|
|
|
7,056 |
|
|
Total
current liabilities
|
|
|
1,960,201 |
|
|
|
1,692,876 |
|
|
Long-term
debt
|
|
|
1,256,282 |
|
|
|
745,128 |
|
|
Postretirement
benefits other than pensions
|
|
|
16,027 |
|
|
|
15,766 |
|
|
Deferred
income taxes
|
|
|
81,441 |
|
|
|
68,646 |
|
|
Other
long-term liabilities
|
|
|
116,768 |
|
|
|
113,439 |
|
|
Total
liabilities
|
|
|
3,430,719 |
|
|
|
2,635,855 |
|
|
Commitments
and contingencies
|
|
|
— |
|
|
|
— |
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01 per share, 400,000,000 shares authorized,
236,315,983 shares issued at September 30, 2008 (232,341,726 issued at
December 31, 2007)
|
|
|
2,363 |
|
|
|
2,324 |
|
|
Capital
in excess of par value
|
|
|
1,175,607 |
|
|
|
1,160,814 |
|
|
Retained
earnings
|
|
|
1,701,417 |
|
|
|
1,256,822 |
|
|
Accumulated
other elements of comprehensive income
|
|
|
2,786 |
|
|
|
101,004 |
|
|
Less:
Treasury stock, 16,809,763 shares at September 30, 2008 (14,332,927 shares
at December 31, 2007)
|
|
|
(579,118 |
) |
|
|
(426,000 |
) |
|
Total
stockholders’ equity
|
|
|
2,303,055 |
|
|
|
2,094,964 |
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
5,733,774 |
|
|
$ |
4,730,819 |
|
The
accompanying notes are an integral part of these statements.
CAMERON
INTERNATIONAL CORPORATION
(dollars
in thousands)
|
|
|
Three
Months
Ended
September 30,
|
|
|
Nine
Months
Ended
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
166,301 |
|
|
$ |
150,723 |
|
|
$ |
444,595 |
|
|
$ |
374,955 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
25,177 |
|
|
|
20,637 |
|
|
|
72,642 |
|
|
|
60,037 |
|
|
Amortization
|
|
|
7,319 |
|
|
|
7,338 |
|
|
|
23,069 |
|
|
|
20,923 |
|
|
Non-cash
stock compensation expense
|
|
|
7,610 |
|
|
|
5,784 |
|
|
|
23,567 |
|
|
|
19,973 |
|
|
Tax
benefit of employee stock compensation plan transactions and deferred
income taxes
|
|
|
(17,010 |
) |
|
|
10,117 |
|
|
|
(14,503 |
) |
|
|
21,901 |
|
|
Changes
in assets and liabilities, net of translation, acquisitions and non-cash
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(47,496 |
) |
|
|
(47,018 |
) |
|
|
(190,448 |
) |
|
|
(97,985 |
) |
|
Inventories
|
|
|
(12,710 |
) |
|
|
(102,473 |
) |
|
|
(31,270 |
) |
|
|
(374,012 |
) |
|
Accounts
payable and accrued liabilities
|
|
|
86,594 |
|
|
|
98,892 |
|
|
|
115,976 |
|
|
|
212,745 |
|
|
Other
assets and liabilities, net
|
|
|
47,543 |
|
|
|
(30,716 |
) |
|
|
69,085 |
|
|
|
(70,996 |
) |
|
Net
cash provided by operating activities
|
|
|
263,328 |
|
|
|
113,284 |
|
|
|
512,713 |
|
|
|
167,541 |
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(64,380 |
) |
|
|
(53,185 |
) |
|
|
(160,426 |
) |
|
|
(161,157 |
) |
|
Acquisitions,
net of cash acquired
|
|
|
(40,187 |
) |
|
|
(727 |
) |
|
|
(97,699 |
) |
|
|
(76,386 |
) |
|
Proceeds
from sale of plant and equipment
|
|
|
786 |
|
|
|
1,353 |
|
|
|
1,711 |
|
|
|
4,977 |
|
|
Net
cash used for investing activities
|
|
|
(103,781 |
) |
|
|
(52,559 |
) |
|
|
(256,414 |
) |
|
|
(232,566 |
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
loan (repayments) borrowings, net
|
|
|
(59,610 |
) |
|
|
(2,414 |
) |
|
|
20,738 |
|
|
|
(201,563 |
) |
|
Redemption of
convertible debt securities
|
|
|
(106,854 |
) |
|
|
— |
|
|
|
(106,854 |
) |
|
|
— |
|
|
Issuance
of long-term senior notes
|
|
|
— |
|
|
|
— |
|
|
|
747,922 |
|
|
|
— |
|
|
Debt
issuance costs
|
|
|
— |
|
|
|
— |
|
|
|
(5,550 |
) |
|
|
— |
|
|
Purchase
of treasury stock
|
|
|
(60,849 |
) |
|
|
(4,712 |
) |
|
|
(215,327 |
) |
|
|
(282,074 |
) |
|
Proceeds
from stock option exercises
|
|
|
6,973 |
|
|
|
19,351 |
|
|
|
17,067 |
|
|
|
41,633 |
|
|
Excess
tax benefits from employee stock compensation plan
transactions
|
|
|
2,727 |
|
|
|
10,034 |
|
|
|
17,172 |
|
|
|
21,669 |
|
|
Principal
payments on capital leases
|
|
|
(1,866 |
) |
|
|
(115 |
) |
|
|
(5,166 |
) |
|
|
(2,736 |
) |
|
Net
cash (used for) provided by financing activities
|
|
|
(219,479 |
) |
|
|
22,144 |
|
|
|
470,002 |
|
|
|
(423,071 |
) |
|
Effect
of translation on cash
|
|
|
(38,668 |
) |
|
|
18,187 |
|
|
|
(30,700 |
) |
|
|
23,008 |
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(98,600 |
) |
|
|
101,056 |
|
|
|
695,601 |
|
|
|
(465,088 |
) |
|
Cash
and cash equivalents, beginning of period
|
|
|
1,534,117 |
|
|
|
467,393 |
|
|
|
739,916 |
|
|
|
1,033,537 |
|
|
Cash
and cash equivalents, end of period
|
|
$ |
1,435,517 |
|
|
$ |
568,449 |
|
|
$ |
1,435,517 |
|
|
$ |
568,449 |
|
The
accompanying notes are an integral part of these statements.
CAMERON
INTERNATIONAL CORPORATION
Unaudited
Note
1: Basis of Presentation
The
accompanying Unaudited Consolidated Condensed Financial Statements of Cameron
International Corporation (the Company) have been prepared in accordance with
Rule 10-01 of Regulation S-X and do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Those adjustments, consisting of normal recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation of the financial information for the interim periods, have been
made. The results of operations for such interim periods are not necessarily
indicative of the results of operations for a full year. The Unaudited
Consolidated Condensed Financial Statements should be read in conjunction with
the Audited Consolidated Financial Statements and Notes thereto filed by the
Company on Form 10-K for the year ended December 31, 2007.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include, but are not limited to, estimated
losses on accounts receivable, estimated realizable value on excess and obsolete
inventory, contingencies, including tax contingencies, estimated liabilities for
litigation exposures and liquidated damages, estimated warranty costs, estimates
related to pension accounting, estimates related to contracts accounted for
under Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, estimated proceeds from
assets held for sale, estimates related to impairment of goodwill and other
long-lived assets and estimates related to deferred tax assets and
liabilities, including valuation allowances on deferred tax assets. Actual
results could differ materially from these estimates.
Note
2: Acquisitions
During
the third quarter of 2008, the Company announced that it had entered into an
agreement to acquire KB Industries, an Odessa, Texas-based manufacturer of
blowout preventers (BOPs) and BOP surface control systems, for approximately $85
million in cash. The acquisition closed during the fourth quarter of
2008 following receipt of required regulatory approvals (see Note 14 of the
Notes to Consolidated Condensed Financial Statements). The
acquisition of KB Industries will broaden Cameron’s existing drilling product
offerings within the Drilling & Production Systems (DPS)
segment.
On
September 30, 2008, the Company acquired the assets and liabilities of Guiberson
Well Service Systems for a cash cost of $29,300,000. The acquisition
was made in order to expand the range of products being offered to customers of
the DPS segment’s elastomer and artificial lift
businesses. Guiberson, a provider of well servicing equipment and
elastomeric replacement parts, has operations in both Oklahoma City, Oklahoma
and Houston, Texas.
On July
21, 2008, the Company acquired the assets and liabilities of Dyna-Torque, Inc.,
a Michigan-based manufacturer of gear operators, for a cash cost of
$10,027,000. The acquisition of Dyna-Torque expands the product
offerings of the DPS segment’s Flow Control business and allows the Company to
combine Dyna-Torque gears with its existing actuator products that are used on
valves around the world.
On
March 26, 2008, the Company acquired the stock of Jiskoot Holdings Limited
(Jiskoot), a UK-based company that engineers and manufactures hardware packages
for crude oil sampling, blending and other related applications, for a cash cost
of approximately $16,526,000. The acquisition of Jiskoot strengthens
the Valves & Measurement (V&M) segment’s ability to deliver a broader
range of solutions to its customers.
On
February 19, 2008, the Company acquired the stock of SBS Oilfield Equipment
GmbH (SBS), an artificial lift systems manufacturer in Austria, at a cash cost
of approximately $10,846,000. SBS designs, builds and installs in-well rod lift
pumping and progressive cavity pumping systems and associated
services. These systems include sucker rods, pony rods, rod guides,
pumps and anchors associated with artificial lift in producing
wells. Management believes SBS will enhance the DPS segment’s
existing artificial lift businesses and will broaden the scope of
products and services currently offered to also include progressive cavity pump
systems.
Finally, on
February 5, 2008, the Company acquired the assets of Baker Hughes
International Oil Tools Division’s Surface Safety Systems (SSS) business at a
cash cost of approximately $31,000,000. The acquisition of SSS
enhances the Company’s flow control product offerings within the DPS segment by
providing hydraulic and pneumatic actuators for surface wellhead
applications, wire cutting actuators, quick disconnect features, and
arctic and high temperature service products.
All
acquisitions were included in the Company’s consolidated condensed financial
statements for the period subsequent to each acquisition. Preliminary goodwill
recorded as a result of these acquisitions totaled approximately $81,995,000 at
September 30, 2008, approximately 75% of which will be deductible for income tax
purposes. The Company is still awaiting significant information relating to the
fair value of the assets and liabilities of the acquired businesses in order to
finalize the purchase price allocations.
