form10-q.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, 2009
|
OR
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE 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 LastReport)
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
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 29, 2009 was
220,698,705.
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
|
17
|
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
|
33
|
Item 4. Controls and
Procedures
|
35
|
PART II
— OTHER INFORMATION
|
35
|
Item 1. Legal
Proceedings
|
35
|
Item 1A. Risk
Factors
|
37
|
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
|
37
|
Item 3. Defaults Upon Senior
Securities
|
38
|
Item 4. Submission of Matters to
a Vote of Security Holders
|
38
|
Item 5. Other
Information
|
38
|
Item 6. Exhibits
|
39
|
SIGNATURES
|
40
|
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,
|
|
|
|
2009
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
(unaudited)
|
|
REVENUES
|
|
$ |
1,231,791 |
|
|
$ |
1,504,733 |
|
|
$ |
3,758,852 |
|
|
$ |
4,324,621 |
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales (exclusive of depreciation and amortization shown separately
below)
|
|
|
828,012 |
|
|
|
1,050,826 |
|
|
|
2,512,454 |
|
|
|
3,079,429 |
|
Selling and administrative
expenses
|
|
|
169,739 |
|
|
|
165,308 |
|
|
|
517,243 |
|
|
|
484,509 |
|
Depreciation and
amortization
|
|
|
38,347 |
|
|
|
32,496 |
|
|
|
112,314 |
|
|
|
95,711 |
|
Interest income
|
|
|
(1,374 |
) |
|
|
(9,692 |
) |
|
|
(5,401 |
) |
|
|
(22,236 |
) |
Interest expense
|
|
|
22,598 |
|
|
|
23,625 |
|
|
|
73,758 |
|
|
|
46,118 |
|
Restructuring
expense
|
|
|
5,853 |
|
|
|
− |
|
|
|
39,033 |
|
|
|
− |
|
Total costs and
expenses
|
|
|
1,063,175 |
|
|
|
1,262,563 |
|
|
|
3,249,401 |
|
|
|
3,683,531 |
|
Income
before income taxes
|
|
|
168,616 |
|
|
|
242,170 |
|
|
|
509,451 |
|
|
|
641,090 |
|
Income
tax provision
|
|
|
(43,672 |
) |
|
|
(79,190 |
) |
|
|
(131,266 |
) |
|
|
(206,343 |
) |
Net
income
|
|
$ |
124,944 |
|
|
$ |
162,980 |
|
|
$ |
378,185 |
|
|
$ |
434,747 |
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.57 |
|
|
$ |
0.75 |
|
|
$ |
1.74 |
|
|
$ |
2.00 |
|
Diluted
|
|
$ |
0.56 |
|
|
$ |
0.71 |
|
|
$ |
1.71 |
|
|
$ |
1.88 |
|
Shares
used in computing earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
219,537 |
|
|
|
218,478 |
|
|
|
217,837 |
|
|
|
217,286 |
|
Diluted
|
|
|
221,912 |
|
|
|
229,219 |
|
|
|
221,246 |
|
|
|
230,953 |
|
(1)
|
Amounts
have been retrospectively revised as a result of the adoption, effective
January 1, 2009, of FASB Accounting Standards Codification Topic 470-20,
Debt with Conversion and Other
Options.
|
The
accompanying notes are an integral part of these statements.
CAMERON
INTERNATIONAL CORPORATION
(dollars
in thousands, except shares and per share data)
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,527,528 |
|
|
$ |
1,621,046 |
|
Receivables,
net
|
|
|
877,706 |
|
|
|
950,362 |
|
Inventories,
net
|
|
|
1,698,565 |
|
|
|
1,336,925 |
|
Other
|
|
|
216,765 |
|
|
|
148,110 |
|
Total current
assets
|
|
|
4,320,564 |
|
|
|
4,056,443 |
|
Plant
and equipment, net
|
|
|
1,045,599 |
|
|
|
931,647 |
|
Goodwill
|
|
|
720,730 |
|
|
|
709,217 |
|
Other
assets
|
|
|
220,052 |
|
|
|
205,064 |
|
TOTAL ASSETS
|
|
$ |
6,306,945 |
|
|
$ |
5,902,371 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
61,042 |
|
|
$ |
161,279 |
|
Accounts
payable and accrued liabilities
|
|
|
1,867,627 |
|
|
|
1,854,384 |
|
Accrued
income taxes
|
|
|
38,101 |
|
|
|
95,545 |
|
Total current
liabilities
|
|
|
1,966,770 |
|
|
|
2,111,208 |
|
Long-term
debt
|
|
|
1,229,067 |
|
|
|
1,218,627 |
|
Deferred
income taxes
|
|
|
119,723 |
|
|
|
99,149 |
|
Other
long-term liabilities
|
|
|
112,967 |
|
|
|
128,860 |
|
Total
liabilities
|
|
|
3,428,527 |
|
|
|
3,557,844 |
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01 per share, 400,000,000 shares authorized,
239,473,764 shares issued at September 30, 2009 (236,316,873 shares issued
at December 31, 2008)
|
|
|
2,395 |
|
|
|
2,363 |
|
Capital in excess of par
value
|
|
|
1,267,992 |
|
|
|
1,254,593 |
|
Retained
earnings
|
|
|
2,188,098 |
|
|
|
1,809,913 |
|
Accumulated other elements of
comprehensive income (loss)
|
|
|
44,023 |
|
|
|
(84,218 |
) |
Less:
Treasury stock, 18,807,197 shares at September 30, 2009
(19,424,120 shares at December 31, 2008)
|
|
|
(624,090 |
) |
|
|
(638,124 |
) |
Total stockholders’
equity
|
|
|
2,878,418 |
|
|
|
2,344,527 |
|
TOTAL LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
$ |
6,306,945 |
|
|
$ |
5,902,371 |
|
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(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
124,944 |
|
|
$ |
162,980 |
|
|
$ |
378,185 |
|
|
$ |
434,747 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
28,265 |
|
|
|
25,177 |
|
|
|
82,279 |
|
|
|
72,642 |
|
Amortization
|
|
|
10,082 |
|
|
|
7,319 |
|
|
|
30,035 |
|
|
|
23,069 |
|
Non-cash stock compensation
expense
|
|
|
6,091 |
|
|
|
7,610 |
|
|
|
22,044 |
|
|
|
23,567 |
|
Tax benefit of employee stock
compensation plan transactions and deferred income taxes
|
|
|
30,322 |
|
|
|
(18,948 |
) |
|
|
22,906 |
|
|
|
(20,250 |
) |
Changes
in assets and liabilities, net of translation, acquisitions and non-cash
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
28,002 |
|
|
|
(47,496 |
) |
|
|
110,967 |
|
|
|
(190,448 |
) |
Inventories
|
|
|
(12,409 |
) |
|
|
(12,710 |
) |
|
|
(305,522 |
) |
|
|
(31,270 |
) |
Accounts payable and accrued
liabilities
|
|
|
27,339 |
|
|
|
86,594 |
|
|
|
(40,739 |
) |
|
|
115,976 |
|
Other assets and liabilities,
net
|
|
|
(67,798 |
) |
|
|
52,802 |
|
|
|
(116,079 |
) |
|
|
84,680 |
|
Net cash provided by operating
activities
|
|
|
174,838 |
|
|
|
263,328 |
|
|
|
184,076 |
|
|
|
512,713 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(55,967 |
) |
|
|
(64,380 |
) |
|
|
(163,779 |
) |
|
|
(160,426 |
) |
Acquisitions, net of cash
acquired
|
|
|
− |
|
|
|
(40,187 |
) |
|
|
(23,177 |
) |
|
|
(97,699 |
) |
Proceeds from sale of plant and
equipment
|
|
|
779 |
|
|
|
786 |
|
|
|
3,508 |
|
|
|
1,711 |
|
Net cash used for investing
activities
|
|
|
(55,188 |
) |
|
|
(103,781 |
) |
|
|
(183,448 |
) |
|
|
(256,414 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term loan borrowings
(repayments), net
|
|
|
(12,024 |
) |
|
|
(59,610 |
) |
|
|
23,036 |
|
|
|
20,738 |
|
Redemption of convertible debt
securities
|
|
|
(131,109 |
) |
|
|
(106,854 |
) |
|
|
(131,109 |
) |
|
|
(106,854 |
) |
Issuance of long-term senior
notes
|
|
|
− |
|
|
|
− |
|
|
|
− |
|
|
|
747,922 |
|
Debt issuance
costs
|
|
|
− |
|
|
|
− |
|
|
|
− |
|
|
|
(5,550 |
) |
Purchase of treasury
stock
|
|
|
− |
|
|
|
(60,849 |
) |
|
|
(7,055 |
) |
|
|
(215,327 |
) |
Proceeds from stock option
exercises, net of tax payments from stock compensation plan
transactions
|
|
|
1,640 |
|
|
|
6,973 |
|
|
|
5,119 |
|
|
|
17,067 |
|
Excess tax benefits from employee
stock
compensation plan
transactions
|
|
|
1,238 |
|
|
|
2,727 |
|
|
|
3,468 |
|
|
|
17,172 |
|
Principal payments on capital
leases
|
|
|
(1,632 |
) |
|
|
(1,866 |
) |
|
|
(5,235 |
) |
|
|
(5,166 |
) |
Net
cash provided by (used in) financing activities
|
|
|
(141,887 |
) |
|
|
(219,479 |
) |
|
|
(111,776 |
) |
|
|
470,002 |
|
Effect
of translation on cash
|
|
|
12,107 |
|
|
|
(38,668 |
) |
|
|
17,630 |
|
|
|
(30,700 |
) |
Increase
(decrease) in cash and cash equivalents
|
|
|
(10,130 |
) |
|
|
(98,600 |
) |
|
|
(93,518 |
) |
|
|
695,601 |
|
Cash
and cash equivalents, beginning of period
|
|
|
1,537,658 |
|
|
|
1,534,117 |
|
|
|
1,621,046 |
|
|
|
739,916 |
|
Cash
and cash equivalents, end of period
|
|
$ |
1,527,528 |
|
|
$ |
1,435,517 |
|
|
$ |
1,527,528 |
|
|
$ |
1,435,517 |
|
(1)
|
Amounts
have been retrospectively revised as a result of the adoption, effective
January 1, 2009, of FASB Accounting Standards Codification Topic 470-20,
Debt with Conversion and Other
Options.
|
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 Current Report on Form 8-K dated July 20, 2009, which reflects certain
adjustments related to the Company’s accounting for its convertible debentures
(see below) to the Audited Consolidated Financial Statements and Notes thereto
filed by the Company on Form 10-K for the year ended December 31,
2008.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles 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, estimates of total contract profit or
loss on certain long-term production contracts, 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 the fair value of reporting units for
purposes of assessing goodwill for impairment, estimated proceeds from assets
held for sale and estimates related to deferred tax assets and liabilities,
including valuation allowances on deferred tax assets. Actual results could
differ materially from these estimates.
The
Company has evaluated subsequent events through November 6, 2009, which is the
date these financial statements were filed with the U.S. Securities and Exchange
Commission.
Certain
prior period amounts have been retrospectively revised as a result of the
adoption, effective January 1, 2009, of FASB Accounting Standards Codification
(ASC) Topic 470-20, Debt with Conversion and Other Options (ASC
470-20). See Note 9 of the Notes to Consolidated Condensed Financial
Statements for additional information.
Note
2: Recently Issued Accounting Pronouncements
Effective
January 1, 2009, the Company adopted FASB ASC Topic 805, Business Combinations
(ASC 805), and FASB ASC Topic 810-10-65, related to Noncontrolling Interests in
Consolidated Financial Statements. There was no material impact on
the Company’s financial statements as of January 1, 2009 as a result of adopting
either statement, although it is anticipated that ASC 805 will significantly
affect the Company’s accounting for business combinations occurring on or after
January 1, 2009.
The
Company adopted the provisions of FASB ASC Topic 820, Fair Value Measurements
and Disclosures (ASC 820) relating to financial assets and liabilities and other
assets and liabilities carried at fair value on a recurring basis as required on
January 1, 2008. As permitted, the Company deferred the adoption
of this standard with respect to all remaining nonfinancial assets
and liabilities until January 1, 2009. There was no impact on the Company’s
financial statements at the time of adoption of the remaining provisions as
required on January 1, 2009; however, the Company does expect that this new
standard will impact certain aspects of its accounting for business combinations
occurring on or after January 1, 2009, including the determination of fair
values assigned to certain purchased assets and liabilities.
