e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-13884
Cameron International Corporation
(Exact Name of Registrant as Specified in its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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76-0451843
(I.R.S. Employer
Identification No.) |
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1333 West Loop South, Suite 1700, Houston, Texas
(Address of Principal Executive Offices)
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77027
(Zip Code) |
713/513-3300
(Registrants Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Number of shares outstanding of issuers common stock as of October 20, 2006 was 111,177,691.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CAMERON INTERNATIONAL CORPORATION
CONSOLIDATED CONDENSED RESULTS OF OPERATIONS
(dollars and shares in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(unaudited) |
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(unaudited) |
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REVENUES |
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$ |
978,792 |
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$ |
636,613 |
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$ |
2,666,217 |
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$ |
1,779,286 |
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COSTS AND EXPENSES |
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Cost of sales (exclusive of depreciation and amortization
shown separately below) |
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684,968 |
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449,828 |
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1,852,872 |
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1,280,025 |
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Selling and administrative expenses |
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126,751 |
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94,602 |
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377,011 |
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268,837 |
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Depreciation and amortization |
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25,200 |
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18,799 |
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72,441 |
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57,505 |
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Interest income |
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(8,917 |
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(3,515 |
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(16,696 |
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(8,712 |
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Interest expense |
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6,668 |
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3,905 |
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14,209 |
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9,049 |
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Acquisition integration costs |
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3,648 |
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22,760 |
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Total costs and expenses |
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838,318 |
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563,619 |
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2,322,597 |
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1,606,704 |
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Income before income taxes |
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140,474 |
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72,994 |
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343,620 |
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172,582 |
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Income tax provision |
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(51,189 |
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(23,776 |
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(122,329 |
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(56,142 |
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Net income |
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$ |
89,285 |
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$ |
49,218 |
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$ |
221,291 |
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$ |
116,440 |
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Earnings per common share:1 |
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Basic |
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$ |
0.80 |
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$ |
0.44 |
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$ |
1.94 |
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$ |
1.06 |
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Diluted |
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$ |
0.78 |
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$ |
0.43 |
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$ |
1.89 |
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$ |
1.05 |
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Shares used in computing earnings per common share:1 |
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Basic |
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111,576 |
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112,274 |
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113,845 |
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109,577 |
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Diluted |
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115,184 |
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114,227 |
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117,311 |
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110,962 |
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1 |
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Prior year earnings per common share amounts and shares used in computing earnings per
common share have been revised to reflect the 2-for-1 stock split effective December 15, 2005. |
The accompanying notes are an integral part of these statements.
3
CAMERON INTERNATIONAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except shares and per share data)
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September 30, |
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December 31, |
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2006 |
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2005 |
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(unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
719,719 |
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$ |
361,971 |
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Receivables, net |
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686,979 |
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574,099 |
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Inventories, net |
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1,004,202 |
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705,809 |
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Other |
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139,821 |
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86,177 |
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Total current assets |
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2,550,721 |
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1,728,056 |
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Plant and equipment, net |
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598,618 |
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525,715 |
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Goodwill |
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578,205 |
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577,042 |
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Other assets |
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258,771 |
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267,749 |
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TOTAL ASSETS |
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$ |
3,986,315 |
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$ |
3,098,562 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current portion of long-term debt |
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$ |
215,552 |
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$ |
6,471 |
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Accounts payable and accrued liabilities |
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1,185,960 |
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891,519 |
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Accrued income taxes |
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36,985 |
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23,871 |
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Total current liabilities |
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1,438,497 |
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921,861 |
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Long-term debt |
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744,831 |
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444,435 |
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Postretirement benefits other than pensions |
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38,372 |
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40,104 |
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Deferred income taxes |
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43,865 |
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39,089 |
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Other long-term liabilities |
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63,787 |
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58,310 |
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Total liabilities |
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2,329,352 |
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1,503,799 |
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Commitments and contingencies |
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Stockholders Equity: |
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Common stock, par value $.01 per share, 150,000,000 shares
authorized, 116,170,863 shares issued at September 30, 2006
(115,629,117 shares issued and outstanding at December 31,
2005) |
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1,162 |
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1,156 |
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Capital in excess of par value |
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1,138,392 |
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1,113,001 |
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Retained earnings |
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664,433 |
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443,142 |
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Accumulated other elements of comprehensive income |
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79,936 |
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37,464 |
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Less: Treasury stock, 5,000,504 shares at September 30, 2006 |
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(226,960 |
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Total stockholders equity |
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1,656,963 |
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1,594,763 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
3,986,315 |
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$ |
3,098,562 |
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The accompanying notes are an integral part of these statements.