Note
3: Receivables
Receivables
consisted of the following (in thousands):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Trade
receivables
|
|
$ |
912,994 |
|
|
$ |
747,006 |
|
|
Other
receivables
|
|
|
65,357 |
|
|
|
58,709 |
|
|
Allowance
for doubtful accounts
|
|
|
(10,447 |
) |
|
|
(8,244 |
) |
|
Total
receivables
|
|
$ |
967,904 |
|
|
$ |
797,471 |
|
Note
4: Inventories
Inventories
consisted of the following (in thousands):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Raw
materials
|
|
$ |
112,851 |
|
|
$ |
121,071 |
|
|
Work-in-process
|
|
|
451,411 |
|
|
|
454,309 |
|
|
Finished
goods, including parts and subassemblies
|
|
|
971,900 |
|
|
|
947,254 |
|
|
Other
|
|
|
9,461 |
|
|
|
8,528 |
|
|
|
|
|
1,545,623 |
|
|
|
1,531,162 |
|
|
Excess
of current standard costs over LIFO costs
|
|
|
(85,884 |
) |
|
|
(67,704 |
) |
|
Allowances
|
|
|
(52,346 |
) |
|
|
(50,055 |
) |
|
Total
inventories
|
|
$ |
1,407,393 |
|
|
$ |
1,413,403 |
|
Note
5: Plant and Equipment and Goodwill
Plant and
equipment consisted of the following (in thousands):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Plant
and equipment, at cost
|
|
$ |
1,743,523 |
|
|
$ |
1,626,636 |
|
|
Accumulated
depreciation
|
|
|
(859,378 |
) |
|
|
(805,532 |
) |
|
Total
plant and equipment
|
|
$ |
884,145 |
|
|
$ |
821,104 |
|
Changes
in goodwill during the nine months ended September 30, 2008 were as follows (in
thousands):
|
Balance
at December 31, 2007
|
|
$ |
647,819 |
|
|
Acquisitions
|
|
|
81,995 |
|
|
Changes
primarily associated with adjustments to acquisition-related tax
contingencies and finalization of purchase price
allocations
|
|
|
(24,140 |
) |
|
Translation
and other
|
|
|
(11,245 |
) |
|
Balance
at September 30, 2008
|
|
$ |
694,429 |
|
Note
6: Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of the following (in
thousands):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Trade
accounts payable and accruals
|
|
$ |
490,458 |
|
|
$ |
517,692 |
|
|
Salaries,
wages and related fringe benefits
|
|
|
126,431 |
|
|
|
155,048 |
|
|
Advances
from customers
|
|
|
827,345 |
|
|
|
756,441 |
|
|
Sales-related
costs and provisions
|
|
|
70,946 |
|
|
|
87,253 |
|
|
Payroll
and other taxes
|
|
|
43,729 |
|
|
|
35,904 |
|
|
Product
warranty
|
|
|
30,285 |
|
|
|
29,415 |
|
|
Other
|
|
|
139,491 |
|
|
|
95,301 |
|
|
Total
accounts payable and accrued liabilities
|
|
$ |
1,728,685 |
|
|
$ |
1,677,054 |
|
Activity
during the nine months ended September 30, 2008 associated with the Company’s
product warranty accruals was as follows (in thousands):
|
Balance
December
31,
2007
|
|
Net
warranty
provisions
|
|
Charges
against
accrual
|
|
Translation
and
other
|
|
Balance
September
30,
2008
|
|
$29,415
|
|
23,686
|
|
(22,348)
|
|
(468)
|
|
$30,285
|
Note
7: Debt
The
Company’s debt obligations were as follows (in thousands):
|
|
|
September
30, 2008
|
|
|
December 31,
2007
|
|
|
Short-term
borrowings under revolving credit facility
|
|
$ |
18,002 |
|
|
$ |
— |
|
|
Senior
notes, net of $2,053 of unamortized original issue discount at September
30, 2008
|
|
|
747,947 |
|
|
|
— |
|
|
Convertible
debentures
|
|
|
631,146 |
|
|
|
738,000 |
|
|
Other
debt
|
|
|
129 |
|
|
|
3,671 |
|
|
Obligations
under capital leases
|
|
|
14,033 |
|
|
|
12,223 |
|
|
|
|
|
1,411,257 |
|
|
|
753,894 |
|
|
Current
maturities
|
|
|
(154,975
|
) |
|
|
(8,766
|
) |
|
Long-term
portion
|
|
$ |
1,256,282 |
|
|
$ |
745,128 |
|
On July
10, 2008, the Company notified the holders of its 1.5% and 2.5% convertible
debentures of their rights under the terms of the debentures to request
conversion of those debentures during the third quarter of 2008. As a
result of conversions by the holders, $106,854,000 principal value of 1.5%
debentures were repaid by the Company in cash during the third quarter of 2008
along with the issuance of 3,974,257 new shares of the Company’s common stock to
satisfy the excess of the conversion value of the debentures over the principal
balance. The Company has included the remainder of its 1.5%
convertible debentures, totaling $131,146,000, in the current portion of
long-term debt in the Consolidated Condensed Balance Sheet at September 30,
2008. Additionally, the 2.5% convertible debentures, totaling
$500,000,000, have been classified as long-term debt in the September 30, 2008
Consolidated Condensed Balance Sheet.
On
June 26, 2008, the Company issued $450,000,000 in aggregate principal
amount of 6.375% Senior Notes due July 15, 2018 (the “2018 Notes”) and
$300,000,000 in aggregate principal amount of 7.0% Senior Notes due July 15,
2038 (the
“2038 Notes” and, together with the 2018 Notes, the “Notes”). The Company will
pay interest on the Notes on January 15 and July 15 of each year,
beginning on January 15, 2009. The Company may redeem some of the
Notes from time to time or all of the Notes at any time at redemption prices
that include accrued and unpaid interest and a make-whole premium as defined in
the respective supplemental indentures (the Supplemental
Indentures). In the event of the occurrence of a Change of Control
Repurchase Event, as defined in the Supplemental Indentures, the holders of the
Notes may require the Company to repurchase the Notes at a purchase price equal
to 101% of their principal amount, plus accrued and unpaid
interest. The Notes are senior unsecured obligations of the Company
and rank equally with all of the Company’s other existing unsecured and
unsubordinated debt.
On
April 14, 2008, the Company entered into a new multicurrency revolving
credit facility providing for borrowings up to $585,000,000. The new facility,
which replaced the existing $350,000,000 multicurrency revolving credit
facility, expires on April 14, 2013. The facility allows the Company to
borrow funds at the London Interbank Offered Rate (LIBOR) plus 40 basis points
(including a facility fee), which varies based on the Company's current debt
rating, and, if aggregate outstanding credit exposure exceeds one-half of
the total facility amount, an additional 10-basis-point fee is incurred. The
Company, at its option, may also borrow at other specified rates as defined in
the credit facility. Additionally, the Company is required to maintain a total
debt-to-capitalization ratio of no more than 60% during the term of the
agreement.
As of
September 30, 2008, the Company had Pound Sterling borrowings outstanding
totaling $18,002,000, under its $585,000,000 multicurrency revolving credit
facility at an interest rate of 6.08% with a maturity date of October 20,
2008.
Note
8: Employee Benefit Plans
Total net
benefit (income) expense associated with the Company’s defined benefit pension
plans consisted of the following (in thousands):
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Service
cost
|
|
$ |
1,607 |
|
|
$ |
2,891 |
|
|
$ |
4,821 |
|
|
$ |
8,673 |
|
|
Interest
cost
|
|
|
4,466 |
|
|
|
7,545 |
|
|
|
13,398 |
|
|
|
22,635 |
|
|
Expected
return on plan assets
|
|
|
(5,944 |
) |
|
|
(10,312 |
) |
|
|
(17,832 |
) |
|
|
(30,936 |
) |
|
Amortization
of prior service cost
|
|
|
(96 |
) |
|
|
(172 |
) |
|
|
(288 |
) |
|
|
(516 |
) |
|
Amortization
of losses and other
|
|
|
2,500 |
|
|
|
3,668 |
|
|
|
7,500 |
|
|
|
11,004 |
|
|
Total
net benefit expense
|
|
$ |
2,533 |
|
|
$ |
3,620 |
|
|
$ |
7,599 |
|
|
$ |
10,860 |
|
Total net
benefit (income) expense associated with the Company’s postretirement benefit
plans consisted of the following (in thousands):
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Service
cost
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
Interest
cost
|
|
|
269 |
|
|
|
303 |
|
|
|
807 |
|
|
|
909 |
|
|
Amortization
of prior service cost
|
|
|
(96 |
) |
|
|
(96 |
) |
|
|
(288 |
) |
|
|
(288 |
) |
|
Amortization
of gains and other
|
|
|
(371 |
) |
|
|
(270 |
) |
|
|
(1,113 |
) |
|
|
(810 |
) |
|
Total
net benefit income
|
|
$ |
(197 |
) |
|
$ |
(62 |
) |
|
$ |
(591 |
) |
|
$ |
(186 |
) |
On April
8, 2008, the Company received a favorable determination letter from the Internal
Revenue Service (IRS) on the qualified status of the Cameron International
Corporation Retirement Plan (the U.S. Retirement Plan) and, on this same date,
received notice from the IRS that the Company’s intention to terminate the U.S.
Retirement Plan will not adversely affect its qualification for federal tax
purposes. It is expected that the Company will finalize the
settlement of its remaining obligations under the U.S. Retirement Plan during
the fourth quarter of 2008.
Note
9: Business Segments
The
Company’s operations are organized into three separate business segments - DPS,
V&M and Compression Systems (CS). Summary financial data by segment is as
follows (in thousands):
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPS
|
|
$ |
956,992 |
|
|
$ |
734,305 |
|
|
$ |
2,773,619 |
|
|
$ |
2,030,927 |
|
|
V&M
|
|
|
383,724 |
|
|
|
329,364 |
|
|
|
1,095,142 |
|
|
|
940,754 |
|
|
CS
|
|
|
164,017 |
|
|
|
122,504 |
|
|
|
455,860 |
|
|
|
350,585 |
|
|
|
|
$ |
1,504,733 |
|
|
$ |
1,186,173 |
|
|
$ |
4,324,621 |
|
|
$ |
3,322,266 |
|
|
Income
(loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPS
|
|
$ |
171,493 |
|
|
$ |
132,282 |
|
|
$ |
453,664 |
|
|
$ |
345,018 |
|
|
V&M
|
|
|
84,661 |
|
|
|
70,740 |
|
|
|
221,711 |
|
|
|
197,634 |
|
|
CS
|
|
|
28,440 |
|
|
|
19,463 |
|
|
|
72,861 |
|
|
|
49,741 |
|
|
Corporate
& other
|
|
|
(37,165 |
) |
|
|
(23,642 |
) |
|
|
(91,551 |
) |
|
|
(61,355 |
) |
|
|
|
$ |
247,429 |
|
|
$ |
198,843 |
|
|
$ |
656,685 |
|
|
$ |
531,038 |
|
Corporate &
other includes expenses associated with the Company’s Corporate office, as well
as all of the Company’s interest income, interest expense, certain litigation
expense managed by the Company’s General Counsel, foreign currency gains and
losses from certain intercompany lending activities managed by the Company’s
centralized Treasury function and all of the Company’s stock compensation
expense.
Note
10: Earnings Per Share
The
calculation of basic and diluted earnings per share for each period presented
was as follows (dollars and shares in thousands, except per share amounts; prior
year amounts have been revised to reflect the 2-for-1 stock split effective
December 28, 2007):
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
166,301 |
|
|
$ |
150,723 |
|
|
$ |
444,595 |
|
|
$ |
374,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (basic)
|
|
|
218,478 |
|
|
|
217,838 |
|
|
|
217,286 |
|
|
|
219,530 |
|
|
Common
stock equivalents
|
|
|
2,555 |
|
|
|
3,378 |
|
|
|
2,799 |
|
|
|
3,272 |
|
|
Incremental
shares from assumed conversion of convertible debentures
|
|
|
8,186 |
|
|
|
9,594 |
|
|
|
10,868 |
|
|
|
7,238 |
|
|
Diluted
shares
|
|
|
229,219 |
|
|
|
230,810 |
|
|
|
230,953 |
|
|
|
230,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.76 |
|
|
$ |
0.69 |
|
|
$ |
2.05 |
|
|
$ |
1.71 |
|
|
Diluted
earnings per share
|
|
$ |
0.73 |
|
|
$ |
0.65 |
|
|
$ |
1.93 |
|
|
$ |
1.63 |
|
The
Company’s 1.5% and 2.5% convertible debentures have been included in the
calculation of diluted earnings per share for the three and nine months ended
September 30, 2008 and 2007, since the average market price of the Company’s
common stock exceeded the conversion value of the debentures during each
period. During the three and nine months ended September 30, 2008,
the Company acquired 1,386,488 and 4,306,963 treasury shares at an average cost
of $43.86 and $46.34 per share, respectively. A total of 457,226 and 1,830,127
treasury shares, at an average FIFO-basis cost of $22.01 and
$25.39, were issued during the three- and nine-month periods ended
September 30, 2008, respectively, in satisfaction of stock option exercises and
vesting of restricted stock units.
Note
11: Comprehensive Income
The
amounts of comprehensive income for the three and nine months ended September
30, 2008 and 2007 were as follows (in thousands):
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net
income per Consolidated Condensed Results of Operations
|
|
$ |
166,301 |
|
|
$ |
150,723 |
|
|
$ |
444,595 |
|
|
$ |
374,955 |
|
|
Foreign currency
translation gain (loss) 1
|
|
|
(122,366 |
) |
|
|
31,293 |
|
|
|
(70,543 |
) |
|
|
64,348 |
|
|
Amortization
of net prior service credits related to the Company’s pension and
postretirement benefit plans, net of tax
|
|
|
(119 |
) |
|
|
(165 |
) |
|
|
(355 |
) |
|
|
(497 |
) |
|
Amortization
of net actuarial losses related to the Company’s pension and
postretirement benefit plans, net of tax
|
|
|
1,315 |
|
|
|
2,098 |
|
|
|
3,944 |
|
|
|
6,295 |
|
|
Change
in fair value of derivatives accounted for as cash flow hedges, net of
tax
|
|
|
(31,532 |
) |
|
|
(309 |
) |
|
|
(31,264 |
) |
|
|
1,692 |
|
|
Comprehensive
income
|
|
$ |
13,599 |
|
|
$ |
183,640 |
|
|
$ |
346,377 |
|
|
$ |
446,793 |
|
1The
“Foreign currency translation gain (loss)” relates primarily to the Company’s
operations in Brazil, Canada, Norway, France, Germany, Ireland and the United
Kingdom.