Note
3: Acquisitions
On June
1, 2009, the Company entered into an Agreement and Plan of Merger with NATCO
Group, Inc. (NATCO). On October 14, 2009, the Company and NATCO
entered into an Amended and Restated Agreement and Plan of Merger dated as of
June 1, 2009 (the Agreement). The Agreement provides that Cameron
will acquire all of the issued and outstanding shares of common stock of NATCO
by exchanging with the NATCO stockholders 1.185 shares of Cameron common stock
for each share of NATCO common stock owned. The merger, expected to close during
the fourth quarter of 2009, is subject to certain regulatory approvals, the
approval of NATCO stockholders and certain other conditions. The
Company expects to incorporate the majority of NATCO’s operations into its
Drilling & Production Systems (DPS) segment upon completion of the
merger.
During
the nine months ended September 30, 2009, the Company acquired the assets or
capital stock of two businesses for a total cash purchase price of
$23,177,000. These businesses were acquired to enhance the Company’s
product offerings or aftermarket services in the DPS and Valves &
Measurement (V&M) segments. The two acquisitions were included in
the Company’s consolidated condensed financial statements for the periods
subsequent to the acquisitions. As of September 30, 2009, preliminary goodwill
recorded as a result of these acquisitions totaled approximately $15,538,000, of
which approximately $2,776,000 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
4: Restructuring Expense
Included
in operating results for the three- and nine-month periods ended September 30,
2009 are employee severance and related benefit costs associated primarily with
workforce reductions and certain other costs incurred mainly in connection with
the pending acquisition of NATCO, totaling approximately $5,853,000 and
$39,033,000, respectively.
Note
5: Receivables
Receivables
consisted of the following (in thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Trade
receivables
|
|
$ |
840,820 |
|
|
$ |
897,453 |
|
Other
receivables
|
|
|
59,746 |
|
|
|
62,557 |
|
Allowance
for doubtful accounts
|
|
|
(22,860 |
) |
|
|
(9,648 |
) |
Total
receivables
|
|
$ |
877,706 |
|
|
$ |
950,362 |
|
Note
6: Inventories
Inventories consisted of the following
(in thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Raw
materials
|
|
$ |
132,972 |
|
|
$ |
126,649 |
|
Work-in-process
|
|
|
518,104 |
|
|
|
403,791 |
|
Finished
goods, including parts and subassemblies
|
|
|
1,210,267 |
|
|
|
931,168 |
|
Other
|
|
|
11,271 |
|
|
|
10,197 |
|
|
|
|
1,872,614 |
|
|
|
1,471,805 |
|
Excess
of current standard costs over LIFO costs
|
|
|
(115,595 |
) |
|
|
(85,240 |
) |
Allowances
|
|
|
(58,454 |
) |
|
|
(49,640 |
) |
Total
inventories
|
|
$ |
1,698,565 |
|
|
$ |
1,336,925 |
|
Note
7: Plant and Equipment and Goodwill
Plant and
equipment consisted of the following (in thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Plant
and equipment, at cost
|
|
$ |
1,959,104 |
|
|
$ |
1,766,646 |
|
Accumulated
depreciation
|
|
|
(913,505 |
) |
|
|
(834,999 |
) |
Total plant and
equipment
|
|
$ |
1,045,599 |
|
|
$ |
931,647 |
|
Changes
in goodwill during the nine months ended September 30, 2009 were as follows (in
thousands):
Balance
at December 31, 2008
|
|
$ |
709,217 |
|
Changes
primarily associated with acquisitions and adjustments to prior period
purchase
price
allocations
|
|
|
(2,170 |
) |
Translation
and other
|
|
|
13,683 |
|
Balance at September 30,
2009
|
|
$ |
720,730 |
|
Note
8: Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of the following (in
thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Trade
accounts payable and accruals
|
|
$ |
341,556 |
|
|
$ |
525,507 |
|
Salaries,
wages and related fringe benefits
|
|
|
152,691 |
|
|
|
164,411 |
|
Advances
from customers
|
|
|
1,071,899 |
|
|
|
855,872 |
|
Sales-related
costs and provisions
|
|
|
66,045 |
|
|
|
85,565 |
|
Payroll
and other taxes
|
|
|
50,568 |
|
|
|
39,409 |
|
Product
warranty
|
|
|
42,359 |
|
|
|
33,551 |
|
Fair
market value of derivatives
|
|
|
10,550 |
|
|
|
35,715 |
|
Other
|
|
|
131,959 |
|
|
|
114,354 |
|
Total accounts payable and
accrued liabilities
|
|
$ |
1,867,627 |
|
|
$ |
1,854,384 |
|
Activity
during the nine months ended September 30, 2009 associated with the Company’s
product warranty accruals was as follows (in thousands):
Balance
December
31,
2008
|
|
|
Net
warranty
provisions
|
|
|
Charges
against
accrual
|
|
|
Translation
and
other
|
|
|
Balance
September
30,
2009
|
|
$33,551 |
|
|
30,986 |
|
|
(20,490) |
|
|
(1,688) |
|
|
$42,359 |
|
Note
9: Debt
The
Company’s debt obligations were as follows (in thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Short-term
borrowings under revolving credit facility
|
|
$ |
31,927 |
|
|
$ |
14,482 |
|
Senior
notes, net of $1,953 of unamortized original issue discount
at
September 30,
2009 ($2,028 at December 31, 2008)
|
|
|
748,047 |
|
|
|
747,972 |
|
1.5%
convertible debentures, net of $785 of conversion option
discount
at
December 31, 2008
|
|
|
− |
|
|
|
130,324 |
|
2.5%
convertible debentures, net of $26,589 of conversion option discount
at
September
30, 2009 ($37,758 at December 31, 2008)
|
|
|
473,411 |
|
|
|
462,242 |
|
Other
debt
|
|
|
23,508 |
|
|
|
10,941 |
|
Obligations
under capital leases
|
|
|
13,216 |
|
|
|
13,945 |
|
|
|
|
1,290,109 |
|
|
|
1,379,906 |
|
Current
maturities
|
|
|
(61,042 |
) |
|
|
(161,279 |
) |
Long-term
portion
|
|
$ |
1,229,067 |
|
|
$ |
1,218,627 |
|
Effective
January 1, 2009, the Company adopted ASC Topic 470-20, which revises the
accounting for convertible debt instruments that may be settled in cash
(including partial cash settlement) upon conversion. The standard
requires issuers of convertible debt instruments within its scope to separately
account for the liability and equity components of the instruments in a manner
that reflects the issuer’s nonconvertible debt borrowing rate when interest cost
is recognized. Specifically, it requires bifurcation of a component
of the debt, classification of that component in equity and the accretion of the
resulting discount on the debt to be recognized as part of interest expense in
the issuer’s consolidated results of operations. The Company was
required to apply this new standard to its 1.5% convertible debentures issued in
2004 and due in 2024 (1.5% Convertible Debentures) and its 2.5% convertible
debentures issued in 2006 and due in 2026 (2.5% Convertible
Debentures).
The
bifurcation of the instruments was based on estimated market borrowing rates of
4.85% and 5.9%, respectively, for non-convertible debt instruments similar to
the 1.5% and 2.5% Convertible Debentures. The discount assigned to
the convertible debentures in order to result in interest expense equal to the
nonconvertible debt borrowing rates mentioned above is being accreted to
interest expense over an estimated five-year life of the convertible
debentures. The estimated life is consistent with an option in the
debentures allowing holders to require the Company to repurchase the debentures
in whole or in part for principal plus accrued and unpaid interest five years
following the date of issuance. Accordingly, as a result of the
adoption of the new standard, interest expense for the three-and nine-month
periods ended September 30, 2009 increased by $3,783,000 and $11,955,000,
respectively. The Company has also retrospectively revised certain
amounts included in these financial statements for the three-and nine-month
periods ended September 30, 2008 as follows:
|
|
Three
Months Ended September 30, 2008
|
|
|
Nine
Months Ended September 30, 2008
|
|
Increase
in interest expense
|
|
$ |
5,259 |
|
|
$ |
15,595 |
|
Decrease
in net income
|
|
|
3,321 |
|
|
|
9,848 |
|
Decrease
in basic earnings per share
|
|
|
.01 |
|
|
|
.05 |
|
Decrease
in diluted earnings per share
|
|
|
.02 |
|
|
|
.05 |
|
Approximately
$65,802,000 has been included in capital in excess of par value on the Company’s
Consolidated Condensed Balance Sheets at both September 30, 2009 and December
31, 2008 related to the conversion value of the Company’s 1.5% and 2.5%
Convertible Debentures.
On June
18, 2009, the Company notified the holders of its 1.5% Convertible Debentures
that it would exercise its right to redeem for cash all of the outstanding notes
on July 20, 2009 at a redemption price equal to 100% of the outstanding
principal amount, plus accrued and unpaid interest up to, but not including the
redemption date. All of the remaining 1.5% Convertible Debentures
were either converted by the holders or redeemed by the
Company. During the nine months ended September 30,
2009, approximately 3,156,891 shares of common stock were issued to
holders of the 1.5% Convertible Debentures who elected the conversion option in
recognition of the conversion value of those debentures.
The
carrying value of the 2.5% Convertible Debentures, totaling $473,411,000, has
been classified as long-term debt in the September 30, 2009 Consolidated
Condensed Balance Sheet as these debentures are not redeemable by holders until
June 2011. At September 30, 2009, the conversion value of the 2.5%
Convertible Debentures did not exceed the principal amount of the
debentures.
At
September 30, 2009, the Company had borrowings outstanding totaling £20,000,000,
under its revolving credit facility at an interest rate of 0.72% with a maturity
date of October 20, 2009. Other debt, totaling $23,508,000 at
September 30, 2009 consists primarily of short-term borrowings at certain other
international locations.
At
September 30, 2009, the fair value of the Company’s fixed-rate debt (based on
level 1 quoted market rates) was approximately $1,456,211,000 as compared to
$1,250,000,000 principal amount of the debt. The carrying value of
all other financial instruments is considered to be representative of their
respective fair values.
Note
10: Income Taxes
The
Company’s effective tax rate for the three and nine months ended September 30,
2009 was 25.9% and 25.8%, respectively. The effective tax rate
is the result of an annual estimated effective tax rate of 27% reduced by
approximately $1,773,000 and $6,213,000 for the three and nine months ended
September 30, 2009, respectively, primarily related to settlements with tax
authorities partially offset by unrecognized benefits of certain tax positions
and adjustments to certain other accruals.
Note
11: 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,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
559 |
|
|
$ |
1,607 |
|
|
$ |
1,677 |
|
|
$ |
4,821 |
|
Interest
cost
|
|
|
2,939 |
|
|
|
4,466 |
|
|
|
8,817 |
|
|
|
13,398 |
|
Expected
return on plan assets
|
|
|
(3,199 |
) |
|
|
(5,944 |
) |
|
|
(9,597 |
) |
|
|
(17,832 |
) |
Amortization
of prior service cost (credits)
|
|
|
2 |
|
|
|
(96 |
) |
|
|
6 |
|
|
|
(288 |
) |
Amortization
of losses and other
|
|
|
1,355 |
|
|
|
2,500 |
|
|
|
4,065 |
|
|
|
7,500 |
|
Total net benefit
expense
|
|
$ |
1,656 |
|
|
$ |
2,533 |
|
|
$ |
4,968 |
|
|
$ |
7,599 |
|
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,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
6 |
|
|
$ |
3 |
|
Interest
cost
|
|
|
128 |
|
|
|
269 |
|
|
|
384 |
|
|
|
807 |
|
Amortization
of prior service credits
|
|
|
(223 |
) |
|
|
(96 |
) |
|
|
(669 |
) |
|
|
(288 |
) |
Amortization
of gains and other
|
|
|
(479 |
) |
|
|
(371 |
) |
|
|
(1,437 |
) |
|
|
(1,113 |
) |
Total net benefit
income
|
|
$ |
(572 |
) |
|
$ |
(197 |
) |
|
$ |
(1,716 |
) |
|
$ |
(591 |
) |
Note
12: 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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
(as
revised)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
DPS
|
|
$ |
791,494 |
|
|
$ |
956,992 |
|
|
$ |
2,459,115 |
|
|
$ |
2,773,619 |
|
V&M
|
|
|
294,680 |
|
|
|
383,724 |
|
|
|
882,599 |
|
|
|
1,095,142 |
|
CS
|
|
|
145,617 |
|
|
|
164,017 |
|
|
|
417,138 |
|
|
|
455,860 |
|
|
|
$ |
1,231,791 |
|
|
$ |
1,504,733 |
|
|
$ |
3,758,852 |
|
|
$ |
4,324,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPS
|
|
$ |
149,706 |
|
|
$ |
171,493 |
|
|
$ |
486,563 |
|
|
$ |
453,664 |
|
V&M
|
|
|
56,552 |
|
|
|
84,661 |
|
|
|
160,094 |
|
|
|
221,711 |
|
CS
|
|
|
20,455 |
|
|
|
28,440 |
|
|
|
58,811 |
|
|
|
72,861 |
|
Corporate &
other
|
|
|
(58,097 |
) |
|
|
(42,424 |
) |
|
|
(196,017 |
) |
|
|
(107,146 |
) |
|
|
$ |
168,616 |
|
|
$ |
242,170 |
|
|
$ |
509,451 |
|
|
$ |
641,090 |
|
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 restructuring and stock
compensation expense.