4
CAMERON INTERNATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(unaudited) |
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(unaudited) |
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Cash flows from operating activities: |
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Net income |
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$ |
89,285 |
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$ |
49,218 |
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$ |
221,291 |
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$ |
116,440 |
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Adjustments to reconcile net income to net cash provided
by operating activities: |
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Depreciation |
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18,945 |
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15,117 |
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56,323 |
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48,202 |
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Amortization |
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6,255 |
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3,682 |
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16,118 |
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9,303 |
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Non-cash stock compensation expense |
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4,593 |
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499 |
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15,988 |
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1,495 |
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Non-cash write-off of assets associated with
acquisition integration efforts |
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10,525 |
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Deferred income taxes and other |
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17,870 |
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11,239 |
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51,907 |
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23,745 |
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Changes in assets and liabilities, net of translation,
acquisitions, dispositions and non-cash items: |
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Receivables |
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(32,731 |
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(13,593 |
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(80,257 |
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(21,954 |
) |
Inventories |
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(72,904 |
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(58,927 |
) |
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(277,719 |
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(89,696 |
) |
Accounts payable and accrued liabilities |
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62,117 |
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90,126 |
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236,906 |
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169,782 |
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Other assets and liabilities, net |
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5,086 |
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4,585 |
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(40,845 |
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26,484 |
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Net cash provided by operating activities |
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98,516 |
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101,946 |
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210,237 |
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283,801 |
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Cash flows from investing activities: |
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Capital expenditures |
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(35,257 |
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(17,814 |
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(108,913 |
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(43,768 |
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Acquisitions, net of cash acquired |
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(1,200 |
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(2,290 |
) |
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(35,859 |
) |
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(124,179 |
) |
Other |
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7,336 |
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4,892 |
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10,576 |
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5,444 |
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Net cash used for investing activities |
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(29,121 |
) |
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(15,212 |
) |
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(134,196 |
) |
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(162,503 |
) |
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Cash flows from financing activities: |
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Loan borrowings (repayments), net |
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8,450 |
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|
174 |
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8,246 |
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(1,895 |
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Issuance of convertible debt |
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500,000 |
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Debt issuance costs |
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(318 |
) |
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(8,536 |
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Redemption of convertible debt |
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(14,821 |
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Purchase of treasury stock |
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(28,216 |
) |
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(2,514 |
) |
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(265,935 |
) |
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(9,402 |
) |
Proceeds from stock option exercises |
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5,296 |
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73,090 |
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38,508 |
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|
165,512 |
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Excess tax benefits from stock compensation plans |
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6,481 |
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6,481 |
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Principal payments on capital leases |
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(1,323 |
) |
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(993 |
) |
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(3,577 |
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(3,044 |
) |
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Net cash (used for) provided by financing activities |
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(9,630 |
) |
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|
69,757 |
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|
275,187 |
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|
136,350 |
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Effect of translation on cash |
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(3,337 |
) |
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(4,659 |
) |
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6,520 |
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(24,289 |
) |
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Increase in cash and cash equivalents |
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56,428 |
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|
151,832 |
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|
357,748 |
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|
233,359 |
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Cash and cash equivalents, beginning of period |
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|
663,291 |
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|
308,525 |
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|
361,971 |
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|
226,998 |
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Cash and cash equivalents, end of period |
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$ |
719,719 |
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$ |
460,357 |
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$ |
719,719 |
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|
$ |
460,357 |
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|
The accompanying notes are an integral part of these statements.