The
components of accumulated other elements of comprehensive income at September
30, 2008 and December 31, 2007 were as follows (in thousands):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Accumulated
foreign currency translation gain
|
|
$ |
93,762 |
|
|
$ |
164,305 |
|
|
Prior
service credits, net, related to the Company’s pension and postretirement
benefit plans, net of tax
|
|
|
1,026 |
|
|
|
1,381 |
|
|
Actuarial
losses, net, related to the Company’s pension and postretirement benefit
plans, net of tax
|
|
|
(65,865 |
) |
|
|
(69,809 |
) |
|
Change
in fair value of derivatives accounted for as cash flow hedges, net of tax
1
|
|
|
(26,137 |
) |
|
|
5,127 |
|
|
Accumulated
other elements of comprehensive income
|
|
$ |
2,786 |
|
|
$ |
101,004 |
|
1At September 30, 2008,
the Company had a net liability of $36.8 million in its Consolidated Condensed
Balance Sheet for the fair value of its open foreign currency forward
contracts compared to a net asset of $6.9 million at December 31,
2007.
Note
12: Contingencies
The
Company is subject to a number of contingencies, including environmental
matters, litigation and tax contingencies.
Environmental
Matters
The
Company’s worldwide operations are subject to regulations with regard to air,
soil and water quality as well as other environmental matters. The Company,
through its environmental management system and active third-party audit
program, believes it is in substantial compliance with these regulations. The
Company is currently identified as a potentially responsible party (PRP) with
respect to two sites designated for cleanup under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) or similar state
laws. One of these sites is Osborne, Pennsylvania (a landfill into which a
predecessor of the CS operation in Grove City, Pennsylvania deposited waste),
where remediation is complete and remaining costs relate to ongoing ground water
treatment and monitoring. The other is believed to be a de minimis exposure. The
Company is also engaged in site cleanup under the Voluntary Cleanup Plan of the
Texas Commission on Environmental Quality at former manufacturing locations in
Houston and Missouri City, Texas. Additionally, the Company has discontinued
operations at a number of other sites which had been active for many years. The
Company does not believe, based upon information currently available, that there
are any material environmental liabilities existing at these locations. At
September 30, 2008, the Company’s consolidated balance sheet included a
noncurrent liability of approximately $6,718,000 for environmental
matters.
Legal
Matters
In 2001,
the Company discovered that contaminated underground water from the former
manufacturing site in Houston referenced above had migrated under an adjacent
residential area. Pursuant to applicable state regulations, the Company notified
the affected homeowners. Concerns over the impact on property values of the
underground water contamination and its public disclosure led to a number of
claims by homeowners.
The
Company has entered into a number of individual settlements and has settled a
class action lawsuit. The individual settlements were made in the form of
agreements with homeowners that obligated the Company to reimburse them for any
estimated decline in the value of their homes at time of sale due to potential
buyers’ concerns over contamination or, in the case of some agreements, to
purchase the property after an agreed marketing period. All but three of these
agreements have been closed out. In addition, the Company has settled
Valice v. Cameron Iron Works, Inc. (80th Jud. Dist. Ct., Harris County,
filed June 21, 2002), which was filed and settled as a class action.
Pursuant to the settlement, the 258 homeowners in the class are entitled to
receive a cash payment of approximately 3% of the 2006 appraised value of their
property or reimbursement of any diminution in value of their property due to
contamination concerns at the time of any sale. To date, 69 homeowners have
elected the cash payment and 21 opted out of the class settlement.
There are
two suits currently pending and one threatened regarding this matter filed by
homeowners who opted out of the class settlement. One was filed by six such
homeowners; the other suit was filed by an individual homeowner. A
suit has been threatened by a group of nine other homeowners but has not yet
been filed. The complaints in the actions filed make, and the other
threatens to make, the claim that the contaminated underground water has reduced
property values and seek recovery of alleged actual and exemplary damages for
the loss of property value.
There are
two suits currently pending filed by persons not in the class. One
seeks damages for reduced property value, the other involves claims arising out
of alleged health risks posed by the contaminated underground
water. The Company is of the opinion that there is no health risk to
area residents and that the suit is without merit.
The
Company believes, based on its review of the facts and law, that any potential
exposure from existing agreements, the class action settlement or other actions
that have been or may be filed, will not have a material adverse effect on its
financial position or results of operations. The Company’s consolidated balance
sheet included a liability of $13,150,000 for these matters as of September 30,
2008.
The
Company has been named as a defendant in a number of multi-defendant,
multi-plaintiff tort lawsuits since 1995. At September 30, 2008, the Company’s
consolidated balance sheet included a liability of approximately $3,387,000 for
such cases, including estimated legal costs. The Company believes, based on its
review of the facts and law, that the potential exposure from these suits will
not have a material adverse effect on its consolidated results of operations,
financial condition or cash flow from operations.
Regulatory
Contingencies
In
January 2007, the Company underwent a Pre-Assessment Survey as part of a
Focused Assessment initiated by the Regulatory Audit Division of the U.S.
Customs and Border Protection, Department of Homeland Security. The
Pre-Assessment Survey resulted in a finding that the Company had deficiencies in
its U.S. Customs compliance processes. The Company is taking corrective action
and currently expects to undergo Assessment Compliance Testing in early
2009.
In
July 2007, the Company was one of a number of companies to receive a letter
from the Criminal Division of the U.S. Department of Justice (DOJ) requesting
information on its use of a customs clearance broker. The DOJ is inquiring into
whether certain of the services provided to the Company by the customs clearance
broker may have involved violations of the U.S. Foreign Corrupt Practices Act
(FCPA). The Company is conducting an internal investigation in response, as
discussed below, and is providing the requested information to the
DOJ.
The
Company engaged special counsel reporting to the Audit Committee of the Board of
Directors to conduct an investigation into its dealings with the customs
clearance broker in Nigeria and Angola to determine if any payments made to or
by the customs clearance broker on the Company’s behalf constituted a violation
of the FCPA. The investigation is also looking into activities of Company
employees and agents with respect to immigration matters and importation
permitting in Nigeria. To date, the special counsel has found that the Company
utilized certain services in Nigeria offered by the customs clearance broker
that appear to be similar to services that have been under review by the DOJ.
Similar issues do not appear to be present in Angola. Special counsel
is reviewing these and other services and activities to determine whether they
were conducted in compliance with all applicable laws and regulations. Special
counsel is also reviewing the extent, if any, of Company personnel’s knowledge
and involvement in the performance of these services and activities, and whether
the Company fulfilled its obligations under the FCPA.
In
addition, the U.S. Securities and Exchange Commission (SEC) is conducting an
informal inquiry into the same matters currently under review by the DOJ. As
part of this inquiry the SEC has requested that the Company provide to them the
information and documents that have been requested by and are being provided to
the DOJ. The Company is cooperating fully with the SEC, as it is doing with the
DOJ, and is providing the requested materials. Both agencies have requested an
extension of the statute of limitations with respect to matters under review
until January 2009. At this stage of the internal investigation,
the Company cannot predict the ultimate outcome of either the internal
investigation or the government inquiries. The Company has established a
separate compliance function and undertaken an enhanced compliance training
effort for its personnel, including foreign operations personnel dealing with
customs clearance regulations.
Tax
Contingencies
The
Company has legal entities in over 35 countries. As a result, the Company is
subject to various tax filing requirements in these countries. The Company
prepares its tax filings in a manner which it believes is consistent with such
filing requirements. However, some of the tax laws and regulations which the
Company is subject to are subject to interpretation and/or judgment. Although
the Company believes that the tax liabilities for periods ending on or before
the balance sheet date have been adequately provided for in the financial
statements, to the extent that a taxing authority believes that the Company has
not prepared its tax filings in accordance with the authority’s interpretation
of the tax laws/regulations, the Company could be exposed to additional taxes.
There were no material changes in the Company’s liabilities for unrecognized tax
benefits during the three or nine months ended September 30, 2008.
In May
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) APB 14-1 that clarifies the accounting for convertible debt instruments
that may be settled in cash upon conversion (including partial cash
settlements). This FSP requires the issuer of a convertible debt
instrument within its scope to separately account for the liability and equity
components of the instrument in a manner that will reflect the entity’s
nonconvertible debt borrowing rate for interest cost when recognized in
subsequent periods. This standard applies to the Company’s existing
1.5% convertible debentures due 2024 and 2.5% convertible debentures due 2026,
totaling in aggregate $631,146,000 at September 30, 2008, as well as certain
convertible debentures outstanding in prior periods. This FSP will be
applied retrospectively to all periods presented once it becomes effective
January 1, 2009. Due to the potential for future conversions of the Company’s
outstanding convertible debentures during the fourth quarter of 2008 (see Note
14 of the Notes to Consolidated Condensed Financial Statements for additional
information), the actual impact on the Company’s Consolidated Balance Sheet as
of December 31, 2008 cannot be computed at this time. However, the
Company expects this FSP will have a significant impact on both its debt and
equity balances upon adoption.
In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires
entities to provide greater transparency about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations and (c) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations, and cash flows.
The Company will provide the level of required disclosures regarding its use of
derivative instruments upon adoption of this new standard, effective
January 1, 2009.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R, Business Combinations (SFAS 141R) and Statement of Financial
Accounting Standards No. 160, Accounting and Reporting of Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB No. 51
(SFAS 160). These two standards must be adopted in conjunction with each other
on a prospective basis. The most significant changes to business combination
accounting pursuant to SFAS 141R and SFAS 160 are the following:
(a) recognize, with certain exceptions, 100 percent of the fair values of
assets acquired, liabilities assumed and noncontrolling interests in
acquisitions of less than a 100 percent controlling interest when the
acquisition constitutes a change in control of the acquired entity,
(b) acquirers’ shares issued in consideration for a business combination
will be measured at fair value on the closing date, not the announcement date,
(c) recognize contingent consideration arrangements at their acquisition
date fair values, with subsequent changes in fair value generally reflected in
earnings, (d) the expensing of all transaction costs as incurred and most
restructuring costs, (e) recognition of pre-acquisition loss and gain
contingencies at their acquisition date fair values, with certain exceptions,
(f) capitalization of acquired in-process research and development rather
than expense recognition and (g) recognize changes that result from a business
combination transaction in an acquirer’s existing income tax valuation
allowances and tax uncertainty accruals as adjustments to income tax expense.
The Company anticipates these new standards will significantly affect the
Company’s accounting for future business combinations following adoption on
January 1, 2009.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159 provides entities with an option to measure
many financial assets and liabilities and certain other items at fair value as
determined on an instrument-by-instrument basis. SFAS 159 became effective for
the Company as of January 1, 2008; however, the Company did not elect to
measure any additional financial instruments at fair value as a result of
adopting SFAS 159. Therefore, there was no impact on the Company’s financial
statements at the time of adoption.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (SFAS 157), which defines fair value,
establishes a framework for measuring fair value and expands the level of
disclosures regarding fair value. SFAS 157 also emphasizes that fair value is a
market-based measurement rather than an entity-specific measurement. The Company
adopted the provisions of SFAS 157 relating to financial assets and liabilities
and other assets and liabilities carried at fair value on a recurring basis
effective on January 1, 2008, as required. As allowed by FASB
Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, the
Company has elected to defer the adoption of SFAS 157 with respect to all
remaining nonfinancial assets and liabilities until January 1,
2009. There was no material impact on the Company’s financial
statements at the time of adoption; however, the Company does expect that this
new standard will impact certain aspects of its accounting for business
combinations on a prospective basis, including the determination of fair values
assigned to certain purchased assets and liabilities.
With
respect to the January 1, 2008 adoption of SFAS 157, the Company determines the
fair value of its outstanding foreign currency forward contracts based on quoted
forward exchange rates for the respective currencies applicable to similar
instruments (Level 2 observable market inputs as defined in SFAS
157).