Note
13: 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):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
124,944 |
|
|
$ |
162,980 |
|
|
$ |
378,185 |
|
|
$ |
434,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (basic)
|
|
|
219,537 |
|
|
|
218,478 |
|
|
|
217,837 |
|
|
|
217,286 |
|
Common
stock equivalents
|
|
|
2,375 |
|
|
|
2,555 |
|
|
|
1,942 |
|
|
|
2,799 |
|
Incremental
shares from assumed conversion
of convertible
debentures
|
|
|
− |
|
|
|
8,186 |
|
|
|
1,467 |
|
|
|
10,868 |
|
Diluted
shares
|
|
|
221,912 |
|
|
|
229,219 |
|
|
|
221,246 |
|
|
|
230,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.57 |
|
|
$ |
0.75 |
|
|
$ |
1.74 |
|
|
$ |
2.00 |
|
Diluted
earnings per share
|
|
$ |
0.56 |
|
|
$ |
0.71 |
|
|
$ |
1.71 |
|
|
$ |
1.88 |
|
The
Company’s 1.5% Convertible Debentures have been included in the calculation of
diluted earnings per share for the nine months ended September 30, 2009 and
2008, since the average market price of the Company’s common stock exceeded the
conversion value of the debentures during both periods. The Company’s
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
for the same reason. The 2.5% Convertible Debentures have not been
included in the calculation of diluted earnings per share for the three and nine
months ended September 30, 2009, as the conversion price of the debentures was
in excess of the average market price of the Company’s common stock during the
period. During the nine-month period ended September 30, 2009, the
Company acquired 347,678 treasury shares at an average cost of $20.29 per
share. No treasury shares were acquired during the three months ended
September 30, 2009. A total of 244,764 and 964,601 treasury shares
were issued during the three- and nine-month periods ended September 30, 2009,
respectively, in satisfaction of stock option exercises and vesting of
restricted stock units.
On August
19, 2009, the Board of Directors approved amending its Stockholders’ Rights
Agreement to accelerate the expiration of the Rights to August 31, 2009 from
October 31, 2017.
Note
14: Comprehensive Income
The
amounts of comprehensive income for the three and nine months ended September
30, 2009 and 2008 were as follows (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per Consolidated Condensed Results of Operations
|
|
$ |
124,944 |
|
|
$ |
162,980 |
|
|
$ |
378,185 |
|
|
$ |
434,747 |
|
Foreign
currency translation gain (loss) (1)
|
|
|
46,524 |
|
|
|
(122,366 |
) |
|
|
103,564 |
|
|
|
(70,543 |
) |
Amortization
of net prior service credits related to the Company’s pension and
postretirement benefit plans, net of tax
|
|
|
(139 |
) |
|
|
(119 |
) |
|
|
(418 |
) |
|
|
(355 |
) |
Amortization
of net actuarial losses related to the Company’s pension and
postretirement benefit plans, net of tax
|
|
|
552 |
|
|
|
1,315 |
|
|
|
1,656 |
|
|
|
3,944 |
|
Change
in fair value of derivatives accounted for as cash flow hedges, net of
tax
|
|
|
3,899 |
|
|
|
(31,512 |
) |
|
|
23,439 |
|
|
|
(31,264 |
) |
Comprehensive
income
|
|
$ |
175,780 |
|
|
$ |
10,298 |
|
|
$ |
506,426 |
|
|
$ |
336,529 |
|
(1)
|
The
“Foreign currency translation gain (loss)” relates primarily to the
Company’s operations in Brazil, Canada, France, Italy, Luxembourg, Norway
and the United Kingdom.
|
The
components of accumulated other elements of comprehensive income (loss) at
September 30, 2009 and December 31, 2008 were as follows (in
thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Accumulated
foreign currency translation gain (loss)
|
|
$ |
98,491 |
|
|
$ |
(5,073 |
) |
Prior
service credits, net, related to the Company’s pension and postretirement
benefit plans, net of tax
|
|
|
3,218 |
|
|
|
3,636 |
|
Actuarial
losses, net, related to the Company’s pension and postretirement benefit
plans, net of tax
|
|
|
(41,068 |
) |
|
|
(42,724 |
) |
Change
in fair value of derivatives accounted for as cash flow
hedges,
net of tax(1)
|
|
|
(16,618 |
) |
|
|
(40,057 |
) |
Accumulated
other elements of comprehensive income (loss)
|
|
$ |
44,023 |
|
|
$ |
(84,218 |
) |
(1)
|
Approximately
$10,100,000 (after tax) of accumulated other elements of comprehensive
loss is expected to be recognized in earnings during the twelve-month
period ending September 30, 2010.
|
Note
15: 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 three 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. Of the other two, one is believed to be a
de minimis exposure and the other recently settled for a de minimis
amount.
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. Changes in the groundwater flow
pattern in the southeast corridor of the Houston project prompted the Company to
take additional proactive remedial measures in order to protect the environment
and avoid new areas of contamination. 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, 2009, the Company’s consolidated balance sheet
included a noncurrent liability of approximately $6,669,000 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. Twenty-one of 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. Three of
these agreements have had no claims made under them yet. The Company has also
settled ten other property claims by homeowners who have sold their properties.
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 homeowners who remained part
of 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, 74 homeowners have elected the cash payment.
Of the
258 properties included in the Valice class, there were 21 homeowners who opted
out of the class settlement. Agreement has been reached with all
homeowners who opted out, including those who filed suits, and their claims for
diminution of property value have been resolved. While one suit that
was filed relating to this matter included a claim for bodily injury, Cameron
was granted summary judgment on the claim. The Company is of the
opinion that there is no health risk to area residents. Recent
testing results of monitoring wells on the southeastern border of the plume have
caused the Company to notify the 33 homeowners who were not in the Valice class
that their property may be affected. Only one such homeowner has made
a claim for property value diminution and that claim has been
resolved. The Company is taking remedial measures to prevent
additional properties from being affected.
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 with respect to this underground water
contamination, 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 approximately $14,464,000 for these matters as of September 30,
2009.
The
Company has been named as a defendant in a number of multi-defendant,
multi-plaintiff tort lawsuits since 1995. At September 30, 2009, the Company’s
consolidated balance sheet included a liability of approximately $4,498,000 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 liquidity.
Regulatory
Contingencies
In
January 2007, the Company underwent a Pre-Assessment Survey as part of a Focused
Assessment Audit 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 process and had underpaid customs
duties. The Company has taken corrective action and has closed out
all matters regarding duties owed for import
entries processed from September 29, 2001 through October 5,
2007. The Company expects that
the final assessment compliance period will encompass import activity during the
second half of 2009. The field work for the Focused Assessment Audit
is expected to commence in January of 2010 and be completed by the end of the
first quarter of 2010.
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 activities undertaken on their behalf by 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). In response, 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 payment made to or by the customs
clearance broker on the Company’s behalf constituted a violation of the FCPA. 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. Special counsel is reviewing
these and other services and activities, such as immigration matters and
importation permitting in Nigeria, 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 its 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.
At this
stage, the Company cannot predict the ultimate outcome of the government
inquiries. The Company has undertaken an enhanced compliance training effort for
its personnel, including foreign operations personnel dealing with customs
clearance regulations and hired a Chief Compliance Officer in September 2008 to
oversee and direct all legal compliance matters for the Company.
Tax
Contingencies
The
Company has legal entities in over 35 countries, each of which has various tax
filing requirements. 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 to which the Company is subject require
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 or regulations,
the Company could be exposed to additional taxes.
The
Company’s financial instruments consist primarily of cash and cash equivalents,
trade receivables, trade payables, derivative instruments and debt instruments.
The book values of cash and cash equivalents, trade receivables, trade payables,
derivative instruments and floating-rate debt instruments are considered to be
representative of their respective fair values. Certain cash equivalents have
also been valued based on quoted market prices which are considered to be Level
1 market inputs as defined in ASC 820.
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 forward foreign currency exchange
contracts to hedge specific large anticipated receipts or disbursements 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, 2009, some of
which extend through 2011. The purpose of the majority of these contracts was to
hedge large anticipated non-functional currency cash flows on major subsea,
drilling, valve or other equipment contracts involving the Company’s United
States operations and its wholly-owned subsidiaries in Brazil, France, Italy,
Mexico, Romania, Singapore and the United Kingdom. The Company determines the
fair value of its outstanding foreign currency forward contracts based on quoted
exchange rates for the respective currencies applicable to similar
instruments. These quoted exchange rates are considered to be Level 2
observable market inputs as defined in the fair value measurements guidance of
the ASC. Information relating to the contracts, which have been
accounted for as cash flow hedges as of September 30, 2009 follows:
Total net
volume bought (sold) by notional currency on open derivative contracts at
September 30, 2009 was as follows (in thousands):
Notional currency in:
|
|
Volume
|
|
|
|
RON
|
|
11,400
|
SGD
|
|
2,160
|
GBP
|
|
888
|
EUR
|
|
(34,625)
|
USD
|
|
(135,531)
|
The fair value of derivative
financial instruments recorded in the Company’s Consolidated Condensed
Balance Sheet at September 30, 2009 is as follows (in
thousands):
|
|
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
designated as
hedging
instruments:
|
|
Foreign exchange
contracts
|
Current
assets
|
|
$ |
3,355
|
|
Current
liabilities
|
|
$ |
(9,455) |
|
|
Non-current
assets
|
|
|
79 |
|
Non-current
liabilities
|
|
|
(1,027) |
|
|
|
|
|
3,434 |
|
|
|
|
(10,482) |
|
|
|
Derivatives
not designated as
hedging
instruments:
|
|
Foreign exchange
contracts
|
Current
assets
|
|
|
98 |
|
Current
liabilities
|
|
|
(1,095) |
|
|
Non-current
assets
|
|
|
− |
|
Non-current
liabilities
|
|
|
− |
|
|
|
|
|
98 |
|
|
|
|
(1,095) |
|
Total
Derivatives
|
|
|
$ |
3,532 |
|
|
|
$ |
(11,577) |
|
The
effects of derivative financial instruments on the Company’s consolidated
condensed financial statements for the three months ended September 30, 2009
were as follows (in thousands):
|
|
Effective
Portion
|
|
Ineffective
Portion and Other
|
|
Derivatives
in
Cash
Flow
Hedging
Relationships
|
|
Amount
of
Pre-Tax
Gain
(Loss) Recognized in OCI on Derivatives
|
|
Location
of
Gain
(Loss)
Reclassified
from
Accumulated
OCI
into
Income
|
|
Amount
of
Gain
(Loss) Reclassified from Accumulated OCI into Income
|
|
Location
of
Gain
(Loss)
Recognized
in
Income
on Derivatives
|
|
Amount
of
Gain
(Loss) Recognized in Income on Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
contracts
|
|
$ |
2,469 |
|
Revenues
|
|
$ |
(703) |
|
Cost
of goods
sold-ineffective
portion
|
|
$ |
486 |
|
|
|
|
|
|
Cost
of
goods sold
|
|
|
(2,845) |
|
|
|
|
|
|
|
|
|
|
|
Depreciationexpense
|
|
|
(26) |
|
|
|
|
|
|
Total
|
|
$ |
2,469 |
|
|
|
$ |
(3,574) |
|
|
|
$ |
486 |
|
The
effects of derivative financial instruments on the Company’s consolidated
condensed financial statements for the nine months ended September 30, 2009 were
as follows (in thousands):
|
|
Effective
Portion
|
|
Ineffective
Portion and Other
|
|
Derivatives
in
Cash
Flow
Hedging
Relationships
|
|
Amount
of
Pre-Tax
Gain
(Loss) Recognized in OCI on Derivatives
|
|
Location
of
Gain
(Loss) R
eclassified
from
Accumulated
OCI
into
Income
|
|
Amount
of
Gain
(Loss) Reclassified from Accumulated OCI into Income
|
|
Location
of
Gain
(Loss)
Recognized
in
Income
on
Derivatives
|
|
Amount
of
Gain
(Loss) Recognized in Income on Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
contracts
|
|
$ |
17,015 |
|
Revenues
|
|
$ |
(15,664) |
|
Cost
of goods
sold-ineffective
portion
|
|
$ |
2,171 |
|
|
|
|
|
|
Cost
of
goods sold
|
|
|
(5,611) |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
(101) |
|
|
|
|
|
|
Total
|
|
$ |
17,015 |
|
|
|
$ |
(21,376) |
|
|
|
$ |
2,171 |
|
Approximately
$1,072,000 and $833,000, respectively was recognized as an addition to cost of
goods sold during the three and nine months ended September 30, 2009 relating to
derivatives which were not designated as hedging instruments.