5
CAMERON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
Note 1: Change In Corporate Name and Basis of Presentation
At the Annual Meeting of Stockholders of Cooper Cameron Corporation held on May 5, 2006,
stockholders voted to change the corporations name to Cameron International Corporation (the
Company). Upon the change in the corporate name, the Company also rebranded its three existing
business segments into Drilling & Production Systems (DPS), formerly the Cameron segment; Valves &
Measurement (V&M), formerly the Cooper Cameron Valves segment; and Compression Systems (CS),
formerly the Cooper Compression segment.
The accompanying Unaudited Consolidated Condensed Financial Statements of the Company have
been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the
information and footnotes required by generally accepted accounting principles for complete
financial statements. Those adjustments, consisting of normal recurring adjustments that are, in
the opinion of management, necessary for a fair presentation of the financial information for the
interim periods, have been made. The results of operations for such interim periods are not
necessarily indicative of the results of operations for a full year. The Unaudited Consolidated
Condensed Financial Statements should be read in conjunction with the Audited Consolidated
Financial Statements and Notes thereto filed by the Company under its former name, Cooper Cameron
Corporation, on Form 10-K for the year ended December 31, 2005.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include estimated losses on accounts receivable, estimated
warranty costs, estimated realizable value on excess or obsolete inventory, contingencies
(including legal and tax matters), estimated liabilities for liquidated damages and environmental
matters, estimates related to pension accounting and estimates related to deferred tax assets and
liabilities. Actual results could differ materially from these estimates.
Note 2: Recently Issued Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
48), to create a single model to address accounting for uncertainty in tax positions. FIN 48
clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. Under FIN 48, income taxes are no longer subject to
Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. The Company will
adopt FIN 48 as of January 1, 2007, as required. The Company has not determined the effect, if
any, the adoption of FIN 48 will have on its financial position and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair
value and expands the level of disclosures regarding fair value. SFAS 157 also emphasizes that
fair value is a market-based measurement rather than an entity-specific measurement. The Company
currently does not expect SFAS 157 to have a material effect on its financial position when adopted
as required on January 1, 2008.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). SFAS
158 requires a company to recognize the overfunded or underfunded status of its defined benefit
postretirement plans as an asset or liability in its statement of financial position and to
recognize changes in the funded status of those plans in the year in which the changes occur
through comprehensive income. SFAS 158 also requires that defined benefit plan assets and
liabilities be measured as of the date of a companys fiscal year-end statement of financial
position, effective for the Company as of December 31, 2008. SFAS 158 does not, however, change
the basic approach to measuring plan assets, benefit obligations or annual net periodic benefit
costs. These issues are expected to be addressed by the FASB at a later date. The Company expects
that the adoption of SFAS 158, effective December 31, 2006, will have a significant effect on its
net assets at that date, although the amount cannot be quantified until year-end. At December 31,
2005, the Company had recognized in its financial statements a long-term prepaid pension asset of
$133,976,000 and pension liabilities of $7,939,000, determined in
6
accordance with Statement of Financial Accounting Standards No. 87, Employers Accounting for
Pensions (SFAS 87). However, the net funded status of all defined benefit pension plans at
December 31, 2005 was a liability of approximately $18,955,000. Under SFAS 158, the Company would
derecognize its long-term prepaid pension assets relating to its underfunded plans and adjust its
liability for those plans through a charge to accumulated other elements of comprehensive income.
Note 3: Acquisitions, Dispositions and Acquisition Integration Costs
On September 1, 2005, the Company announced it had agreed to acquire substantially all of the
businesses included within the Flow Control segment of Dresser, Inc. (the Dresser Acquired
Businesses). On November 30, 2005, the Company completed the acquisition of all of these businesses
other than a portion of the business which was acquired on January 10, 2006. The total cash
purchase price for the Dresser Acquired Businesses was approximately $217,483,000, subject to
certain adjustments, of which approximately $21,570,000 was paid in the first quarter of 2006. The
acquired operations serve customers in the worldwide oil and gas production, pipeline and process
markets and have been included in the Companys consolidated financial statements for the period
subsequent to the acquisition, primarily in the V&M segment. Effective May 30, 2006, the Company
sold the assets and liabilities of a portion of the acquired operations located in the Netherlands
for $1,500,000, payable upon collection of the customer receivables of this business. No gain or
loss was recognized in connection with this transaction.