Note
14: Subsequent Events
On
October 6, 2008, the Company notified the holders of its 1.5% convertible
debentures of their rights under the terms of the debentures to request
conversion of those debentures during the fourth quarter of 2008 (see Note 7 of
the Notes to Consolidated Condensed Financial Statements for information on
conversions during the third quarter of 2008). The 2.5% convertible
debentures did not meet the terms for conversion during the fourth quarter of
2008.
The
Company currently anticipates repaying in cash 100% of the principal amount of
any debentures converted with the conversion value of the debentures in excess
of the principal value to be satisfied through the issuance of additional shares
of the Company’s common stock. The final amounts ultimately to be
recognized during the fourth quarter of 2008 will be based on the actual amount
of debentures, if any, submitted for conversion during that time
period.
During
the fourth quarter of 2008, the Company closed on the acquisition of KB
Industries, following receipt of required regulatory approvals (see Note 2 of
the Notes to Consolidated Condensed Financial Statements for additional
information).
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
In
addition to the historical data contained herein, this document includes
“forward-looking statements” regarding future market strength, order
levels,
revenues and earnings of the Company, as well as expectations regarding
cash
flows, future capital spending and the estimated remaining pension assets and
pre-tax settlement charge to be incurred upon final settlement of the Company's
obligations under its U.S. defined benefit pension plans, made in reliance
upon the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. The Company’s
actual results may differ materially from those described in forward-looking
statements. These statements are based on current expectations
of
the Company’s performance and are subject to a variety of factors, some
of which
are not under the control of the Company, which can affect the Company’s
results
of operations, liquidity or financial condition. Such factors
may include
overall demand for, and pricing of, the Company’s products; the size
and
timing of orders; the Company’s ability to successfully execute large
subsea
and drilling systems projects it has been awarded; the Company’s ability to
convert backlog into
revenues on a timely and profitable basis; the Company’s ability to successfully
implement its capital expenditures program; the impact of acquisitions
the Company has made or may make; changes in the price of (and demand
for) oil and gas in both domestic and international markets; raw material
costs and availability; political and social issues affecting the countries
in which the Company does business; fluctuations in currency markets
worldwide;
and variations in global economic activity. In particular,
current and
projected oil and gas prices historically have generally affected customers’
spending levels and their related purchases of the Company’s products
and services. Additionally, changes in oil and gas price
expectations may
impact the Company’s financial results due to changes in cost structure,
staffing
or spending levels. See additional factors discussed in “Factors
That May Affect
Financial Condition and Future Results” contained
herein.
Because
the information herein is based solely on data currently available,
it is subject to change as a result of changes in conditions over which
the Company has no control or influence, and should not therefore be
viewed
as assurance regarding the Company’s future
performance. Additionally, the
Company is not obligated to make public indication of such changes unless
required
under applicable disclosure rules and
regulations.
THIRD
QUARTER 2008 COMPARED TO THIRD QUARTER 2007
Consolidated
Results -
The
Company’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
Company’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
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 Company’s revenue was reflected in
entities with functional currencies other than the U.S. dollar. In
translating these entities’ 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 Company’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 Management’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 Company’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 segment’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 Company’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
Company’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 Company’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 Company’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 Company’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
|
|
|
Quarter
Ended
September
30,
|
|
|
Increase
|
|
|
(dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
Revenues
|
|
$ |
957.0 |
|
|
$ |
734.3 |
|
|
$ |
222.7
|
|
|
|
30.3
|
% |
|
Income
before income taxes
|
|
$ |
171.5 |
|
|
$ |
132.3 |
|
|
$ |
39.2 |
|
|
|
29.6
|
% |
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 segment’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 segment’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 segment’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 segment’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.
V&M
Segment
|
|
|
Quarter
Ended
September
30,
|
|
|
Increase
|
|
|
(dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
Revenues
|
|
$ |
383.7 |
|
|
$ |
329.4 |
|
|
$ |
54.3 |
|
|
|
16.5
|
% |
|
Income
before income taxes
|
|
$ |
84.7 |
|
|
$ |
70.7 |
|
|
$ |
14.0 |
|
|
|
19.7
|
% |
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 “Consolidated Results – Revenues”
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 Company’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
|
|
|
Quarter
Ended
September
30,
|
|
|
Increase
|
|
|
(dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
Revenues
|
|
$ |
164.0 |
|
|
$ |
122.5 |
|
|
$ |
41.5 |
|
|
|
33.9
|
% |
|
Income
before income taxes
|
|
$ |
28.4 |
|
|
$ |
19.5 |
|
|
$ |
8.9 |
|
|
|
46.1
|
% |
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 segment’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 segment’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.
Corporate
Segment
The
Corporate segment’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 Company’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 “Consolidated Results”
above.
ORDERS
Orders
were as follows (dollars in millions):
|
|
|
Quarter
Ended
September
30,
|
|
|
Increase
(decrease)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
DPS
|
|
$ |
1,945.4 |
|
|
$ |
789.2 |
|
|
$ |
1,156.2 |
|
|
|
146.5 |
% |
|
V&M
|
|
|
475.4 |
|
|
|
341.3 |
|
|
|
134.1 |
|
|
|
39.3 |
% |
|
CS
|
|
|
191.0 |
|
|
|
198.5 |
|
|
|
(7.5 |
) |
|
|
(3.8 |
)% |
|
|
|
$ |
2,611.8 |
|
|
$ |
1,329.0 |
|
|
$ |
1,282.8 |
|
|
|
96.5 |
% |
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.
NINE
MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2007
Consolidated
Results -
The
Company’s net income for the nine months ended September 30, 2008 totaled $444.6
million, or $1.93 per diluted share, compared to $375.0 million, or $1.63 per
diluted share, in the nine months ended September 30, 2007. Higher
earnings in each of the Company’s business segments driven by strong demand for
the Company’s products were the primary drivers in the 18.4% increase in
earnings per share for the first nine months of 2008 as compared to the same
period last year. The income tax provision for the first nine months
of 2007 included gains totaling $27.1 million, or $0.12 per
share. The reduction in the income tax provision during the first
nine months of 2007 included (i) an adjustment of $5.5 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 $5.1 million based on a change in estimated
utilization of certain foreign tax deductions locally resulting from changes in
estimated earnings internationally, (iv) an adjustment of $5.7 million for
resolution of an international contingency relating to transfer pricing, (v)
adjustments to deferred taxes of $1.5 million due to a change in the statutory
tax rate in the United Kingdom and (vi) adjustments to other tax accruals based
on changes in estimated earnings, contingencies and other matters of $4.3
million.
Income
before income taxes for the DPS, V&M and CS segments is discussed in more
detail below.
Revenues
Revenues
for the nine months ended September 30, 2008 totaled $4.3 billion, an increase
of $1.0 billion, or 30.2%, from $3.3 billion for the nine months ended September
30, 2007. Nearly three-fourths of the increase was related to the DPS
segment, which was largely impacted by higher revenues in the segment’s drilling
and subsea product lines.
For the
first nine months of 2008, over 55% of the Company’s revenue was reflected in
entities with functional currencies other than the U.S. dollar. As
described previously, in translating these entities’ 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. Accordingly, approximately 4%
of the consolidated increase in revenues for the first nine months of 2008
compared to the first nine months of 2007 was attributable to the net effects of
a weaker U.S. dollar against these other foreign currencies. A
further discussion of revenues by segment may be found below.
Costs
and Expenses
Cost of
sales (exclusive of depreciation and amortization) for the first nine months of
2008 totaled $3.1 billion, an increase of $783.2 million, or 34.1%, from $2.3
billion in the first nine months of 2007. Cost of sales as a percent
of revenues increased from 69.1% for the nine months ended September 30, 2007 to
71.2% for the nine months ended September 30, 2008. The increase in
the ratio of cost of sales to revenues was attributable primarily to (i) a 1.7
percentage-point increase in the ratio due primarily to increased volumes and a
change in sales mix to more sales of equipment for major drilling and subsea
projects, which typically carry lower margins as compared to the Company’s base
and valve-related businesses 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 expansion of the
Company’s business (approximately a 0.4 percentage-point increase).
Selling
and administrative expenses for the nine months ended September 30, 2008 were
$484.5 million as compared to $419.1 million for the nine months ended September
30, 2007, an increase of $65.4 million, or 15.6%. As a percentage of
revenues, selling and administrative expenses declined from 12.6% for the first
nine months of 2007 to 11.2% for the first nine months of 2008. The
impact of newly acquired businesses, a charge taken in the first nine months of
2008 related to a dispute on an historical acquisition, additional third-party
consulting fees and higher litigation costs and additional non-cash stock
compensation expense added a combined $17.0 million in incremental costs during
the first nine months of 2008. Over 90% of the remaining increase was
attributable to higher employee-related costs associated with increased
headcount and higher activity levels needed to support the expansion of the
Company’s business.
Depreciation
and amortization expense for the first nine months of 2008 was $95.7 million, an
increase of $14.7 million from $81.0 million for the first nine months of
2007. Depreciation expense increased $12.6 million due largely to
higher levels of capital spending for machinery and equipment and the impact of
the Company’s new subsea facility in Malaysia, which opened during the second
half of 2007. Amortization expense increased $2.1 million, primarily
related to acquired intangibles from recent
acquisitions.
Interest
income totaled $22.2 million for the nine months ended September 30, 2008
compared to $23.3 million for the nine months ended September 30,
2007. The decrease is primarily due to a decline in short-term
interest rates from the first nine months of 2007, which was partially offset by
a higher level of invested cash balances during the third quarter of 2008
resulting primarily from the proceeds received from the Company’s $750.0 million
long-term debt offering in June 2008. Interest income for the first
nine months of 2008 also includes $1.6 million associated with a refund received
upon settlement by the Company of an international tax contingency.
Interest
expense was $30.5 million for the first nine months of 2008 compared to $18.3
million for the first nine months of 2007, an increase of $12.2
million. The primary reasons for the increase were (i) $13.4 million
of additional interest relating to the Company’s $750.0 million long-term debt
offering in June 2008, (ii) $3.0 million of additional expense primarily related
to borrowings under the Company’s revolving credit agreement and (iii) a
write-off of certain debt issuance costs totaling $1.9 million associated with
the conversion of $106.9 million of the Company’s 1.5% convertible debentures
during the third quarter of 2008. These increases were partially
offset by (i) the absence of approximately $2.0 million of interest recognized
in the first nine months of 2007 relating to $200.0 million of 2.65% senior
notes that were repaid in April 2007 and (ii) a reduction of $3.7 million in
interest costs associated with a settlement of an international tax
matter.
The
income tax provision for the nine months ended September 30, 2008 was $212.1
million compared to $156.1 million for the nine months ended September 30,
2007. The effective tax rates during the first nine months of 2008
and 2007 were 32.3% and 29.4%, respectively. The tax provision for
the nine months ended September 30, 2007 was reduced for certain discrete items
totaling $27.1 million as described previously. Absent these items,
the effective tax rate for the nine months ended September 30, 2007 would have
been 34.5%. The decrease in the effective tax rate for the first nine
months of 2008 as compared to the first nine months 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
|
|
|
Nine
Months
Ended
September
30,
|
|
|
Increase
|
|
|
(dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
Revenues
|
|
$ |
2,773.6 |
|
|
$ |
2,030.9 |
|
|
$ |
742.7 |
|
|
|
36.6
|
% |
|
Income
before income taxes
|
|
$ |
453.7 |
|
|
$ |
345.0 |
|
|
$ |
108.7 |
|
|
|
31.5
|
% |
DPS
segment revenues for the nine months ended September 30, 2008 totaled $2.8
billion, an increase of $742.7 million, or 36.6%, from $2.0 billion for the nine
months ended September 30, 2007. A 45% increase in drilling equipment
sales and a 51% increase in subsea equipment sales accounted for approximately
three-fourths of the revenue increase from the same period in the prior
year. Nearly two-thirds of the increase in drilling equipment sales
was for major deepwater rig construction projects with the remaining increase
largely attributable to higher demand for BOPs and related equipment for land
and jack-up rigs. The increase in subsea equipment sales was mostly
due to increased shipments and activity levels for major projects offshore West
Africa, Egypt, Eastern Canada, Western Australia and in the Gulf of
Mexico. Surface equipment sales increased 17% due largely to higher
activity levels in the Asia Pacific/Middle East region, Eastern Europe, the
Caspian Sea and in the United States as a result of historically high commodity
price levels. These increases were partially offset by weakness in
the Latin America and Canadian markets. Revenues associated with oil,
gas and water separation applications increased 46% in the first nine months of
2008 compared to the first nine months of 2007 as various large projects awarded
in 2007 were nearing completion as of September 30, 2008.