On
October 19, 2009, the Company entered into an interest rate swap with a third
party to receive a fixed interest rate of 6.375% and to pay a variable rate
based on the 3 month London Interbank Offered Rate (LIBOR) plus 4.801% on a
notional value of $200,000,000. The swap matures on January 15,
2012 and provides for semi-annual payments each January 15 and July 15,
beginning January 15, 2010. Interest is compounded quarterly on the
15th of each January, April, July and October. An additional interest
rate swap with a notional value of $200,000,000 and terms identical to the above
was also entered into on October 23, 2009, except that the variable rate to be
paid is based on 3 month LIBOR plus 4.779%. The fair value of both
interest rate swaps will be reflected on the Company’s consolidated balance
sheet as either an asset or liability with the change in the fair value of the
swaps reflected as an adjustment to the Company’s consolidated interest income
(in the case of an asset) or consolidated interest expense (in the case of a
liability).
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 and future capital
spending 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; 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 directly 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 it may make in its cost
structure, staffing or
spending levels based on these expectations. Finally, results could
be affected by the following factors related to the proposed acquisition of
NATCO: the ability to satisfy the closing conditions of the
transaction, including obtaining regulatory approvals for the transaction and
the approval of the merger agreement by the NATCO stockholders; the timing of
the satisfaction of the required approvals; the risk that the businesses will
not be integrated successfully; the risk that the cost savings and any other
synergies from the transaction may not be fully realized or may take longer to
realize than expected; disruption from the transaction making it more difficult
to maintain relationships with customers, employees or suppliers; the impact of
other acquisitions that Cameron or NATCO have made or may make before the
transaction; and competition and its effect on pricing. 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 2009 COMPARED TO THIRD QUARTER 2008
Consolidated Results
-
The
Company’s net income for the third quarter of 2009 totaled $124.9 million, or
$0.56 per diluted share, compared to $163.0 million, or $0.71 per diluted share,
for the third quarter of 2008. The Company’s consolidated condensed
results of operations for the three months ended September 30, 2008 and the
consolidated condensed balance sheet as of December 31, 2008 have been
retrospectively revised to reflect the adoption of FASB Accounting Standards
Codification Topic 470-20, (ASC 470-20), effective January 1,
2009. The standard was issued by the Financial Accounting Standards
Board in May 2008 to clarify the accounting for convertible debt instruments
that may be settled in cash upon conversion (including partial cash
settlements). The new guidance requires issuers of these instruments
to separately account for the related liability and equity components in a
manner that will reflect an issuer’s nonconvertible debt borrowing rate in its
reported interest expense. Retrospective revision of the financial
statements for prior periods is required. As a result, the Company’s
consolidated net income for the third quarter of 2008 has been retrospectively
revised from $166.3 million, or $0.73 per diluted share, as previously reported,
to $163.0 million, or $0.71 per diluted share.
Included
in operating results for the third quarter of 2009 were employee severance and
related benefit costs associated primarily with workforce reductions during this
period and certain other costs incurred mainly in connection with the pending
acquisition of NATCO Group, Inc., totaling $5.9 million, or $0.02 per diluted
share.
Revenues
Revenues
for the third quarter of 2009 totaled $1.2 billion, a decrease of $272.9
million, or 18.1%, from $1.5 billion for the third quarter of
2008. Drilling & Production Systems (DPS) segment revenues
declined 17.3% as a result of lower levels of major drilling and subsea project
activities and the effects of lower surface equipment sales due to lower
drilling and production activity levels throughout much of the
world. Valves & Measurement (V&M) segment revenues were down
23.2%, largely reflecting lower activity levels in the U.S. and Canadian markets
while Compression Systems (CS) segment revenues decreased 11.2%, mainly as a
result of lower sales of reciprocating compression equipment caused by the
effect of lower natural gas prices on activity levels and weakness in the North
American markets.
Costs
and Expenses
Cost of
sales (exclusive of depreciation and amortization) for the third quarter of 2009
totaled $828.0 million, a decrease of $222.8 million, or 21.2%, from $1.1
billion for the third quarter of 2008. Cost of sales as a percent of
revenues decreased from 69.8% for the three months ended September 30, 2008 to
67.2% for the three months ended September 30, 2009. 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, 2009 and 2008. The decrease in the ratio of cost
of sales to revenues was attributable primarily to a 3.3 percentage-point
decline in the ratio related to the DPS segment, primarily as a result of higher
margins on drilling and subsea equipment sales as well as process systems
projects, including the recovery of previously expensed costs related to a large
subsea project, partially offset by (i) an increase in the ratio in the CS
segment due mainly to a reclassification of a provision previously recorded in
selling and administrative expenses to cost of sales and other inventory related
costs (approximately a 0.4 percentage-point increase) and (ii) the impact on
sales mix of the decline in the sales volumes in the V&M segment
(approximately a 0.3 percentage-point increase).
Selling
and administrative expenses for the three months ended September 30, 2009 were
$169.7 million as compared to $165.3 million for the three months ended
September 30, 2008, an increase of $4.4 million, or 2.7%. As a
percentage of revenues, selling and administrative costs increased from 11.0%
for the third quarter of 2008 to 13.8% for the third quarter of
2009. The increase was mainly attributable to (i) an increase of $4.6
million in the provision for doubtful accounts taken by the DPS segment during
the third quarter of 2009 that was primarily related to certain past due
receivables from an international customer, (ii) higher legal, consulting and
other third party service provider costs of approximately $3.9 million and (iii)
higher facility-related costs of $2.6 million. These increased costs
were partially offset by a $5.6 reclassification of a previously recorded
provision to cost of sales by the CS segment.
Depreciation
and amortization expense for the third quarter of 2009 was $38.3 million, an
increase of nearly $5.8 million, or 18.0%, from $32.5 million for the third
quarter of 2008. Nearly 40% of the increase was due to the effects of
newly acquired businesses with the remaining increase primarily the result of
higher depreciation expense associated with increased levels of capital spending
in periods prior to the third quarter of 2009, as well as higher amortization of
acquired intangibles.
Interest
income totaled $1.4 million for the three months ended September 30, 2009
compared to $9.7 million for the three months ended September 30,
2008. The decrease was due primarily to lower short-term interest
rates during the third quarter of 2009 as compared to the third quarter of
2008.
Interest
expense was $22.6 million for the three months ended September 30, 2009 compared
to $23.6 million for the three months ended September 30, 2008, a decrease of
$1.0 million. Interest expense for the third quarter of 2008 has been
retrospectively revised from $18.4 million to $23.6 million to reflect the
adoption of ASC 470-20 as described above. The primary reason for the
decrease in interest expense was due to a reduction in interest expense in the
third quarter of 2009 related to the Company’s convertible
debentures.
The
income tax provision for the third quarter of 2009 was $43.7 million compared to
$79.2 million for the third quarter of 2008. The effective tax rates
during the third quarter of 2009 and 2008 were 25.9% and 32.7%,
respectively. The effective tax rate for the third quarter of 2009 is
lower than the comparable previous period due primarily to a lowering of the
annual estimated effective tax rate to 27% as a result of changes in the
Company’s international structure implemented earlier in 2009 and a net
reduction recorded during the third quarter of 2009 related to adjustments to
prior year accruals totaling approximately $1.8 million.
Revenues
and income before income taxes for the DPS, V&M and CS segments are
discussed in more detail below.
Segment Results -
DPS
Segment
|
|
Quarter
Ended
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
$ |
|
% |
Revenues
|
|
$ |
791.5 |
|
|
$ |
957.0 |
|
|
$ |
(165.5 |
) |
|
|
(17.3 |
)% |
Income
before income taxes
|
|
$ |
149.7 |
|
|
$ |
171.5 |
|
|
$ |
(21.8 |
) |
|
|
(12.7 |
)% |
DPS
segment revenues for the third quarter of 2009 totaled $791.5 million, a
decrease of $165.5 million, or 17.3%, from $957.0 million for the third quarter
of 2008. Almost one-half of the decrease in sales by the segment was
the result of a nearly 26% decline in surface equipment sales as activity was
down in all major regions of the world, except Latin America. Drilling equipment
sales declined nearly 22% primarily due to the lower level of activity relating
to completion of equipment for new major deepwater rig construction projects,
lower levels of drilling riser production and lower demand for land blowout
preventers and related equipment. Subsea equipment sales declined 9%
as lower activity levels for projects offshore Brazil and the western coast of
Australia more than offset higher revenues for projects offshore West Africa
during the third quarter of 2009 as compared to the third quarter of
2008. Revenues associated with process systems were up 11% in the
third quarter of 2009 as compared to the same period last year due to activity
levels relating to certain large projects during the third quarter of
2009.
Income
before income taxes totaled $149.7 million for the three months ended September
30, 2009 compared to $171.5 million for the three months ended September 30,
2008, a decrease of $21.8 million, or 12.7%. Cost of sales as a
percent of revenues decreased from 72.0% in the third quarter of 2008 to 67.1%
in the third quarter of 2009. The decrease in the ratio of cost of
sales to revenues was due primarily to (i) the impact of higher net margins on
deepwater drilling projects (approximately a 2.0 percentage-point decrease) and
(ii) an improvement in margins on large subsea projects and process systems
projects, including the impact of a recovery of previously expensed costs
related to a large subsea project (approximately a 3.1 percentage-point decrease
in the ratio).
Selling
and administrative expenses for the third quarter of 2009 totaled $89.0 million,
an increase of $9.2 million, or 11.5%, from $79.8 million during the comparable
period of 2008. Selling and administrative expenses as a percent of
revenues increased from 8.3% in the third quarter of 2008 to 11.2% in the third
quarter of 2009. The increase was mainly attributable to (i) a $4.6
million increase in the provision for doubtful accounts mostly related to
certain past due receivables from an international customer and (ii) higher
headcount and employee-related costs and other discretionary spending, primarily
in the subsea business.
Depreciation
and amortization increased $5.1 million, from $16.9 million for the three months
ended September 30, 2008 to $22.0 million for the three months ended September
30, 2009. Nearly half of the increase was due to the effects of newly
acquired businesses with the remaining increase primarily the result of higher
depreciation expense associated with increased levels of capital spending in
periods prior to the third quarter of 2009 for new machinery and equipment as
well as higher amortization of acquired intangibles.
V&M Segment
|
|
Quarter
Ended
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
$ |
|
% |
Revenues
|
|
$ |
294.7 |
|
|
$ |
383.7 |
|
|
$ |
(89.0 |
) |
|
|
(23.2 |
)% |
Income
before income taxes
|
|
$ |
56.6 |
|
|
$ |
84.7 |
|
|
$ |
(28.1 |
) |
|
|
(33.2 |
)% |
Revenues
for the V&M segment for the third quarter of 2009 totaled $294.7 million as
compared to $383.7 million in the third quarter of 2008, a decline of $89.0
million, or 23.2%. Lower sales of engineered and distributed valves
and of measurement products due largely to the impact of a decrease in market
activity in the United States and Canada accounted for virtually all of the
decline in revenues.
Income
before income taxes totaled $56.6 million for the third quarter of 2009, a
decrease of $28.1 million, or 33.2%, compared to $84.7 million for the third
quarter of 2008. Cost of sales as a percent of revenues declined from
65.0% in the third quarter of 2008 to 63.8% in the third quarter of
2009. Improved sourcing of materials as well as a shift in mix toward
sales of higher margin products during the third quarter of 2009 as compared to
the third quarter of 2008 resulted in a reduction in the ratio of cost of sales
to revenues of approximately 3.5 percentage-points for engineered products and
process valves combined. A mix shift toward higher margin measurement
and aftermarket sales also reduced the cost of sales to revenue ratio by
approximately 1.2 percentage points. Offsetting these reductions was the impact
of a reduction in the amount of distributed product sales in the third quarter
of 2009 as compared to the third quarter of 2008 which added nearly 3.8
percentage points to the ratio.