During the first nine months of 2006, the Company has obtained preliminary information
relating to the fair value of the assets and liabilities existing at the acquisition date for
purposes of allocating the purchase price in accordance with Statement of Financial Accounting
Standards No. 141, Business Combinations. As a result of incorporating this information into its
initial purchase price allocation, goodwill associated with this acquisition has been decreased by
$29,324,000 since December 31, 2005 to approximately $71,999,000 at September 30, 2006. The Company
is continuing to review the information received and expects to further refine the purchase price
allocation during the fourth quarter of 2006.
In connection with the integration of the Dresser Acquired Businesses into the V&M segment, a
total of $22,760,000 in integration costs were recognized in the first nine months of 2006, of
which approximately $10,525,000 relate to non-cash impairment charges for goodwill, fixed assets
and other assets at certain legacy locations of the Company that are in the process of being closed
or otherwise being impacted by the integration. The components of the total integration costs are
as follows (dollars in thousands):
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
Non-cash asset impairment charges |
|
$ |
10,525 |
|
Employee severance |
|
|
4,066 |
|
Stay bonuses and employee relocation costs |
|
|
1,314 |
|
Plant rearrangement and other integration costs |
|
|
6,855 |
|
|
|
|
|
Total |
|
$ |
22,760 |
|
|
|
|
|
On January 3, 2006, the Company acquired the assets and liabilities of Caldon Company for
approximately $13,089,000 in cash. The acquisition of Caldon added a new ultrasonic flow
measurement product line to the existing flow measurement products in the V&M segment. Caldons
results are included in the Companys consolidated financial statements for the period subsequent
to the acquisition date. A preliminary purchase price allocation for Caldon resulted in goodwill of
approximately $5,794,000 at September 30, 2006, most of which will be deductible for income tax
purposes. The purchase price is subject to adjustment as the Company is awaiting information
related to the value of Caldons intangible assets.
On August 25, 2006, the Company acquired certain assets of a Norwegian company for a cash
payment of $1,200,000 at closing plus additional consideration. The assets acquired are
complementary to the Companys existing measurement product offerings in the V&M segment.
Note 4: Stock-Based Compensation
As described more fully in Note 9 of the Companys Notes to Consolidated Financial Statements
incorporated by reference in the Companys Form 10-K for the year ended December 31, 2005, the
Company has grants outstanding under four equity compensation plans, only one of which, the 2005
Equity Incentive Plan (2005 EQIP), is currently available for future grants of equity compensation
awards to employees and non-employee directors. Prior to January 1, 2006, the Company accounted for
those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock-Based Compensation. No stock-based employee compensation cost was recognized in the
Consolidated Condensed Results of Operations statement for the three and nine
7
months ended September 30, 2005, except with respect to the amortization of the intrinsic
value of restricted stock unit grants totaling $499,000 and $1,495,000, respectively. Options
granted under the Companys equity compensation plans had an exercise price equal to the market
value of the underlying common stock on the date of grant and all terms were fixed. Accordingly, no
expense was recognized under APB Opinion No. 25. Effective January 1, 2006, the Company adopted the
fair value recognition provisions of Financial Accounting Standards Board Statement No. 123(R),
Share-Based Payment (SFAS 123(R)), using the modified-prospective-transition method. Under that
transition method, compensation cost recognized in the three and nine months ended September 30,
2006 included: (a) compensation cost related to all share-based payments granted prior to, but not
yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of Financial Accounting Standards Board Statement 123, Accounting for
Stock-Based Compensation (SFAS 123), and (b) compensation cost related to all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123(R). Results for prior periods have not been restated. Additionally,
there was no material cumulative effect of adopting SFAS 123(R) at January 1, 2006.