Income
before income taxes totaled $453.7 million for the nine months ended September
30, 2008 compared to $345.0 million for the nine months ended September 30,
2007, an increase of $108.7 million, or 31.5%. Cost of sales as a
percent of revenues increased from 71.6% for the first nine months of 2007 to
73.6% for the first nine months of 2008. The increase in the ratio of
cost of sales to revenues was due primarily to a 2.2 percentage point
increase in the ratio mainly from 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 segment's base business. This increase was
partially offset by (i) a lower provision for obsolete inventory and (ii) the
application of relatively fixed manufacturing overhead to a larger revenue base
which had a combined effect of lowering the ratio of cost of sales to revenues
by 0.2 percentage points.
Selling
and administrative expenses for the first nine months of 2008 totaled $227.0
million, an increase of $37.1 million, or 19.5%, from $189.9 million during the
comparable period of 2007. Selling and administrative expenses as a
percent of revenues declined from 9.4% for the nine months ended September 30,
2007 to 8.2% for the nine months ended September 30, 2008. Nearly 55%
of the increase was attributable to higher employee-related costs due mainly to
increased headcount levels with the remainder due largely to higher support
costs relating to expansion of the segment’s business.
Depreciation
and amortization increased $9.5 million, from $41.3 million for the first nine
months of 2007 to $50.8 million for the first nine months of
2008. The increase was primarily the result of higher amortization of
recently acquired intangible assets as well as higher depreciation expense
associated with increased levels of capital spending in recent periods for new
machinery and equipment and a new subsea facility in Malaysia, which opened
during the second half of 2007.
V&M
Segment
|
|
|
Nine
Months Ended
September
30,
|
|
|
Increase
|
|
|
(dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
Revenues
|
|
$ |
1,095.1 |
|
|
$ |
940.8 |
|
|
$ |
154.3 |
|
|
|
16.4
|
% |
|
Income
before income taxes
|
|
$ |
221.7 |
|
|
$ |
197.6 |
|
|
$ |
24.1 |
|
|
|
12.2
|
% |
Revenues
of the V&M segment for the nine months ended September 30, 2008 totaled $1.1
billion as compared to $940.8 million for the nine months ended September 30,
2007, an increase of $154.3 million, or 16.4%. Over one-fourth 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 “Consolidated
Results – Revenues” above. Increases in all product lines contributed
to the remaining revenue increase. Absent the effects of a weaker
U.S. dollar, sales of engineered valves, which accounted for over one-third of
the remaining revenue increase, were up 10% compared to last year due largely to
higher international pipeline construction project activity. Sales of
distributed products increased 11% based primarily on the strength of
demand in the U.S. market. Measurement product sales were up
24% in the first nine months of 2008 compared to the first nine months of 2007
due to the impact of newly acquired product offerings, higher U.S. market
activity driven by robust natural gas price levels and higher demand for
equipment to be used in nuclear applications.
Income
before income taxes totaled $221.7 million for the first nine months of 2008, an
increase of $24.1 million, or 12.2%, compared to $197.6 million for the first
nine months of 2007. Cost of sales as a percent of revenues increased
from 64.0% for the nine months ended September 30, 2007 to 65.8% for the nine
months ended September 30, 2008. The increase in the ratio was due
primarily to a 1.6 percentage-point increase in the ratio of certain indirect
production costs compared to revenues, resulting mainly from higher headcount
levels and higher overhead costs associated with expansion of the segment’s
business.
Selling
and administrative expense for the nine months ended September 30, 2008 were
$129.6 million, an increase of $11.3 million, or 9.5%, as compared to $118.3
million for the nine months ended September 30, 2007. As a percentage
of revenues, selling and administrative expenses declined from 12.6% for the
first nine months of 2007 to 11.8% for the first nine months of
2008. Approximately 57% of the increase was attributable to the
effects of a weaker U.S. dollar for the same reasons mentioned under
“Consolidated Results – Revenues” above and the incremental impact of newly
acquired operations. Absent these factors, 90% of the remaining
increase was attributable to higher employee-related costs due largely to higher
headcount needed to support the expansion of the segment’s
business.
Depreciation
and amortization increased $1.2 million from $22.5 million in the first nine
months of 2007 to $23.7 million in the first nine months of 2008. The
increase was due largely to increased capital spending for new machinery and
equipment in recent periods.
CS
Segment
|
|
|
Nine
Months Ended
September
30,
|
|
|
Increase
|
|
|
(dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
Revenues
|
|
$ |
455.9 |
|
|
$ |
350.6 |
|
|
$ |
105.3 |
|
|
|
30.0
|
% |
|
Income
before income taxes
|
|
$ |
72.9 |
|
|
$ |
49.7 |
|
|
$ |
23.2 |
|
|
|
46.5
|
% |
CS
segment revenues for the nine months ended September 30, 2008 totaled $455.9
million, an increase of $105.3 million, or 30.0%, from $350.6 million for the
nine months ended September 30, 2007. Sales of centrifugal
compression equipment were up 46%, which accounted for nearly 70% of the total
increase in segment revenues, while sales of reciprocating equipment, which
accounted for the remaining increase, were up 17% for the nine months ended
September 30, 2008 compared to the same period last year. A 59%
increase in demand for engineered units, designed primarily for air separation
and engineered industrial air applications, accounted for nearly two-thirds of
the increase in centrifugal equipment sales. Shipments of plant air
equipment were up 36% and demand for aftermarket parts and services increased
31%, accounting for the remainder of the increase in this product
line. A 38% increase in demand for Ajax units, primarily from
customers in Asia and packagers in the United States, as well as a nearly 10%
increase in sales of aftermarket parts and services, accounted for almost 90% of
the increase in sales of reciprocating equipment during the first nine months of
2008 compared to the first nine months of 2007.
Income
before income taxes for the CS segment totaled $72.9 million for the nine months
ended September 30, 2008 compared to $49.7 million for the nine months ended
September 30, 2007, an increase of $23.2 million, or 46.5%. Cost of
sales as a percent of revenues declined from 69.3% for the first nine months of
2007 to 68.9% for the first nine months of 2008. The improvement in
the ratio was due primarily to a decline in the provision for obsolete inventory
as strong activity levels in the current year have resulted in consumption of
previously slow-moving inventory, primarily in the reciprocating product line (a
0.4 percentage-point decrease).
Selling
and administrative expenses for the first nine months of 2008 totaled $57.8
million, an increase of $9.8 million, or 20.5%, from $48.0 million during the
comparable period of 2007. As a percent of revenues, selling and
administrative expenses declined from 13.7% for the nine months ended September
30, 2007 to 12.7% for the nine months ended September 30,
2008. Nearly 84% of the increase was due to higher employee-related
costs due mainly to increased headcount levels needed to support expansion of
the segment’s business.
Depreciation
and amortization increased $1.1 million, from $10.1 million for the first nine
months of 2007 to $11.2 million for the first nine months of
2008. The increase was primarily the result of higher levels of
capital spending in recent periods.
Corporate
Segment
The
Corporate segment’s loss before income taxes was $91.6 million in the first nine
months of 2008 as compared to $61.4 million in the first nine months of
2007.
Included
in the Corporate segment’s results for the nine months ended September 30, 2008
was a foreign currency loss of $2.7 million relating to the changing value of
the U.S. dollar in relation to short-term intercompany loans the Company has
with various foreign subsidiaries that are denominated in currencies other than
the U.S. dollar. The corresponding amount for the comparable period
in the prior year was a foreign currency gain of $3.9 million.
Selling
and administrative expenses for the first nine months of 2008 totaled $70.2
million, an increase of $7.3 million, or 11.6%, from $62.9 million during the
comparable period of 2007. The primary reasons for the increase were
(i) a $3.6 million charge in the first nine months of 2008 related to a dispute
on an historical acquisition and (ii) $3.6 million of additional non-cash stock
compensation expense. Additionally, during the first nine months of
2008, the Company recorded a $5.8 million reduction in expense relating to one
of its non-U.S. defined benefit pension plans. A similar reduction in
expense was recorded in the first nine months of 2007 relating to another of the
Company’s non-U.S. defined benefit pension plans.
Depreciation
and amortization expense totaled $10.0 million for the nine months ended
September 30, 2008 as compared to $7.1 million for the same period in 2007, an
increase of $2.9 million. The increase is due primarily to increased
amortization from higher capital spending on the Company’s enterprise-wide
information technology assets as well as additional amortization of certain
other acquired intangible assets.
The
decrease in interest income and the increase in interest expense for the first
nine months of 2008 as compared to the same period in 2007 are discussed in
“Consolidated Results” above.
ORDERS
& BACKLOG
Orders
were as follows (dollars in millions):
|
|
|
Nine
Months Ended
September
30,
|
|
|
Increase
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
DPS
|
|
$ |
4,511.0 |
|
|
$ |
2,347.2 |
|
|
$ |
2,163.8 |
|
|
|
92.2% |
|
|
V&M
|
|
|
1,260.5 |
|
|
|
1,041.6 |
|
|
|
218.9 |
|
|
|
21.0% |
|
|
CS
|
|
|
596.6 |
|
|
|
505.5 |
|
|
|
91.1 |
|
|
|
18.0% |
|
|
|
|
$ |
6,368.1 |
|
|
$ |
3,894.3 |
|
|
$ |
2,473.8 |
|
|
|
63.5% |
|
Orders
for the first nine months of 2008 were up $2.5 billion, or 63.5%, from $3.9
billion for the first nine months of 2007 to $6.4 billion for the nine months
ended September 30, 2008.
DPS
segment orders for the first nine months of 2008 totaled $4.5 billion, up 92.2%
from $2.3 billion for the first nine months of 2007. Subsea equipment orders
increased 212% primarily as a result of two large awards totaling nearly $1.5
billion for projects offshore West Africa. Drilling equipment orders
were up 114% during the first nine months of 2008 as compared to the same period
in 2007, nearly three-fourths of which was due to awards received for new
deepwater rig construction projects. Surface equipment orders
increased nearly 8% from 2007 due largely to higher commodity prices and
activity levels in the United States and the Asia Pacific region, partially
offset by the high level of orders in the first nine months of 2007 from
customers in Eastern Europe and the Caspian Sea region which did not repeat at
the same levels during the first nine months of 2008. Orders for oil,
gas and water separation applications were down 19% in the first nine months of
2008 as compared to the same period in 2007 primarily due to the timing of order
placement.
The
V&M segment had order increases in all product lines totaling $1.3 billion
in the first nine months of 2008, an increase of $218.9 million, or 21.0%, from
$1.0 billion in the comparable period of 2007. Distributed valve
orders and aftermarket orders were up 43% and 20%, respectively, due mainly to
higher commodity prices and activity levels in the U.S. and improved market
conditions in Canada. Measurement orders increased nearly 33% as a
result of increased demand for equipment to be used for nuclear and oil and gas
applications. Demand for equipment for a major subsea flow line
construction project was a primary factor driving a 13% increase in awards for
engineered valves during the nine months ended September 30, 2008 compared to
the nine months ended September 30, 2007. Additionally, strong demand
for equipment designed for gas processing, storage and refinery applications,
primarily in the United States, led to a 7% increase in orders of process valves
during the current year to date period.
Orders in
the CS segment for the first nine months of 2008 totaled $596.6 million, up
$91.1 million, or 18.0%, from $505.5 million in the first nine months of 2007.
Centrifugal compression equipment orders increased 31% in the first nine months
of 2008 as compared to the same period in 2007. The increase in
centrifugal compression equipment orders was the result of (i) a 37% increase in
demand across all product lines for plant air equipment, (ii) a 29% increase in
orders of engineered air machines, primarily designed for air separation and
engineered industrial air applications and (iii) a 33% increase in the
centrifugal aftermarket business, particularly with regard to stronger demand
for legacy and spare unit parts. Reciprocating compression equipment
orders were up a modest 3% for the nine months ended 2008 compared to the same
period in 2007 due to mainly to (i) a 30% increase in orders for Superior
compressors, primarily from customers in the United States, Latin America and
the Asia Pacific region and (ii) a 3% increase in the demand for Ajax units as
strong order levels from customers in the Far East more than offset a decline in
demand from packagers in the United States. The increase in new
reciprocating equipment orders was partially offset by a 3% decline in demand
for aftermarket parts and services, primarily from customers in the United
States.