Selling
and administrative expenses for the third quarter of 2009 were $40.7 million, a
decrease of $0.7 million, or 1.7%, as compared to $41.4 million in the third
quarter of 2008. However, as a percent of revenues, selling and
administrative expenses increased from 10.8% in the third quarter of 2008 to
13.8% in the third quarter of 2009 as costs did not decline as quickly as
revenues.
Depreciation
and amortization increased $1.2 million from $8.1 million in the third quarter
of 2008 to $9.3 million in the third quarter of 2009. The increase
was due largely to higher capital spending in periods prior to the third quarter
of 2009.
CS Segment
|
|
Quarter
Ended
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
$ |
|
% |
Revenues
|
|
$ |
145.6 |
|
|
$ |
164.0 |
|
|
$ |
(18.4 |
) |
|
|
(11.2 |
)% |
Income
before income taxes
|
|
$ |
20.5 |
|
|
$ |
28.4 |
|
|
$ |
(7.9 |
) |
|
|
(28.1 |
)% |
CS
segment revenues for the three months ended September 30, 2009 totaled $145.6
million, a decrease of $18.4 million, or 11.2%, from $164.0 million for the
three months ended September 30, 2008. Sales of reciprocating compression
equipment were down 30% in the third quarter of 2009 as compared to the third
quarter of 2008. This decrease was partially offset by an 8% increase
in sales of centrifugal compression equipment during the same
period. The decrease in reciprocating compression equipment
sales was due primarily to a 74% decline in sales of Ajax units, primarily to
U.S.-based lease fleet operators, and a 21% reduction in aftermarket revenues
reflecting weaker market conditions and the impact of low natural gas prices in
North America on activity levels. A 41% increase in sales of
centrifugal engineered units, primarily attributable to higher international
shipments of gas compression and engineered air equipment, more than offset a
45% decrease in shipments of plant air machines and an 11% decrease in demand
for aftermarket parts and services. The decline in shipments of plant air
machines was largely attributable to the absence in the third quarter of 2009 of
several multi-unit shipments that had occurred in the third quarter of 2008 to
various international customers, as well as overall weakness in the industrial
markets.
Income
before income taxes for the CS segment totaled $20.5 million for the third
quarter of 2009 compared to $28.4 million for the third quarter of 2008, a
decrease of $7.9 million, or 28.1%. Cost of sales as a percent of revenues
increased from 68.2% in the third quarter of 2008 to 74.1% for the same period
in 2009. The increase in the ratio of cost of sales to revenues was
due primarily to (i) a reclassification of a provision previously recorded in
selling and administrative expenses to cost of sales which resulted in an
approximate 3.3 percentage-point increase in the ratio and (ii) higher inventory
write-offs in the third quarter of 2009 (resulting in an approximate 2.3
percentage-point increase in the cost of sales to revenues ratio).
Selling
and administrative expenses for the three months ended September 30, 2009
totaled $13.2 million, a decrease of $6.6 million, or 33.3%, from $19.8 million
during the comparable period of 2008. The decrease was primarily attributable to
a $5.6 million reclassification of a previously recorded provision to cost of
sales.
Corporate
Segment
The
Corporate segment’s loss before income taxes was $58.1 million in the third
quarter of 2009 as compared to $42.4 million in the third quarter of
2008. The loss before income taxes for the Corporate segment for the
third quarter of 2008 was retrospectively revised from $37.2 million to $42.4
million to reflect the adoption of ASC 470-20 described above under
“Consolidated Results”. The adoption of ASC 470-20, effective January
1, 2009, required the Company to retrospectively revise its 2008 financial
statements for consistency with the results for the third quarter of 2009
reported under this new accounting standard.
Selling
and administrative expenses for the third quarter of 2009 totaled $26.8 million,
an increase of $2.5 million, or 10.4%, from $24.3 million during the comparable
period of 2008. The primary reason for the increase was higher
employee incentive costs.
The
decrease in interest income and in interest expense and the severance and other
restructuring expense incurred during the third quarter of 2009 as compared to
the same period in 2008 are discussed in “Consolidated Results”
above.
Orders
-
Orders
were as follows (dollars in millions):
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
% |
DPS
|
|
$ |
961.8 |
|
|
$ |
1,945.4 |
|
|
$ |
(983.6 |
) |
|
|
(50.6 |
)% |
V&M
|
|
|
253.4 |
|
|
|
475.4 |
|
|
|
(222.0 |
) |
|
|
(46.7 |
)% |
CS
|
|
|
127.8 |
|
|
|
191.0 |
|
|
|
(63.2 |
) |
|
|
(33.0 |
)% |
|
|
$ |
1,343.0 |
|
|
$ |
2,611.8 |
|
|
$ |
(1,268.8 |
) |
|
|
(48.6 |
)% |
Orders
for the third quarter of 2009 decreased $1.3 billion, or 48.6%, from the third
quarter of 2008. Approximately $15.7 million of orders were cancelled
by customers during the third quarter of 2009.
DPS
segment orders for the third quarter of 2009 totaled $961.8 million, a decrease
of $983.6 million, or 50.6%, from over $1.9 billion for the third quarter of
2008. Orders for drilling equipment in the third quarter of 2009 declined nearly
77% from the third quarter of 2008 largely due to a lower level of activity with
regard to new deepwater rig construction projects and lower levels of awards for
new land equipment. Orders for subsea equipment were down 52% in the
third quarter of 2009 as compared to the same period in 2008 as the third
quarter of 2008 included an award for a major subsea project offshore West
Africa totaling in excess of $800 million compared to orders received in the
third quarter of 2009 under a new frame agreement for future delivery of subsea
trees for projects offshore Brazil currently valued at approximately $300
million. The total value to the Company of this new frame agreement is expected
to approximate $500 million as additional orders are received in the
future. Surface equipment orders decreased 19% during the three
months ended September 30, 2009 when compared to the same period in 2008
primarily due to a decline during these same periods of nearly 51% in average
U.S. rig counts as a result of a more than 40% decrease in average crude oil
prices and a nearly 65% decrease in average natural gas prices. Orders for
process systems were up 14% during the third quarter of 2009 as compared to the
third quarter of 2008, due primarily to a large multiphase pumping system order
received in the third quarter of 2009 for use on offshore platforms in the Gulf
of Mexico.
The
V&M segment had orders of $253.4 million in the third quarter of 2009, a
decrease of $222.0 million, or 46.7%, from $475.4 million for the comparable
period in 2008. Orders decreased in all product lines during the third quarter
of 2009 as compared to the same period in 2008 as follows: (i) distributed
product orders decreased 70% as a result of softness in the North American
market as compared to strong 2008 activity levels, (ii) orders for engineered
valves decreased nearly 43% due to delays in various large international
projects as compared to the third quarter of 2008 and overall weakness in the
U.S. and Canadian markets, (iii) orders in the process valve product line
decreased nearly 20% due to lower international project activity as well as
weaker demand from customers in the United States and (iv) orders for
measurement products decreased 47% over the similar period in 2008 reflecting
lower awards from customers in the United States, Canada and the United Kingdom
due to declining activity levels.
Orders in
the CS segment for the three months ended September 30, 2009 totaled $127.8
million, a decrease of $63.2 million, or 33.0%, from $191.0 million for the
three months ended September 30, 2008. Centrifugal compression equipment orders
declined 32% in the third quarter of 2009 when compared to the similar period in
2008, accounting for nearly 56% of the total decrease in segment orders, whereas
reciprocating compression equipment orders decreased nearly 35% in the third
quarter of 2009. The global decline in economic activity that began in late 2008
contributed significantly to the decline in centrifugal compression equipment
orders for plant air machines and for engineered products, primarily those
designed for air separation applications. Nearly 59% of the decline in orders
within the reciprocating compression equipment product line was due to a 79%
reduction in demand for Superior compressors in the third quarter of 2009 as
compared to the same period in 2008 due largely to the strong order levels in
the third quarter of 2008 from international customers which did not repeat in
the third quarter of 2009. The impact of lower natural gas prices on activity
levels and the lack of a repeat of the strong order levels experienced in the
third quarter of 2008 also contributed to declines in demand for Ajax units and
aftermarket parts and services in the current quarter as compared to last
year.
NINE
MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2008
Consolidated Results
-
The Company’s net income for the first nine
months of 2009 totaled $378.2 million, or $1.71 per diluted share, compared to
$434.7 million, or $1.88 per diluted share, for the first nine months of
2008. The Company’s consolidated condensed results of operations for
the first nine months of 2008 and the consolidated condensed balance sheet as of
December 31, 2008 have been retrospectively revised to reflect the adoption of
ASC 470-20, effective January 1, 2009. ASC 470-20 was issued by the
Financial Accounting Standards Board in May 2008 to clarify the accounting for
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlements). The standard requires issuers
of these instruments to separately account for the related liability and equity
components in a manner that will reflect an issuer’s nonconvertible debt
borrowing rate in its reported interest expense. Retrospective
revision of the financial statements for prior periods is required under ASC
470-20. As a result of the adoption of this new standard, the
Company’s consolidated net income for the first nine months of 2008 has been
retrospectively revised from $444.6 million, or $1.93 per diluted share, as
previously reported, to $434.7 million, or $1.88 per diluted share.
Included
in operating results for the first nine months of 2009 were employee severance
and related benefit costs associated primarily with workforce reductions during
this period and certain other costs incurred mainly in connection with the
pending acquisition of NATCO Group, Inc., totaling $39.0 million, or $0.11 per
diluted share.
Revenues
Revenues
for the first nine months of 2009 totaled $3.8 billion, a decrease of $565.8
million, or 13.1%, from $4.3 billion for the first nine months of
2008. DPS segment revenues declined 11.3%, accounting for nearly 56%
of the decrease in consolidated revenues, as a result of lower surface equipment
sales due to lower worldwide drilling and production activity levels and due to
lower shipments and activity levels relating to certain large subsea
projects. V&M segment revenues were down 19.4%, largely
reflecting lower activity levels in the U.S., Canadian and U.K. markets while CS
segment revenues decreased 8.5%, mainly as a result of a decline in
reciprocating compression parts and equipment sales resulting from the impact of
lower natural gas prices on activity levels and weakness in the U.S.
market. Included in consolidated revenues for the first nine months
of 2009 were $19.8 million of fees associated with cancellation of existing
orders.
During
the first nine months of 2009, nearly 60% 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, an increase in the value of the U.S. dollar
compared to the applicable functional currency will result in a lower amount of
U.S. dollar revenues and costs for the same amount of functional currency
revenues and costs. Nearly 13% of the net reduction in consolidated
revenue during the first nine months of 2009 as compared to the same period in
2008 was due to the stronger U.S. dollar against these other foreign currencies
for much of the year, partially offset by approximately $52.3 million in
incremental revenues generated by businesses acquired since the first nine
months of 2008.
Costs
and Expenses
Cost of
sales (exclusive of depreciation and amortization) for the first nine months of
2009 totaled $2.5 billion, a decrease of $567.0 million, or 18.4%, from $3.1
billion for the first nine months of 2008. Cost of sales as a percent
of revenues decreased from 71.2% for the nine months ended September 30, 2008 to
66.8% for the nine months ended September 30, 2009. 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, 2009 and 2008. The decrease in the ratio of cost
of sales to revenues was attributable primarily to a 4.7 percentage-point
decline in the ratio related to the DPS segment primarily as a result of higher
margins on drilling and subsea equipment sales as well as process systems
projects, including the recovery of previously expensed costs related to a large
subsea project, partially offset by the impact of the decline in sales volume in
the V&M segment (a 0.5 percentage-point increase in the ratio of cost of
sales to revenues).
Selling
and administrative expenses for the nine months ended September 30, 2009 were
$517.2 million as compared to $484.5 million for the nine months ended September
30, 2008, an increase of $32.7 million, or 6.8%. As a percentage of
revenues, selling and administrative costs increased from 11.2% for the first
nine months of 2008 to 13.8% for the first nine months of 2009. The
increase was mainly attributable to (i) higher provisions for doubtful accounts
totaling approximately $14.1 million relating to uncertainties regarding
collection of receivables, primarily in the DPS and CS segments, (ii) a $7.5
million write-down related to a receivable associated with the 2006 sale of the
Company’s interest in its Iranian joint venture, (iii) the absence in the first
nine months of 2009 of a $5.8 million reduction in expense recorded in the first
nine months of 2008 relating to one of the Company’s non-U.S. defined benefit
pension plans and (iv) higher employee-related and facility costs primarily
associated with the Subsea business in the DPS segment. These
increases were partially offset by the absence in the first nine months of 2009
of a $3.6 million charge recorded in the first nine months of 2008 related to a
dispute on an historical acquisition.
Depreciation
and amortization expense for the first nine months of 2009 was $112.3 million,
an increase of $16.6 million, or 17.3%, from $95.7 million for the first nine
months of 2008. Nearly 40% of the increase was due to the effects of
newly acquired businesses with the remaining increase primarily the result of
higher depreciation expense associated with increased levels of capital spending
in periods prior to the first nine months of 2009 and higher amortization of
acquired intangibles.
Interest
income totaled $5.4 million for the nine months ended September 30, 2009
compared to $22.2 million for the nine months ended September 30,
2008. The decrease is due primarily to lower short-term interest
rates during the first nine months of 2009 as compared to the first nine months
of 2008, partially offset by higher levels of invested cash balances during the
first nine months of 2009.
Interest
expense was $73.8 million for the nine months ended September 30, 2009 compared
to $46.1 million for the nine months ended September 30, 2008, an increase of
$27.7 million. Interest expense for the first
nine months of 2008 has been retrospectively revised from $30.5 million to $46.1
million to reflect the adoption of ASC 470-20 described
above. Interest expense during the first nine months of 2009 relating
to the adoption of ASC 470-20 totaled over $11.9 million. The primary
reason for the increase in interest expense was due to $24.7 million of
additional interest associated with the issuance of $450.0 million of 6.375%
senior notes and $300.0 million of 7.0% senior notes in June 2008.
The
income tax provision for the nine months ended September 30, 2009 was $131.3
million compared to $206.3 million for the nine months ended September 30,
2008. The effective tax rates during the first nine months of 2009
and 2008 were 25.8% and 32.2%, respectively. The effective tax rate
for the first nine months of 2009 is lower than the comparable previous period
primarily as a result of two items (i) a lowering of the annual estimated
effective tax rate to 27% as a result of changes in the Company’s international
structure implemented during 2009 and (ii) a net reduction in reserves for
uncertain tax positions primarily related to settlements with tax authorities
and adjustments to prior year accruals, partially offset by unrecognized
benefits of certain tax positions totaling approximately $6.3
million.
Revenues
and income before income taxes for the DPS, V&M and CS segments are
discussed in more detail below.
Segment Results -
DPS
Segment
|
|
Nine
Months Ended
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
$ |
|
% |
Revenues
|
|
$ |
2,459.1 |
|
|
$ |
2,773.6 |
|
|
$ |
(314.5 |
) |
|
|
(11.3 |
)% |
Income
before income taxes
|
|
$ |
486.6 |
|
|
$ |
453.7 |
|
|
$ |
32.9 |
|
|
|
7.3 |
% |
DPS
segment revenues for the first nine months of 2009 totaled $2.5 billion, a
decrease of $314.5 million, or 11.3%, from $2.8 billion for the first nine
months of 2008. Approximately 17% of the decrease was attributable to
the effects of a stronger U.S. dollar against certain other foreign currencies
for much of the year for the same reasons as mentioned under “Consolidated
Results – Revenues” above, partially offset by the incremental impact of
approximately $42.7 million of additional revenues generated from businesses
acquired since the first nine months of 2008. Absent the effects of a
stronger U.S. dollar and newly acquired businesses, the remaining decrease was
the result of a 14% decline in surface equipment sales, an 11% decrease in
subsea equipment sales and a 4% decrease in drilling equipment sales while sales
of process systems were flat during the first nine months of 2009 as compared to
the first nine months of 2008. Surface equipment sales declined in
all major regions of the world due to the impact of lower commodity prices on
drilling and production activity levels. The decrease in subsea equipment sales
was mostly due to a lower level of shipments and activity relating to major
projects offshore West Africa and the Western coast of
Australia. Sales of drilling equipment during the first nine months
of 2009 as compared to the first nine months of 2008 were down due primarily to
a lower level of activity relating to completion of equipment for new major
deepwater rig construction projects, partially offset by an increased level of
demand for spares and aftermarket repairs.
Income
before income taxes totaled $486.6 million for the nine months ended September
30, 2009 compared to $453.7 million for the nine months ended September 30,
2008, an increase of $32.9 million, or 7.3%. Cost of sales as a
percent of revenues decreased from 73.6% in the first nine months of 2008 to
67.0% in the first nine months of 2009. The decrease in the ratio of
cost of sales to revenues was due primarily to (i) the impact of higher margins
on deepwater drilling projects, including the impact of changes in estimates of
project costs, as well as a higher proportion of sales of higher-margin drilling
projects in the first nine months of 2009 as compared to the first nine months
of 2008 (approximately a 3.2 percentage-point decrease), (ii) an improvement in
margins on large subsea projects, including the recovery of previously expensed
costs related to a large subsea project, as well as a mix change to a lower
proportion of sales of subsea projects which carry a higher cost of
sales-to-revenue ratio than the segment’s other base businesses (approximately a
2.6 percentage-point decrease in the ratio) and (iii) higher margins on process
systems projects during the first nine months of 2009 as compared to the same
period in 2008 (approximately a 0.5 percentage-point decrease).
Selling
and administrative expenses for the first nine months of 2009 totaled $263.4
million, an increase of $36.4 million, or 16.0%, from $227.0 million during the
comparable period of 2008. The increase was mainly attributable to
(i) a $10.7 million increase in the provision for doubtful accounts primarily
relating to certain past due receivables, (ii) a $7.5 million write-down related
to a receivable associated with the 2006 sale of the Company’s interest in its
Iranian joint venture and (iii) the effects of higher headcount and
employee-related costs, primarily in the subsea business.
Depreciation
and amortization increased $11.8 million, from $50.8 million for the nine months
ended September 30, 2008 to $62.6 million for the nine months ended September
30, 2009. Over one-half of the increase was due to the effects of
newly acquired businesses with the remaining increase primarily the result of
higher depreciation expense associated with increased levels of capital spending
in periods prior to the first nine months of 2009 and higher amortization of
acquired intangibles.
V&M
Segment
|
|
Nine
Months Ended
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
$ |
|
% |
Revenues
|
|
$ |
882.6 |
|
|
$ |
1,095.1 |
|
|
$ |
(212.5 |
) |
|
|
(19.4 |
)% |
Income
before income taxes
|
|
$ |
160.1 |
|
|
$ |
221.7 |
|
|
$ |
(61.6 |
) |
|
|
(27.8 |
)% |
Income
before income taxes totaled $160.1 million for the first nine months of 2009, a
decrease of $61.6 million, or 27.8%, compared to $221.7 million for the first
nine months of 2008. Cost of sales as a percent of revenues decreased
from 65.8% in the first nine months of 2008 to 65.2% in the first nine months of
2009. The decline is primarily the result of the net impact of
improved margins in the process valve product line and a mix shift in product
line sales as the result of a large decrease in sales of generally lower margin
distributed products.
Selling
and administrative expenses for the first nine months of 2009 were $120.5
million, a decrease of $9.1 million, or 7.0%, as compared to $129.6 million in
the first nine months of 2008. However, as a percent of revenues,
selling and administrative expenses increased from 11.8% in the first nine
months of 2008 to 13.7% in the first nine months of 2009 as costs did not
decline as quickly as revenues. The decrease was primarily
attributable to lower employee related costs due to headcount reductions,
savings from plant consolidations and discretionary spending
controls.
Depreciation
and amortization increased $2.8 million from $23.7 million in the first nine
months of 2008 to $26.5 million in the first nine months of 2009. The
increase was due largely to higher capital spending in periods prior to the
first nine months of 2009 on facilities and for new machinery and equipment,
mainly in the U.S., Canada and Italy.
CS
Segment
|
|
Nine
Months Ended
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
$ |
|
%
|
Revenues
|
|
$ |
417.1 |
|
|
$ |
455.9 |
|
|
$ |
(38.8 |
) |
|
|
(8.5 |
)% |
Income
before income taxes
|
|
$ |
58.8 |
|
|
$ |
72.9 |
|
|
$ |
(14.1 |
) |
|
|
(19.3 |
)% |
CS
segment revenues for the nine months ended September 30, 2009 totaled $417.1
million, a decrease of $38.8 million, or 8.5%, from $455.9 million for the nine
months ended September 30, 2008. Sales of reciprocating equipment were down 18%
in the first nine months of 2009 as compared to the first nine months of 2008,
accounting for nearly 97% of the decline in segment
revenues. The decrease in reciprocating equipment sales was
primarily due to a 41% decline in sales of Ajax units, primarily to U.S.-based
lease fleet operators, and a 12% reduction in aftermarket revenues reflecting
weaker market conditions in the United States. In the centrifugal
compression equipment product line, lower aftermarket revenues and a 40%
decrease in shipments of plant air machines were mostly offset by a 17% increase
in sales of engineered units, primarily to international customers for gas
compression and engineered air applications. The decline in shipments
of plant air machines was largely attributable to the absence in the first nine
months of 2009 of several multi-unit shipments that had occurred in the first
nine months of 2008 to various international customers.
Income
before income taxes for the CS segment totaled $58.8 million for the first nine
months of 2009 compared to $72.9 million for the first nine months of 2008, a
decrease of $14.1 million, or 19.3%. Cost of sales as a percent of revenues
increased from 68.9% in the first nine months of 2008 to 69.2% for the same
period in 2009. The increase in the ratio of cost of sales to
revenues was due primarily to (i) a reclassification of a provision previously
recorded in selling and administrative expenses to cost of sales which resulted
in an approximate 1.3 percentage-point increase in the ratio, (ii) higher
inventory write-offs in the first nine months of 2009 (resulting in an
approximate 0.8 percentage-point increase in the cost of sales to revenues
ratio) and (iii) higher warranty accruals and a higher exchange loss on
transactions denominated in currencies other than functional currency
(approximately a 0.9 percentage-point increase). These increases were
mostly offset by an improvement in margins on reciprocating and centrifugal
compression equipment due to better pricing, a mix shift from lower-margin
domestic shipments to higher margin international shipments and a mix shift from
lower margin reciprocating compression equipment to a higher portion of sales of
higher margin centrifugal compression equipment (approximately a 2.7
percentage-point decrease in the ratio of cost of sales to
revenues).
Selling
and administrative expenses for the nine months ended September 30, 2009 totaled
$57.4 million, a decrease of $0.4 million, or 0.6%, from $57.8 million during
the comparable period of 2008. The decrease was primarily attributable to lower
employee-related costs associated largely with travel restrictions and other
spending controls partially offset by an increase of $2.6 million in the
provision for bad debts, net of a reclassification of a portion of the provision
to cost of sales as described above.
Corporate
Segment
The
Corporate segment’s loss before income taxes was $196.0 million in the first
nine months of 2009 as compared to $107.2 million in the first nine months of
2008. The loss before income taxes for the Corporate segment for the
first nine months of 2008 was retrospectively revised from $91.6 million to
$107.2 million to reflect the adoption of ASC 470-20 described above under
“Consolidated Results”. The adoption of ASC 470-20, effective January
1, 2009, required the Company to retrospectively revise its 2008 financial
statements for consistency with the results for the first nine months of 2009
reported under this new accounting standard.
Selling
and administrative expenses for the first nine months of 2009 totaled $76.0
million, an increase of $5.8 million, or 8.2%, from $70.2 million during the
comparable period of 2008. The primary reasons for the increase were
(i) the absence in the first nine months of 2009 of a $5.8 million reduction in
expense recorded in the first nine months of 2008 relating to one of the
Company’s non-U.S. defined benefit pension plans and (ii) higher employee
incentive costs. These increases were partially offset by the absence
in the first nine months of 2009 of a $3.6 million charge taken in the first
nine months of 2008 related to a dispute on an historical
acquisition.
The
decrease in interest income, the increase in interest expense and the severance
and other restructuring expense incurred during the first nine months of 2009 as
compared to the same period in 2008 are discussed in “Consolidated Results”
above.