Backlog
was as follows (dollars in millions):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Increase
|
|
|
DPS
|
|
$ |
4,809.6 |
|
|
$ |
3,203.0 |
|
|
$ |
1,606.6 |
|
|
V&M
|
|
|
829.9 |
|
|
|
685.2 |
|
|
|
144.7 |
|
|
CS
|
|
|
511.3 |
|
|
|
380.1 |
|
|
|
131.2 |
|
|
|
|
$ |
6,150.8 |
|
|
$ |
4,268.3 |
|
|
$ |
1,882.5 |
|
Liquidity
and Capital Resources
The
Company’s cash and cash equivalents increased by $695.6 million to $1.4 billion
at September 30, 2008 as compared to $739.9 million at December 31, 2007.
The main reasons for the increase were (i) positive cash flow from operations of
$512.7 million, (ii) net proceeds after issuance costs of approximately $742.4
million received from the Company’s issuance of senior notes in June 2008 (see
Note 7 of the Notes to the Consolidated Condensed Financial Statements for
additional information) and (iii) additional net short-term debt borrowings
totaling approximately $20.7 million, primarily made under the Company’s $585.0
million multicurrency revolving credit facility. These cash inflows
more than offset cash outflows from (i) the purchase of treasury stock at a
cash cost of $215.3 million, (ii) the acquisition of certain assets and
liabilities of five businesses during the first nine months of 2008 totaling
$97.7 million, (iii) debt repayments totaling $106.9 million associated with the
conversion by holders of certain of the 1.5% convertible debentures during the
third quarter of 2008 and (iv) capital expenditures of $160.4
million.
During
the first nine months of 2008, the Company generated $512.7 million of cash from
operations as compared to $167.5 million for the same period in 2007. The
primary reasons for the increase were the higher level of earnings in 2008
and the lower level of cash needed for working capital growth during the first
nine months of 2008 as compared to the first nine months of 2007. Net
income for the first nine months of 2008 totaled $444.6 million, an increase of
$69.6 million from the comparable period in 2007. Cash totaling
approximately $36.7 million was utilized in the first nine months of 2008 to
increase working capital compared to $330.3 million utilized during the same
period in 2007. The increase in working capital in the first nine
months of 2008 primarily reflected higher levels of receivables due to strong
revenue growth and an increase in inventory levels and accounts payable and
accrued liabilities as a result of higher backlog and orders and an increase in
advances received from customers. Backlog increased approximately
$1.9 billion, or 44.1%, from December 31, 2007 and orders increased
approximately $2.5 billion, or 63.5%, during the nine months ended September 30,
2008 as compared to the same period in 2007. An increased investment
in inventory, higher receivables and higher income tax payments, partially
offset by higher accounts payable and accrued liabilities, accounted for a
majority of the cash utilized to increase working capital during the first nine
months of 2007.
The
Company utilized $256.4 million of cash for investing activities during the
first nine months of 2008 as compared to $232.6 million during the same period
in 2007. Most of the increase was due to the additional cash cost of
acquisitions. During the nine months ended September 30, 2008, the
Company spent $97.7 million in connection with the acquisition of certain assets
and liabilities of five businesses (see Note 2 of the Notes to the Consolidated
Condensed Financial Statements for additional information) compared to $76.4
million of cash utilized during the nine months ended September 30, 2007 for
acquisitions. Additionally, $160.4 million of cash was spent for
capital expenditures in the first nine months of 2008 compared to $161.2 million
in the first nine months of 2007.
During
the first nine months of 2008, the Company’s financing activities generated
$470.0 million of cash compared to $423.1 million of cash utilized during the
first nine months of 2007. In June 2008, the Company received net proceeds after
issuance costs of approximately $742.4 million from issuance of long-term
senior notes with maturities of 10 and 30 years. Net short-term debt
borrowings of $20.7 million were also made during the nine months ended
September 30, 2008, most of which related to amounts borrowed for working
capital purposes utilizing the Company’s $585.0 million multicurrency revolving
credit facility. During the third quarter of 2008, a total of $106.9 million of
1.5% convertible debentures were repaid as a result of conversion of those
debentures by their holders. During the first nine months of 2007, the Company
repaid $200.0 million of its 2.65% senior notes upon maturity in April
2007. Additionally, the Company spent $215.3 million of cash in the
first nine months of 2008 to acquire 4.3 million shares of treasury stock as
compared to $282.1 million spent in the first nine months of 2007.
The
Company expects to spend an estimated $260.0 million for capital equipment and
facilities during 2008 in connection with its program of improving manufacturing
efficiency and expanding capacity. The Company currently has underway
a $63.5 million expansion of its manufacturing operations in Romania to increase
the Company’s capacity for high-pressure, high-specification wellheads and trees
for the surface equipment markets, particularly in Europe, Africa, Russia and
the Mediterranean and Caspian Seas. The majority of expenditures for
this new facility will occur in 2008. Cash on hand and future
expected operating cash flows will be utilized to fund the remainder of the
Company’s 2008 capital spending program.
On a
longer-term basis, the Company issued $450.0 million of 6.375% 10-year senior
notes and $300.0 million of 7.0% 30-year senior notes in June 2008. The Company
also has outstanding $131.1 million of 1.5% convertible debentures in addition
to $500.0 million of 2.5% convertible debentures. Holders of the 1.5%
convertible debentures could require the Company to redeem them beginning in
May 2009. Holders of the Company’s 2.5% convertible debentures
could also require the Company to redeem them beginning in
June 2011.
As
described more fully in Note 14 of the Notes to the Consolidated Condensed
Financial Statements, the Company notified the holders of its 1.5% convertible
debentures of their rights under the terms of the debentures to request
conversion of those debentures during the fourth quarter of 2008.
Accordingly, the Company anticipates repaying in cash 100% of the principal
amount of any debentures converted during the fourth quarter of
2008. Additionally, during the fourth quarter of 2008, the conversion
value of any debentures converted that is in excess of the principal value will
be satisfied through the issuance of additional shares of the Company’s common
stock.
Despite
the current uncertainty and volatility in the credit markets, the Company
believes, based on its current financial condition, existing backlog levels and
current expectations for future market conditions, that it will be able to meet
its short- and longer-term liquidity needs with the existing $1.4 billion of
cash on hand, expected cash flow from future operating activities and amounts
available under its $585.0 million five-year multicurrency revolving credit
facility, expiring April 14, 2013.
It is
expected that the Company will finalize the settlement of its remaining
obligations under its U.S. defined benefit pension plans during the fourth
quarter of 2008. Following settlement, the Company currently
anticipates that approximately $3.0 million of pension assets will
remain. These assets will be used by the Company to fund its future
matching obligations under its remaining U.S. defined contribution
plans. A final pre-tax settlement charge of $31.0 million is
currently expected in the fourth quarter of 2008 as payments are made to
beneficiaries under the defined benefit pension plans. These
estimates are based on current expectations of settlement options to be selected
by participants.
Factors
That May Affect Financial Condition and Future Results
The
current turmoil and uncertainty in the public and private credit markets could
adversely impact the Company’s ability to finance its future operational and
capital needs or could adversely impact the ability of its customers to finance
future purchases of equipment.
The
public and private credit markets in the United States and around the world are
currently severely constricted due to economic concerns regarding past mortgage
lending practices, current housing values and the present state of various world
economies. Although the Company does not currently anticipate a need
to access the credit markets for new financing in the short-term, a prolonged
constriction on future lending by banks or investors could result in higher
interest rates on future debt obligations of the Company or could restrict the
Company’s ability to obtain sufficient financing to meet its long-term
operational and capital needs or could limit its ability in the future to
consummate significant business acquisitions to be paid for in
cash. On a shorter-term basis, the current uncertainty and turmoil in
the credit markets may also negatively impact the ability of customers to
finance purchases of the Company’s equipment and could ultimately result in
a decline in sales, profitability and operating cash flows of the
Company.
The
inability of the Company to deliver its backlog on time could affect the
Company’s future sales and profitability and its relationships with its
customers.
At
September 30, 2008, the Company’s backlog was $6.2 billion, a record level for
the Company. The ability to meet customer delivery schedules for this backlog is
dependent on a number of factors including, but not limited to, access to the
raw materials required for production, an adequately trained and capable
workforce, project engineering expertise for certain large projects, sufficient
manufacturing plant capacity and appropriate planning and scheduling of
manufacturing resources. Many of the contracts the Company enters into with its
customers require long manufacturing lead times and contain penalty or incentive
clauses relating to on-time delivery. A failure by the Company to deliver in
accordance with customer expectations could subject the Company to financial
penalties or loss of financial incentives and may result in damage to existing
customer relationships. Additionally, the Company bases its earnings guidance to
the financial markets on expectations regarding the timing of delivery of
product currently in backlog. Failure to deliver backlog in accordance with
expectations could negatively impact the Company’s financial performance and
thus cause adverse changes in the market price of the Company’s outstanding
common stock and other publicly-traded financial instruments.
The
Company has embarked on a significant capital expansion program.
The
Company’s capital expenditures totaled $160.4 million for the nine months ended
September 30, 2008. For 2008, the Company expects full-year capital
expenditures of approximately $260.0 million to continue its program of
upgrading its machine tools, manufacturing technologies, processes and
facilities in order to improve its efficiency and address current and expected
market demand for the Company’s products. To the extent this program causes
disruptions in the Company’s plants, or the needed machine tools or facilities
are not delivered and installed or in use as currently expected, the Company’s
ability to deliver existing or future backlog may be negatively impacted. In
addition, if the program does not result in the expected efficiencies, future
profitability may be negatively impacted.
Execution
of subsea systems projects exposes the Company to risks not present in its
surface business.
This
market is significantly different from the Company’s other markets since subsea
systems projects are significantly larger in scope and complexity, in terms of
both technical and logistical requirements. Subsea projects (i) typically
involve long lead times, (ii) typically are larger in financial scope,
(iii) typically require substantial engineering resources to meet the
technical requirements of the project, (iv) often involve the application
of existing technology to new environments and in some cases, new technology,
and (v) may require manufacturing and other activities in underdeveloped parts
of the world. These projects accounted for approximately 12.2% of total revenues
for the nine months ended September 30, 2008. To the extent the Company
experiences difficulties in meeting the technical and/or delivery requirements
of the projects, the Company’s earnings or liquidity could be negatively
impacted. As of September 30, 2008, the Company had a subsea systems project
backlog of approximately $2.2 billion.
Downturns
in the oil and gas industry have had, and may in the future have, a negative
effect on the Company’s sales and profitability.
Demand
for most of the Company’s products and services, and therefore its revenues,
depends to a large extent upon the level of capital expenditures related to oil
and gas exploration, production, development, processing and transmission.
Declines, as well as anticipated declines, in oil and gas prices could
negatively affect the level of these activities, or could result in the
cancellation, modification or rescheduling of existing orders. The
Company is typically protected against financial losses related to products and
services it has provided prior to any cancellation. However, if the
Company’s customers cancel existing purchase orders, future profitability could
be negatively impacted. Factors that contribute to the volatility of
oil and gas prices include the following:
|
·
|
demand
for oil and gas, which is impacted by economic and political conditions
and weather;
|
|
·
|
the
ability of the Organization of Petroleum Exporting Countries (OPEC) to set
and maintain production levels and
pricing;
|
|
·
|
the
level of production from non-OPEC
countries;
|
|
·
|
policies
regarding exploration and development of oil and gas
reserves;
|
|
·
|
the
political environments of oil and gas producing regions, including the
Middle East;
|
Recently,
oil and gas prices have declined significantly, reflecting the impact of the
difficulties in the credit markets. Any weakening in worldwide demand
for oil and gas may negatively impact demand from customers for the Company’s
equipment, including equipment to be used on new onshore and offshore drilling
rigs currently under construction, particularly rigs whose construction is not
supported by a pre-existing contract with an operator. As of
September 30, 2008, the Company had a backlog of orders for equipment to be used
on deepwater drilling rigs of approximately $1.1 billion, including
approximately $364.0 million of equipment ordered for rigs whose construction
was not supported by a pre-existing contract with an operator. The
Company has been notified of a potential order cancellation for such equipment
totaling nearly $54.0 million. If oil and gas prices continue to
decline or stay at current levels for an extended period of time, further order
cancellations or delays in expected shipment dates may occur.
Fluctuations
in worldwide currency markets can impact the Company’s
profitability.