Orders
and Backlog -
Orders
were as follows (dollars in millions):
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
% |
DPS
|
|
$ |
2,186.1 |
|
|
$ |
4,511.0 |
|
|
$ |
(2,324.9 |
) |
|
|
(51.5 |
)% |
V&M
|
|
|
680.7 |
|
|
|
1,260.5 |
|
|
|
(579.8 |
) |
|
|
(46.0 |
)% |
CS
|
|
|
361.3 |
|
|
|
596.6 |
|
|
|
(235.3 |
) |
|
|
(39.4 |
)% |
|
|
$ |
3,228.1 |
|
|
$ |
6,368.1 |
|
|
$ |
(3,140.0 |
) |
|
|
(49.3 |
)% |
Orders
for the first nine months of 2009 decreased over $3.1 billion, or 49.3%, from
the first nine months of 2008. This year-to-date percentage decrease
was consistent with the percentage decrease in the third quarter of 2009
compared to the same period last year. In addition, approximately
$61.0 million of orders were cancelled by customers during the first nine months
of 2009.
DPS
segment orders for the first nine months of 2009 totaled $2.2 billion, a
decrease of over $2.3 billion, or 51.5%, from $4.5 billion for the first nine
months of 2008. Orders for subsea equipment were down 62% in the first nine
months of 2009 as compared to the same period in 2008 as a result of two large
awards received in the first nine months of 2008 totaling nearly $1.5 billion
for projects offshore West Africa that did not re-occur in the current period
other than for orders received in the first nine months of 2009 under a new
frame agreement for future delivery of subsea trees for projects offshore Brazil
currently valued at approximately $300 million. The total value to
the Company of this new frame agreement is expected to approximate $500 million
as additional orders are received in the future. Orders for drilling
equipment in the first nine months of 2009 declined 57% from the first nine
months of 2008 largely due to a lower level of activity with regard to new
deepwater rig construction projects and lower levels of awards for new land
equipment. Surface equipment orders decreased 30% in the first nine
months of 2009 when compared to the same period in 2008 primarily due to a
decline during these same periods of nearly 42% in average U.S. rig counts as a
result of a nearly 50% decrease in average crude oil prices and a decrease of
over 60% in average natural gas prices. Orders for process systems were down 4%
in the first nine months of 2009 when compared to the same period in 2008 mainly
as a result of project delays during the current period.
The
V&M segment had orders of $680.7 million in the first nine months of 2009, a
decrease of $579.8 million, or 46.0%, from nearly $1.3 billion for the
comparable period in 2008. Orders decreased in all product lines during the
first nine months of 2009 as compared to the same period in 2008 as follows: (i)
distributed product orders decreased 64% as a result of weakness in the North
American market as compared to 2008 activity levels, (ii) orders for engineered
valves decreased 48% due to project delays and overall weakness in the U.S. and
Canadian markets, (iii) orders in the process valve product line decreased 31%
due to lower activity relating to refinery and petrochemical projects and (iv)
orders for measurement products decreased nearly 27% reflecting lower awards in
the U.K., Canada and the United States.
Orders in
the CS segment for the first nine months of 2009 totaled $361.3 million, a
decrease of $235.3 million, or 39.4%, from $596.6 million in the first nine
months of 2008. Centrifugal compression equipment orders declined 55% in the
first nine months of 2009 when compared to the similar period in 2008, whereas
reciprocating compression equipment orders decreased nearly 16% in the current
period. Within the centrifugal compression equipment product line, the global
decline in economic activity that began in late 2008 and the lack of new plant
construction activity internationally contributed to a 66% decline in orders for
new engineered units, primarily designed for air separation and engineered air
applications, and to a 47% decline in demand for new plant air
equipment. Similarly, within the reciprocating compression equipment
product line, orders for Superior compressors were down 38% and orders for Ajax
units declined 26% in the first nine months of 2009 as compared to the first
nine months of 2008 reflecting the impact that weak natural gas prices and
surplus equipment have had on demand from U.S.-based lease fleet operators and
packagers. The current market conditions and the impact of weak
natural gas prices on market activity also contributed to a 6% decline in
reciprocating aftermarket parts and service orders for the current
period.
Backlog
was as follows (dollars in millions):
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
Decrease |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
% |
|
DPS |
|
|
$4,195.0 |
|
|
|
$4,416.8 |
|
|
|
$(221.8) |
|
|
|
(5.0)% |
|
V&M |
|
|
537.8 |
|
|
|
749.2 |
|
|
|
(211.4) |
|
|
|
(28.2)% |
|
CS |
|
|
384.8 |
|
|
|
440.5 |
|
|
|
(55.7) |
|
|
|
(12.6)% |
|
|
|
|
$5,117.6 |
|
|
|
$5,606.5 |
|
|
|
$(488.9) |
|
|
|
(8.7)% |
|
Liquidity
and Capital Resources
The
Company’s cash and cash equivalents decreased by $93.5 million to $1.5 billion
at September 30, 2009 as compared to $1.6 billion at December 31, 2008. The
primary reasons for the decrease were cash used for capital expenditures and
acquisitions of $187.0 million and $131.1 million cash used for the redemption
of convertible debt securities offset by cash provided by operations of $184.1
million, and net loan borrowings of $23.0 million.
During
the first nine months of 2009, the Company generated $184.1 million of cash from
operations as compared to generating $512.7 million for the same period in 2008.
Cash totaling approximately $351.4 million was utilized in the first nine months
of 2009 to increase working capital compared to $21.1 million utilized during
the same period in 2008. Cash used for working capital during the
first nine months of 2009 primarily resulted from a build in inventory levels in
the Company’s project-related drilling and subsea businesses during the first
nine months of 2009, higher cash advances paid to vendors, higher income tax
payments and a reduction in accounts payable and accrued liabilities, partially
offset by a lower level of receivables in each of the Company’s business
segments.
The
Company utilized $183.4 million of cash for investing activities during the
first nine months of 2009 as compared to $256.4 million used during the same
period in 2008. The main reason for the decrease is less cash spent on business
acquisitions of $74.5 million as compared to the same period of
2008.
During
the first nine months of 2009, the Company’s financing activities used $111.8
million of cash compared to $470.0 million of cash generated during the first
nine months of 2008. During June 2008, the Company received net
proceeds totaling approximately $742.4 million from issuance of $450.0 million
principal amount of 6.375% 10-year senior notes and $300.0 million principal
amount of 7.0% 30-year senior notes. Additionally short-term
borrowings of $20.7 million were made during the nine months ended September 30,
2008, most of which was drawn under the Company’s revolving credit facility by
the Company’s operations in the United Kingdom for working capital purposes.
This compares to payments of $131.1 million related to the redemption of the
1.5% Convertible Debentures offset by net borrowings of $23.0 million during the
nine months ended September 30, 2009. Additionally, the Company spent
$7.1 million of cash in the first nine months of 2009 to acquire treasury stock
as compared to $215.3 million spent in the first nine months of
2008.
The
Company expects to spend approximately $240.0 million for capital equipment and
facilities during 2009 in connection with its program of improving manufacturing
efficiency. Cash on hand and future expected operating cash flows
will be utilized to fund the remainder of the Company’s 2009 capital spending
program.
On June
18, 2009, the Company notified the holders of its 1.5% Convertible Debentures
that it would exercise its right to redeem for cash all of the outstanding notes
on July 20, 2009 at a redemption price equal to 100% of the outstanding
principal amount, plus accrued and unpaid interest up to, but not including the
redemption date. All of the 1.5% Convertible Debentures were
either converted by the holders or redeemed by the Company utilizing available
cash on hand.
The
Company also has outstanding $500.0 million principal amount of 2.5% Convertible
Debentures due in 2026. Under the terms of the debenture agreement,
holders of the Company’s 2.5% convertible debentures could require the Company
to redeem them beginning in June 2011.
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, including future order
levels, that it will be able to meet its short- and longer-term liquidity needs
with the existing $1.5 billion of cash on hand, expected cash flow from future
operating activities and amounts available under its $585 million five-year
revolving credit facility, expiring April 14, 2013.
Factors
That May Affect Financial Condition and Future Results
The
lack of liquidity in the public and private credit markets could adversely
impact the ability of its customers to finance future purchases of equipment or
could adversely impact the Company’s ability to finance the Company's future
operational and capital needs.
The
public and private credit markets in the United States and around the world are
currently constricted due to economic concerns regarding the present state of
various world economies. The tight credit markets have in certain cases,
negatively impacted the ability of customers to finance purchases of the
Company’s equipment and is expected to continue, in the short-term, to
negatively impact sales, profitability and operating cash flows of the Company.
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 also 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.
Downturns
in the oil and gas industry have had, and will likely 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 in the latter part of 2008 and in 2009 in oil and gas prices have
negatively affected the level of these activities by the Company’s customers and
have, in certain instances, resulted in the cancellation, modification or
rescheduling of existing orders. Additionally, the Company expects
that the substantial decline in oil and gas prices during the latter half of
2008, which continued into 2009, combined with currently tight credit markets,
will continue to affect future short-term spending by the Company’s customers
during the remainder of 2009 and into 2010 and will negatively impact the
Company’s revenues and profitability for the remainder of 2009 and for
2010.
Factors
that contribute to the volatility of oil and gas prices include, but are not
limited to, 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 productionlevels 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.
Cancellation
of orders in backlog are possible
The
Company has experienced cancellations of existing orders in both its project and
certain of its base businesses during recent quarters. If oil and gas prices
begin to decline again or return to recently low levels for an extended period
of time, further order cancellations or delays in expected shipment dates may
occur. 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 continue to cancel existing purchase orders,
future profitability could be further negatively impacted.
At
September 30, 2009, the Company had a backlog of orders for equipment to be used
on deepwater drilling rigs of approximately $683.9 million, including
approximately $178.5 million of equipment ordered for rigs whose construction
was not supported by a pre-existing contract with an operator.
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, 2009, the Company’s backlog was $5.1 billion. 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 large subsea 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’s capital expansion program may not yield intended results.
For 2009,
the Company expects full-year capital expenditures of approximately $240.0
million, of which nearly $164.0 million has been spent through the first nine
months of 2009. Included in the year-to-date expenditures through
September 30, 2009 are approximately $60.1 million of capital spending related
to the recently opened surface manufacturing facility in Ploiesti, Romania and
an expansion of the Company’s subsea manufacturing facility in Johor,
Malaysia. To the extent these facilities are unable to add production
in accordance with the currently scheduled timetable, or in the event production
is not as efficient as expected, the Company’s ability to deliver existing or
future backlog at expected levels of 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 and (iv) often involve the application of existing
technology to new environments and in some cases, new technology. The Company’s
subsea business unit received orders in the amount of $875.7 million during the
first nine months of 2009. Several of these orders are substantially
more complex and involve substantially more risk than previous projects. To the
extent the Company experiences unplanned efficiencies or difficulties in meeting
the technical and/or delivery requirements of the projects, the Company’s
earnings or liquidity could be positively or negatively impacted. The
Company accounts for its subsea projects, as well as separation and drilling
projects, using ASC 605-35, Construction-Type and Production-Type
contracts. In accordance with this standard, the Company estimates
the expected margin on these projects and recognizes this margin as units are
completed. Factors that may affect future project costs and margins include the
ability to properly execute the engineering and design phases consistent with
our customers’ expectations, production efficiencies, and availability and costs
of labor, materials and subcomponents. These factors can significantly impact
the accuracy of the Company’s estimates and materially impact the Company’s
future period earnings. If the Company experiences cost underruns or overruns,
the expected margin could increase or decline. In accordance with ASC 605-35,
the Company would record a cumulative adjustment to increase or reduce the
margin previously recorded on the related project. Subsea projects accounted for
approximately 14.4% of total revenues for the nine months ended September 30,
2009. As of September 30, 2009, the Company had a subsea systems
project backlog of approximately $2.3 billion.
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 U.S. dollar strengthens
against these same currencies.
The
Company’s worldwide operations expose it to instability and changes in economic
and political conditions, 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;
• inability
to repatriate income or capital;
• reductions
in the number or capacity of qualified personnel; and
• seizure
of equipment.
As an
example, it has been publicly reported that certain oilfield service companies
have experienced recent disputes and difficulties in their business dealings
with the national oil company of Venezuela. While Cameron has experienced a
slowdown in payments owed to it by the national oil company of Venezuela during
2009, including having amounts due where ultimate collectability is uncertain,
the Company has not experienced the extent of difficulties in its business
relationship with this company that certain other oilfield service companies
have been reported to have had. Total customer revenues earned by the Company’s
wholly-owned subsidiaries in Venezuela for the year ended December 31, 2008
totaled $27.8 million. At September 30, 2009, the Company had a backlog of
unfilled subsea orders totaling $151.4 million with the national oil company of
Venezuela.
In
addition, Cameron has manufacturing and service operations that are essential
parts of its business in other 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
Southeast 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 inquiries regarding
its compliance with certain such laws and regulations from several U.S. federal
agencies.
The
Company does business and has operations in a number of developing countries
that have relatively underdeveloped 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 as having 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 and responded to 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. In addition, as discussed in Note 15 of the Notes to
Consolidated 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 activities undertaken on
their behalf by 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 FCPA. In response, 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. 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. Special counsel is reviewing these and other services and
activities, such as immigration matters and importation permitting in Nigeria,
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 its involvement in the performance of these services
and activities, and whether the Company fulfilled its obligations under the
FCPA. In addition, the 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, and been granted, an
extension of the statute of limitations with respect to matters under review
until January 2010.
At this
stage, the Company cannot predict the ultimate outcome of the government
inquiries. The Company has undertaken an enhanced compliance training effort for
its personnel, including foreign operations personnel dealing with customs
clearance regulations, and hired a Chief Compliance Officer in September 2008 to
oversee and direct all legal compliance matters for the Company.
Compliance
with U.S. regulations on trade sanctions and embargoes also poses a risk to
Cameron since its business is conducted on a worldwide basis through various
entities. Cameron has received a number of inquiries from U.S. governmental
agencies regarding compliance with these regulations. On March 25, 2009, Cameron
received a letter from the Office of Global Security Risk of the U.S. Securities
and Exchange Commission inquiring into the status of Cameron's non-U.S.
entities' withdrawal from conducting business in or with Iran, Syria and Sudan.
In mid-2006, Cameron adopted a policy which prohibited doing business with these
and other U.S. embargoed countries and restricted its non-U.S. subsidiaries and
persons from taking new orders from those countries, though Cameron did not
prohibit them from honoring then existing contracts if they were, in the opinion
of non-U.S. counsel, binding and enforceable in accordance with their terms and
would subject a Cameron entity to damages for a failure to perform thereunder,
provided such contracts could, in fact, be performed without any U.S. person or
entity involvement and otherwise in accordance with existing U.S. regulations.
Cameron's records show that its non-U.S. entities recognized revenues in 2008 of
approximately $3.1 million (direct) and $1.9 million (indirect) to Iran and $1.5
million to Syria. No deliveries were made to Sudan in 2008 nor have there been
any deliveries to Syria or Sudan in 2009. Revenues of approximately
$0.6 million were recognized with respect to business with Iran in the third
quarter of 2009. Cameron's backlog report shows
remaining revenues from deliveries to Iran of approximately $4.4
million scheduled to be recognized subsequent to September 30,
2009. It is expected that with these deliveries, performance under
the pre-mid-2006 contracts will be complete. Cameron is examining these
deliveries to confirm they were in compliance with its policy and is actively
monitoring present and future performance of its non-U.S. entities to ensure
compliance. Cameron also received an inquiry from the Office of
Global Security Risk regarding essentially the same matters in 2006. In December
2008, Cameron received an inquiry from the U.S. Department of Treasury's Office
of Foreign Assets Control regarding a bank guaranty Cameron attempted to
establish for a sale to a Burmese entity. Cameron has responded and has received
no further inquiry regarding this matter.
In
January 2007, the Company underwent a Pre-Assessment Survey as part of a Focused
Assessment Audit 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 process and had underpaid customs duties. The Company has
taken corrective action and will close out all matters regarding duties owed
for import entries processed from September 29,
2001 through October 5, 2007. The Company expects that the final
assessment compliance period will encompass import activity during the second
half of 2009. The fieldwork for the focused Assessment Audit is
expected to commence in January of 2010 and be completed by the end of the first
quarter of 2010.
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, has 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,
2009. The purpose of the majority of these contracts was to hedge
large anticipated non-functional currency cash flows on major subsea, drilling,
valve or other equipment contracts involving the Company’s United States
operations and its wholly-owned subsidiaries in Brazil, France, Italy, Mexico,
Romania, Singapore and the United Kingdom. Information relating to
the contracts, which have been accounted for as cash flow hedges under ASC Topic
815, Derivatives and Hedging, and the fair values recorded in the Company’s
Consolidated Balance Sheets at September 30, 2009 follows:
|
|
September
30, 2009
|
|
|
|
|
|
|
Year
of Contract Expiration
|
|
|
|
|
(amounts
in millions except exchang rates)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Total
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
BRL/Sell EUR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to sell (in
EUR)
|
|
|
8.3 |
|
|
|
2.6 |
|
|
|
− |
|
|
|
10.9 |
|
|
|
23.1 |
|
Average BRL to EUR contract
rate
|
|
|
2.6234 |
|
|
|
2.6702 |
|
|
|
− |
|
|
|
2.6345 |
|
|
|
2.5889 |
|
Average BRL to EUR rate at
September 30, 2009
|
|
|
2.6298 |
|
|
|
2.6655 |
|
|
|
− |
|
|
|
2.6383 |
|
|
|
3.4544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(8.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
EUR/Sell GBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to buy
(in EUR)
|
|
|
4.1 |
|
|
|
8.1 |
|
|
|
0.7 |
|
|
|
12.9 |
|
|
|
49.5 |
|
Average GBP
to EUR contract rate
|
|
|
0.8105 |
|
|
|
0.8053 |
|
|
|
0.8120 |
|
|
|
0.8074 |
|
|
|
0.7992 |
|
Average GBP to EUR rate
at September 30, 2009
|
|
|
0.9139 |
|
|
|
0.9142 |
|
|
|
0.9165 |
|
|
|
0.9142 |
|
|
|
0.9611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.2 |
|
|
$ |
11.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
USD/Buy EUR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to sell (in
USD)
|
|
|
36.8 |
|
|
|
44.6 |
|
|
|
− |
|
|
|
81.4 |
|
|
|
117.8 |
|
Average USD to EUR contract
rate
|
|
|
1.4565 |
|
|
|
1.4475 |
|
|
|
− |
|
|
|
1.4515 |
|
|
|
1.5069 |
|
Average USD to EUR rate at
September 30, 2009
|
|
|
1.4587 |
|
|
|
1.4585 |
|
|
|
− |
|
|
|
1.4586 |
|
|
|
1.3929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.4 |
|
|
$ |
(8.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
USD/Buy GBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to sell (in
USD)
|
|
|
21.5 |
|
|
|
37.8 |
|
|
|
2.3 |
|
|
|
61.6 |
|
|
|
156.1 |
|
Average USD to GBP contract
rate
|
|
|
1.7697 |
|
|
|
1.8932 |
|
|
|
1.8721 |
|
|
|
1.8475 |
|
|
|
1.9155 |
|
Average USD to GBP rate at
September 30, 2009
|
|
|
1.5961 |
|
|
|
1.5957 |
|
|
|
1.5930 |
|
|
|
1.5957 |
|
|
|
1.4498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(8.4 |
) |
|
$ |
(37.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Currencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at September 30, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2.2 |
) |
|
$ |
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 value of the 2.5%
convertible debentures is 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.
On
October 19, 2009, the Company entered into an interest rate swap with a third
party to receive a fixed interest rate of 6.375% and to pay a variable rate
based on the 3 month London Interbank Offered Rate (LIBOR) plus 4.801% on a
notional value of $200,000,000. The swap matures on January 15,
2012 and provides for semi-annual payments each January 15 and July 15,
beginning January 15, 2010. Interest is compounded quarterly on the
15th of each January, April, July and October. An additional interest
rate swap with a notional value of $200,000,000 and terms identical to the above
was also entered into on October 23, 2009, except that the variable rate to be
paid is based on 3 month LIBOR plus 4.779%. The fair value of both
interest rate swaps will be reflected on the Company’s consolidated balance
sheet as either an asset or liability with the change in the fair value of the
swaps reflected as an adjustment to the Company’s consolidated interest income
(in the case of an asset) or consolidated interest expense (in the case of a
liability).
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,
2009 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,
2009.
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 three 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. Of the other two, one is believed to be a de minimis
exposure and the other recently settled for a de minimis amount.
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. Changes in the groundwater flow
pattern in the southeast corridor of the Houston project prompted the Company to
take additional proactive remedial measures in order to protect the environment
and avoid new areas of contamination. 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, 2009, 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. Twenty-one of 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. Three of
these agreements have had no claims made under them yet. The Company has also
settled ten other property claims by homeowners who have sold their properties.
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 homeowners who remained part
of 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, 74 homeowners have elected the cash payment.
Of the
258 properties included in the Valice class, there were 21 homeowners who opted
out of the class settlement. Agreement has been reached with all
homeowners who opted out, including those who filed suits, and their claims for
diminution of property value have been resolved. While one suit that
was filed relating to this matter included a claim for bodily injury, Cameron
was granted summary judgment on the claim. The Company is of the
opinion that there is no health risk to area residents. Recent
testing results of monitoring wells on the southeastern border of the plume have
caused the Company to notify the 33 homeowners who were not in the Valice class
that their property may be affected. Only one such homeowner has made
a claim for property value diminution and that claim has been
resolved. The Company is taking remedial measures to prevent
additional properties from being affected.
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 with respect to this underground water
contamination, 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 $14.5 million for these matters as of September 30,
2009.
The
Company has been named as a defendant in a number of multi-defendant,
multi-plaintiff tort lawsuits since 1995. At September 30, 2009, the Company’s
consolidated balance sheet included a liability of approximately $4.5 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 liquidity.
Regulatory
Contingencies
In
January 2007, the Company underwent a Pre-Assessment Survey as part of a Focused
Assessment Audit 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 process and had underpaid customs
duties. The Company has taken corrective action and has closed out
all matters regarding duties owed for import
entries processed from September 29, 2001 through October 5,
2007. The Company expects that
the final assessment compliance period will encompass import activity during the
second half of 2009. The field work for the Focused Assessment Audit
is expected to commence in January of 2010 and be completed by the end of the
first quarter of 2010.
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 activities undertaken on their behalf by 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). In response, 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 payment made to or by the customs
clearance broker on the Company’s behalf constituted a violation of the FCPA. 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. Special counsel is reviewing
these and other services and activities, such as immigration matters and
importation permitting, in Nigeria 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 its 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.
At this
stage, the Company cannot predict the ultimate outcome of the government
inquiries. The Company has undertaken an enhanced compliance training effort for
its personnel, including foreign operations personnel dealing with customs
clearance regulations, and hired a Chief Compliance Officer in September 2008 to
oversee and direct all legal compliance matters for the Company.
Tax
Contingencies
The
Company has legal entities in over 35 countries, each of which has various tax
filing requirements. 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 to which the Company is subject require 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 or regulations, the Company could be
exposed to additional taxes.
The
information set forth under the caption “Factors That May Affect Financial
Condition and Future Results” on pages 29 – 32 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 nine months ended September 30, 2009 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/1/09
– 7/31/09
|
|
|
− |
|
|
$ |
− |
|
|
|
25,894,668 |
|
|
|
6,760,102 |
|
8/1/09
– 8/31/09
|
|
|
− |
|
|
$ |
− |
|
|
|
25,894,668 |
|
|
|
6,760,102 |
|
9/1/09
– 9/30/09
|
|
|
− |
|
|
$ |
− |
|
|
|
25,894,668 |
|
|
|
6,760,102 |
|
Total
|
|
|
− |
|
|
$ |
− |
|
|
|
25,894,668 |
|
|
|
6,760,102 |
|
(a)
|
There
were no share purchases during the three months ended September 30,
2009.
|
|
(b)
|
As
of September 30, 2009, there were no remaining shares available for
purchase under the May 22, 2006 Board
authorization.
|
Item
3. Defaults Upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security Holders
None
(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 25, 2009 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.
|
Exhibit 101.INS
–
XBRL Instance Document
Exhibit 101.SCH
–
XBRL Taxonomy Extension Schema
Document
Exhibit 101.CAL
–
XBRL Taxonomy Extension Calculation
Linkbase Document
Exhibit 101.LAB
–
XBRL Taxonomy Extension Label Linkbase
Document
Exhibit 101.PRE
–
XBRL Taxonomy Extension Presentation
Linkbase Document
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
6, 2009
|
CAMERON
INTERNATIONAL CORPORATION
|
|
(Registrant)
|
|
|
|
By: /s/
Charles M.
Sledge
|
|
Charles M. Sledge
|
|
Senior Vice President 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.
|
101.INS
|
XBRL
Instance Document
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase
Document
|
41