The
Company has established multiple “Centers of Excellence” facilities for
manufacturing such products as subsea trees, subsea chokes, subsea production
controls and BOPs. These production facilities are located in the United
Kingdom, Brazil and other European and Asian countries. To the extent the
Company sells these products in U.S. dollars, the Company’s profitability is
eroded when the U.S. dollar weakens against the British pound, the euro, the
Brazilian real and certain Asian currencies, including the Singapore
dollar. Alternatively, profitability is enhanced when the dollar
strengthens against these same currencies.
The
Company’s worldwide operations expose it to instability and changes in economic
and political conditions, foreign currency fluctuations, trade and investment
regulations and other risks inherent to international business.
The
economic risks of doing business on a worldwide basis include the
following:
|
·
|
volatility
in general economic, social and political
conditions;
|
|
·
|
differing
tax rates, tariffs, exchange controls or other similar
restrictions;
|
|
·
|
changes
in currency rates;
|
|
·
|
inability
to repatriate income or capital;
|
|
·
|
reductions
in the number or capacity of qualified personnel;
and
|
Cameron
has manufacturing and service operations that are essential parts of its
business in developing countries and economically and politically volatile areas
in Africa, Latin America, Russia and other countries that were part of the
Former Soviet Union, the Middle East, and Central and South East Asia. The
Company also purchases a large portion of its raw materials and components from
a relatively small number of foreign suppliers in developing countries. The
ability of these suppliers to meet the Company’s demand could be adversely
affected by the factors described above.
The
Company is subject to trade regulations that expose the Company to potential
liability.
Doing
business on a worldwide basis also puts the Company and its operations at risk
due to political risks and the need for compliance with the laws and regulations
of many jurisdictions. These laws and regulations impose a range of restrictions
and/or duties on importation and exportation, operations, trade practices, trade
partners and investment decisions. The Company has received certain
inquiries regarding its compliance with such laws and regulations from U.S.
federal agencies.
The
Company does business and has operations in a number of developing countries
that have relatively under-developed legal and regulatory systems when compared
to more developed countries. Several of these countries are generally
perceived as presenting a higher than normal risk of corruption, or a culture
where requests for improper payments are not discouraged. Maintaining
and administering an effective U.S. Foreign Corrupt Practices Act (FCPA)
compliance program in these environments presents greater challenges to the
Company than is the case in other, more developed countries. With
respect to FCPA compliance, the Company received a voluntary request for
information in September 2005 from the U.S. Securities and Exchange
Commission (SEC) regarding certain of the Company’s West African activities and
responded to this request.
As
discussed in Note 12 of the Notes to the Consolidated Condensed Financial
Statements, in July 2007, the Company was one of a number of companies to
receive a letter from the Criminal Division of the U.S. Department of Justice
(DOJ) requesting information on its use of a customs clearance broker. The DOJ
is inquiring into whether certain of the services provided to the Company by the
customs clearance broker may have involved violations of the U.S. Foreign
Corrupt Practices Act (FCPA). The Company is conducting an internal
investigation in response, as discussed below, and is providing the requested
information to the DOJ.
The
Company engaged special counsel reporting to the Audit Committee of the Board of
Directors to conduct an investigation into its dealings with the customs
clearance broker in Nigeria and Angola to determine if any payments made to or
by the customs clearance broker on the Company’s behalf constituted a violation
of the FCPA. The investigation is also looking into activities of Company
employees and agents with respect to immigration matters and importation
permitting in Nigeria. To date, the special counsel has found that the Company
utilized certain services in Nigeria offered by the customs clearance broker
that appear to be similar to services that have been under review by the DOJ.
Similar issues do not appear to be present in Angola. Special counsel
is reviewing these and other services and activities to determine whether they
were conducted in compliance with all applicable laws and regulations. Special
counsel is also reviewing the extent, if any, of the Company’s knowledge and
involvement in the performance of these services and activities, and whether the
Company fulfilled its obligations under the FCPA.
In
addition, the U.S. Securities and Exchange Commission (SEC) is conducting an
informal inquiry into the same matters currently under review by the DOJ. As
part of this inquiry the SEC has requested that the Company provide to them the
information and documents that have been requested by and are being provided to
the DOJ. The Company is cooperating fully with the SEC, as it is doing with the
DOJ, and is providing the requested materials. Both agencies have requested an
extension of the statute of limitations with respect to matters under review
until January 2009. At
this stage of the internal investigation, the Company cannot predict the
ultimate outcome of either the internal investigation or the government
inquiries. The Company has also undertaken an enhanced compliance training
effort for its personnel, including foreign operations personnel dealing with
customs clearance regulations.
Compliance
with U.S. trade sanctions and embargoes also pose a risk to the Company since it
deals with its business on a worldwide basis through various incorporated and
unincorporated entities. The U.S. Department of Treasury’s Office of
Foreign Assets Control made an inquiry regarding U.S. involvement in a United
Kingdom subsidiary’s commercial and financial activity relating to Iran in
September 2004 and the U.S. Department of Commerce made an inquiry
regarding sales by another United Kingdom subsidiary to Iran in
February 2005. The Company responded to these two inquiries and
has not received any additional requests related to these
matters. The Company’s policy is to not do business with, and has
restricted its non-U.S. subsidiaries and persons from doing business with,
countries with respect to which the United States has imposed sanctions, which
include Iran, Syria, Sudan, North Korea and Cuba.
In
January 2007, the Company underwent a Pre-Assessment Survey as part of a
Focused Assessment initiated by the Regulatory Audit Division of the U.S.
Customs and Border Protection, Department of Homeland Security. The
Pre-Assessment Survey resulted in a finding that the Company had deficiencies in
its U.S. Customs compliance processes. The Company is taking
corrective action and currently expects to undergo Assessment Compliance Testing
in early 2009.
The
Company is subject to environmental, health and safety laws and regulations that
expose the Company to potential liability.
The
Company’s operations are subject to a variety of national and state, provisional
and local laws and regulations, including laws and regulations relating to the
protection of the environment. The Company is required to invest financial and
managerial resources to comply with these laws and expects to continue to do so
in the future. To date, the cost of complying with governmental regulation has
not been material, but the fact that such laws or regulations are frequently
changed makes it impossible for the Company to predict the cost or impact of
such laws and regulations on the Company’s future operations. The modification
of existing laws or regulations or the adoption of new laws or regulations
imposing more stringent environmental restrictions could adversely affect the
Company.
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
The
Company is currently exposed to market risk from changes in foreign currency
rates and changes in interest rates. A discussion of the Company’s
market risk exposure in financial instruments follows.
Foreign
Currency Exchange Rates
A large
portion of the Company’s operations consist of manufacturing and sales
activities in foreign jurisdictions, principally in Europe, Canada, West Africa,
the Middle East, Latin America and the Pacific Rim. As a result, the
Company’s financial performance may be affected by changes in foreign currency
exchange rates in these markets. Overall, for those locations where
the Company is a net receiver of local non-U.S. dollar currencies, Cameron
generally benefits from a weaker U.S. dollar with respect to those
currencies. Alternatively, for those locations where the Company is a
net payer of local non-U.S. dollar currencies, a weaker U.S. dollar with respect
to those currencies will generally have an adverse impact on the Company’s
financial results. The impact on the Company’s financial results of
gains or losses arising from foreign currency-denominated transactions, if
material, have been described in Part I, Item 2, Management’s Discussion
and Analysis of Financial Condition and Results of Operations for the periods
covered by this report.
In order
to mitigate the effect of exchange rate changes, the Company will often attempt
to structure sales contracts to provide for collections from customers in the
currency in which the Company incurs its manufacturing costs. In certain
instances, the Company will enter into foreign currency forward contracts to
hedge specific large anticipated receipts or payments in currencies for which
the Company does not traditionally have fully offsetting local currency
expenditures or receipts. The Company was party to a number of
long-term foreign currency forward contracts at September 30,
2008. The purpose of the majority of these contracts was to hedge
large anticipated non-functional currency cash flows on major subsea, drilling
or valve contracts involving the Company’s United States operations and its
wholly-owned subsidiaries in Brazil, Ireland, Italy, Romania, Singapore and the
United Kingdom. Information relating to the contracts, which have
been accounted for as cash flow hedges under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
and the fair values recorded in the Company’s Consolidated Balance Sheets at
September 30, 2008 follows:
|
|
|
Year of Contract Expiration
|
|
(amounts in millions except exchange rates)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Total
|
|
Sell
USD/Buy GBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount to sell (in U.S. dollars)
|
|
$ |
49.4 |
|
|
$ |
116.0 |
|
|
$ |
37.8 |
|
|
$ |
2.3 |
|
|
$ |
205.5 |
|
|
Average
USD to GBP contract rate
|
|
|
1.9451 |
|
|
|
1.9238 |
|
|
|
1.8932 |
|
|
|
1.8721 |
|
|
|
1.9225 |
|
|
Average
USD to GBP forward rate at September 30, 2008
|
|
|
1.7844 |
|
|
|
1.7748 |
|
|
|
1.7516 |
|
|
|
1.7316 |
|
|
|
1.7723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2008 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(16.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
USD/Buy BRL:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount to sell (in U.S. dollars)
|
|
|
16.4 |
|
|
|
10.4 |
|
|
|
— |
|
|
|
— |
|
|
|
26.8 |
|
|
Average
BRL to USD contract rate
|
|
|
1.6440 |
|
|
|
1.6967 |
|
|
|
— |
|
|
|
— |
|
|
|
1.6644 |
|
|
Average
BRL to USD forward rate at September 30, 2008
|
|
|
1.9224 |
|
|
|
1.9674 |
|
|
|
— |
|
|
|
— |
|
|
|
1.9399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2008 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
RON/Buy USD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount to sell (in RON)
|
|
|
34.5 |
|
|
|
9.5 |
|
|
|
— |
|
|
|
— |
|
|
|
44.0 |
|
|
Average
USD to RON contract rate
|
|
|
0.4160 |
|
|
|
0.4000 |
|
|
|
— |
|
|
|
— |
|
|
|
0.4126 |
|
|
Average
USD to RON forward rate at September 30, 2008
|
|
|
0.3744 |
|
|
|
0.3699 |
|
|
|
— |
|
|
|
— |
|
|
|
0.3734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2008 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
Euro/Sell USD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount to buy (in euros)
|
|
|
45.2 |
|
|
|
76.7 |
|
|
|
14.0 |
|
|
|
— |
|
|
|
135.9 |
|
|
Average
USD to EUR contract rate
|
|
|
1.4868 |
|
|
|
1.5217 |
|
|
|
1.5248 |
|
|
|
— |
|
|
|
1.5104 |
|
|
Average
USD to EUR forward rate at September 30, 2008
|
|
|
1.4125 |
|
|
|
1.4169 |
|
|
|
1.4012 |
|
|
|
— |
|
|
|
1.4138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2008 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(11.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
Euro/Sell GBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount to buy (in euros)
|
|
|
15.0 |
|
|
|
40.7 |
|
|
|
8.1 |
|
|
|
0.7 |
|
|
|
64.5 |
|
|
Average
EUR to GBP contract rate
|
|
|
1.2587 |
|
|
|
1.2536 |
|
|
|
1.2417 |
|
|
|
1.2316 |
|
|
|
1.2530 |
|
|
Average
EUR to GBP forward rate at September 30, 2008
|
|
|
1.2631 |
|
|
|
1.2593 |
|
|
|
1.2492 |
|
|
|
1.2450 |
|
|
|
1.2588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2008 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
NOK/Sell GBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount to buy (in Norwegian krone)
|
|
|
11.6 |
|
|
|
23.1 |
|
|
|
— |
|
|
|
— |
|
|
|
34.7 |
|
|
Average
NOK to GBP contract rate
|
|
|
10.2428 |
|
|
|
10.2786 |
|
|
|
— |
|
|
|
— |
|
|
|
10.2666 |
|
|
Average
NOK to GBP forward rate at September 30, 2008
|
|
|
10.5090 |
|
|
|
10.5827 |
|
|
|
— |
|
|
|
— |
|
|
|
10.5580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2008 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Currencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2008 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3.8 |
) |
Interest
Rates
The
Company is subject to interest rate risk on its long-term fixed interest rate
debt and, to a lesser extent, variable-interest rate
borrowings. Variable-rate debt, where the interest rate fluctuates
periodically, exposes the Company’s cash flows to variability due to changes in
market interest rates. Fixed-rate debt, where the interest rate is
fixed over the life of the instrument, exposes the Company to changes in the
fair value of its debt due to changes in market interest rates and to the risk
that the Company may need to refinance maturing debt with new debt at a higher
rate.
The
Company manages its debt portfolio to achieve an overall desired position of
fixed and floating rates and may employ interest rate swaps as a tool to achieve
that goal. The major risks from interest rate derivatives include
changes in the interest rates affecting the fair value of such instruments,
potential increases in interest expense due to market increases in floating
interest rates and the creditworthiness of the counterparties in such
transactions.
The fair
values of the short-term borrowings under the Company’s revolving credit
facility, the 6.375% 10-year Senior Notes and the 7.0% 30-year Senior Notes are
principally dependent on prevailing interest rates. The fair values of the 1.5%
and 2.5% convertible debentures are principally dependent on both prevailing
interest rates and the Company’s current share price as it relates to the
initial conversion price of the respective instruments. Since the
Company typically borrows or renews its outstanding borrowings under its
revolving credit facility at current interest rates for 30-day periods, changes
in interest rates tend to impact the Company’s cash flows over time more so than
the fair market value of this portion of the Company’s debt.
The
Company has various other short- and long-term borrowings, but believes that the
impact of changes in interest rates in the near term will not be material to
these instruments.
Item 4. Controls and
Procedures
In
accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried
out an evaluation, under the supervision and with the participation of the
Company’s Disclosure Committee and the Company’s management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures, as of
the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective as of September 30,
2008 to ensure that information required to be disclosed by the Company that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and
that information required to be disclosed in the reports that the Company files
or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. There were no material changes in the Company’s internal control
over financial reporting during the quarter ended September 30,
2008.
The
Company is subject to a number of contingencies, including environmental
matters, litigation and tax contingencies.
Environmental
Matters
The
Company’s worldwide operations are subject to regulations with regard to air,
soil and water quality as well as other environmental matters. The Company,
through its environmental management system and active third-party audit
program, believes it is in substantial compliance with these regulations. The
Company is currently identified as a potentially responsible party (PRP) with
respect to two sites designated for cleanup under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) or similar state
laws. One of these sites is Osborne, Pennsylvania (a landfill into which a
predecessor of the CS operation in Grove City, Pennsylvania deposited waste),
where remediation is complete and remaining costs relate to ongoing ground water
treatment and monitoring. The other is believed to be a de minimis exposure. The
Company is also engaged in site cleanup under the Voluntary Cleanup Plan of the
Texas Commission on Environmental Quality at former manufacturing locations in
Houston and Missouri City, Texas. Additionally, the Company has discontinued
operations at a number of other sites which had been active for many years. The
Company does not believe, based upon information currently available, that there
are any material environmental liabilities existing at these locations. At
September 30, 2008, the Company’s consolidated balance sheet included a
noncurrent liability of approximately $6.7 million for environmental
matters.
Legal
Matters
In 2001,
the Company discovered that contaminated underground water from the former
manufacturing site in Houston referenced above had migrated under an adjacent
residential area. Pursuant to applicable state regulations, the Company notified
the affected homeowners. Concerns over the impact on property values of the
underground water contamination and its public disclosure led to a number of
claims by homeowners.
The
Company has entered into a number of individual settlements and has settled a
class action lawsuit. The individual settlements were made in the form of
agreements with homeowners that obligated the Company to reimburse them for any
estimated decline in the value of their homes at time of sale due to potential
buyers’ concerns over contamination or, in the case of some agreements, to
purchase the property after an agreed marketing period. All but three of these
agreements have been closed out. In addition, the Company has settled
Valice v. Cameron Iron Works, Inc. (80th Jud. Dist. Ct., Harris County,
filed June 21, 2002), which was filed and settled as a class action.
Pursuant to the settlement, the 258 homeowners in the class are entitled to
receive a cash payment of approximately 3% of the 2006 appraised value of their
property or reimbursement of any diminution in value of their property due to
contamination concerns at the time of any sale. To date, 69 homeowners have
elected the cash payment and 21 opted out of the class settlement.
There are
two suits currently pending and one threatened regarding this matter filed by
homeowners who opted out of the class settlement. One was filed by six such
homeowners; the other suit was filed by an individual homeowner. A
suit has been threatened by a group of nine other homeowners but has not yet
been filed. The complaints in the actions filed make, and the other
threatens to make, the claim that the contaminated underground water has reduced
property values and seek recovery of alleged actual and exemplary damages for
the loss of property value.
There are
two suits currently pending filed by persons not in the class. One
seeks damages for reduced property value, the other involves claims arising out
of health risks posed by the contaminated underground water. The
Company is of the opinion that there is no health risk to area residents and
that the suit is without merit.
The
Company believes, based on its review of the facts and law, that any potential
exposure from existing agreements, the class action settlement or other actions
that have been or may be filed, will not have a material adverse effect on its
financial position or results of operations. The Company’s consolidated balance
sheet included a liability of $13.2 million for these matters as of September
30, 2008.
The
Company has been named as a defendant in a number of multi-defendant,
multi-plaintiff tort lawsuits since 1995. At September 30, 2008, the Company’s
consolidated balance sheet included a liability of approximately $3.4 million
for such cases, including estimated legal costs. The Company believes, based on
its review of the facts and law, that the potential exposure from these suits
will not have a material adverse effect on its consolidated results of
operations, financial condition or cash flow from operations.
Regulatory
Contingencies
In
January 2007, the Company underwent a Pre-Assessment Survey as part of a
Focused Assessment initiated by the Regulatory Audit Division of the U.S.
Customs and Border Protection, Department of Homeland Security. The
Pre-Assessment Survey resulted in a finding that the Company had deficiencies in
its U.S. Customs compliance processes. The Company is taking corrective action
and currently expects to undergo Assessment Compliance Testing in early
2009.
In
July 2007, the Company was one of a number of companies to receive a letter
from the Criminal Division of the U.S. Department of Justice (DOJ) requesting
information on its use of a customs clearance broker. The DOJ is inquiring into
whether certain of the services provided to the Company by the customs clearance
broker may have involved violations of the U.S. Foreign Corrupt Practices Act
(FCPA). The Company is conducting an internal investigation in response, as
discussed below, and is providing the requested information to the
DOJ.
The
Company engaged special counsel reporting to the Audit Committee of the Board of
Directors to conduct an investigation into its dealings with the customs
clearance broker in Nigeria and Angola to determine if any payments made to or
by the customs clearance broker on the Company’s behalf constituted a violation
of the FCPA. The investigation is also looking into activities of Company
employees and agents with respect to immigration matters and importation
permitting in Nigeria. To date, the special counsel has found that the Company
utilized certain services in Nigeria offered by the customs clearance broker
that appear to be similar to services that have been under review by the DOJ.
Similar issues do not appear to be present in Angola. Special counsel
is reviewing these and other services and activities to determine whether they
were conducted in compliance with all applicable laws and regulations. Special
counsel is also reviewing the extent, if any, of Company personnel’s knowledge
and involvement in the performance of these services and activities, and whether
the Company fulfilled its obligations under the FCPA.
In
addition, the U.S. Securities and Exchange Commission (SEC) is conducting an
informal inquiry into the same matters currently under review by the DOJ. As
part of this inquiry the SEC has requested that the Company provide to them the
information and documents that have been requested by and are being provided to
the DOJ. The Company is cooperating fully with the SEC, as it is doing with the
DOJ, and is providing the requested materials. Both agencies have requested an
extension of the statute of limitations with respect to matters under review
until January 2009. At this stage of the internal investigation,
the Company cannot predict the ultimate outcome of either the internal
investigation or the government inquiries. The Company has established a
separate compliance function and undertaken an enhanced compliance training
effort for its personnel, including foreign operations personnel dealing with
customs clearance regulations.
Tax
Contingencies
The
Company has legal entities in over 35 countries. As a result, the Company is
subject to various tax filing requirements in these countries. The Company
prepares its tax filings in a manner which it believes is consistent with such
filing requirements. However, some of the tax laws and regulations which the
Company is subject to are subject to interpretation and/or judgment. Although
the Company believes that the tax liabilities for periods ending on or before
the balance sheet date have been adequately provided for in the financial
statements, to the extent that a taxing authority believes that the Company has
not prepared its tax filings in accordance with the authority’s interpretation
of the tax laws/regulations, the Company could be exposed to additional taxes.
There were no material changes in the Company’s liabilities for unrecognized tax
benefits during the three or nine months ended September 30, 2008.
The
information set forth under the caption “Factors That May Affect Financial
Condition and Future Results” on pages 25 – 28 of this quarterly report on
Form 10-Q is incorporated herein by reference.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
In
February 2006, the Company’s Board of Directors changed the number of
shares of the Company’s common stock authorized for repurchase from the
5,000,000 shares authorized in August 2004 to 10,000,000 shares in order to
reflect the 2-for-1 stock split effective December 15, 2005. This
authorization was subsequently increased to 20,000,000 in connection with the
2-for-1 stock split effective December 28, 2007 and eventually to
30,000,000 by a resolution adopted by the Board of Directors on
February 21, 2008. Additionally, on May 22, 2006, the Company’s Board
of Directors approved repurchasing shares of the Company’s common stock with the
proceeds remaining from the Company’s 2.5% Convertible Debenture offering, after
taking into account a planned repayment of $200,000,000 principal amount of the
Company’s outstanding 2.65% senior notes due 2007. This authorization is in
addition to the 30,000,000 shares described above.
Purchases
pursuant to the 30,000,000-share Board authorization may be made by way of open
market purchases, directly or indirectly, for the Company’s own account or
through commercial banks or financial institutions and by the use of derivatives
such as a sale or put on the Company’s common stock or by forward or
economically equivalent transactions. Shares of common stock purchased and
placed in treasury during the three months ended September 30, 2008 under the
Board’s two authorization programs described above are as follows:
|
Period
|
|
Total
number
of
shares
purchased
|
|
|
Average
price paid
per share
|
|
|
Total
number
of
shares
purchased
as
part
of all
repurchase
programs
(a)
|
|
|
Maximum
number
of
shares
that may
yet
be
purchased
under
all
repurchase
programs
(b)
|
|
|
7/1/08
– 7/31/08
|
|
|
25,000 |
|
|
$ |
48.89 |
|
|
|
21,524,102 |
|
|
|
11,063,777 |
|
|
8/1/08
– 8/31/08
|
|
|
700,000 |
|
|
$ |
46.53 |
|
|
|
22,224,102 |
|
|
|
10,391,449 |
|
|
9/1/08
– 9/30/08
|
|
|
661,488 |
|
|
$ |
40.85 |
|
|
|
22,885,590 |
|
|
|
9,769,180 |
|
|
Total
|
|
|
1,386,488 |
|
|
$ |
43.86 |
|
|
|
22,885,590 |
|
|
|
9,769,180 |
|
____________
|
(a)
|
All
share purchases during the three months ended September 30, 2008 were done
through open market transactions.
|
|
(b)
|
As
of September 30, 2008, there were no shares available for purchase under
the $250,000,000 Board
authorization.
|
Item 3. Defaults Upon
Senior Securities
None
Item 4. Submission of
Matters to a Vote of Security Holders
None.
Item 5. Other
Information
|
|
(a)
|
Information
Not Previously Reported in a Report on
Form 8-K
|
None
|
|
(b)
|
Material
Changes to the Procedures by Which Security Holders May Recommend
Board Nominees.
|
There
have been no material changes to the procedures enumerated in the Company’s
definitive proxy statement filed on Schedule 14A with the Securities and
Exchange Commission on March 27, 2008 with respect to the procedures by
which security holders may recommend nominees to the Company’s Board of
Directors.
Exhibit 31.1
-
Certification
Exhibit 31.2
-
Certification
Exhibit 32.1
-
Certification
of the CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Date:
November 3, 2008
|
CAMERON
INTERNATIONAL CORPORATION
|
|
|
(Registrant)
|
|
|
|
|
|
By: /s/ Charles M.
Sledge
|
|
|
Charles M. Sledge
|
|
|
Vice President, Finance and Chief Financial Officer
and authorized to sign on behalf of the
Registrant
|
EXHIBIT
INDEX
|
Exhibit
Number
|
|
Description
|
| |
31.1
|
|
Certification
|
| |
|
|
|
| |
31.2
|
|
Certification
|
| |
|
|
|
| |
32.1
|
|
Certification
of the CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
35