Stock-based compensation expense recognized during the three and nine months ended September
30, 2006 under the provisions of SFAS 123(R) totaled $4,593,000 and $15,988,000, respectively, of
which $1,947,000 and $7,786,000 are related to outstanding restricted and deferred stock unit
grants and $2,646,000 and $8,202,000 are related to unvested outstanding stock option grants,
respectively. Accordingly, the Companys income before income taxes, net income, basic earnings per
share and diluted earnings per share for the three and nine months ended September 30, 2006 were
lower than if the Company had continued to account for share-based compensation under APB Opinion
No. 25 as follows (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Decrease in |
|
2006 |
|
|
2006 |
|
Income before income taxes |
|
$ |
2,646 |
|
|
$ |
8,202 |
|
Net income |
|
|
1,671 |
|
|
|
5,282 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
The following table illustrates the effect on net income and earnings per share for the three
and nine months ended September 30, 2005, as if the Company had applied the fair value recognition
provisions of SFAS 123 to options granted under the Companys equity compensation plans. For
purposes of this pro forma disclosure, the value of the options is estimated using a
Black-Scholes-Merton option-pricing formula and amortized to expense over the options vesting
periods. Amounts shown are in thousands, except per share data, which has been revised to reflect
the 2-for-1 stock split effective December 15, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
Net income, as reported |
|
$ |
49,218 |
|
|
$ |
116,440 |
|
Deduct: Total stock-based
employee compensation
expense determined under the
fair value method, net of
tax |
|
|
(2,779 |
) |
|
|
(8,095 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
46,439 |
|
|
$ |
108,345 |
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.44 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.41 |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.43 |
|
|
$ |
1.05 |
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.40 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
Stock Option Awards
Options with terms of seven years are granted to officers of the Company under the 2005 EQIP
plan at a fixed exercise price equal to the fair value of the Companys common stock on the date of
grant. The options vest in one-third increments each year on the anniversary date following the
date of grant, based on continued employment. Grants made in previous years to officers and other
key employees under the Long-Term and Broad-Based Incentive Plans provide similar terms, except
that the options terminate after ten years rather than seven.
8
A summary of option activity under the Companys stock compensation plans as of September 30,
2006 and changes during the nine months ended September 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
2005 Equity |
|
Broad-Based |
|
Long-term |
|
Non-employee |
|
|
|
|
Incentive Plan |
|
Incentive Plan |
|
Incentive Plan |
|
Director Plan |
|
Total All Plans |
Stock options outstanding at December 31, 2005 |
|
|
1,519,139 |
|
|
|
1,104,986 |
|
|
|
3,755,796 |
|
|
|
276,154 |
|
|
|
6,656,075 |
|
Options granted |
|
|
46,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,000 |
|
Options forfeited |
|
|
|
|
|
|
(17,399 |
) |
|
|
(3,666 |
) |
|
|
|
|
|
|
(21,065 |
) |
Options expired |
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
|
|
(12,000 |
) |
|
|
(13,000 |
) |
Options exercised |
|
|
(65,924 |
) |
|
|
(282,504 |
) |
|
|
(972,547 |
) |
|
|
(84,000 |
) |
|
|
(1,404,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at September 30, 2006 |
|
|
1,499,215 |
|
|
|
805,083 |
|
|
|
2,778,583 |
|
|
|
180,154 |
|
|
|
5,263,035 |
|
Options vested at September 30, 2006 or
expected to vest in the future |
|
|
1,484,795 |
|
|
|
804,621 |
|
|
|
2,772,597 |
|
|
|
180,154 |
|
|
|
5,242,167 |
|
Options exercisable at September 30, 2006 |
|
|
310,215 |
|
|
|
673,440 |
|
|
|
1,439,342 |
|
|
|
180,154 |
|
|
|
2,603,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information |
|
|
2005 Equity |
|
Broad-Based |
|
Long-term |
|
Non-employee |
|
|
|
|
Incentive Plan |
|
Incentive Plan |
|
Incentive Plan |
|
Director Plan |
|
Total All Plans |
Stock based compensation cost not yet
recognized under the straight-line method (dollars
in thousands) |
|
$ |
7,464 |
|
|
$ |
206 |
|
|
$ |
3,292 |
|
|
$ |
|
|
|
$ |
10,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining expense recognition
period (in years) |
|
|
1.22 |
|
|
|
0.35 |
|
|
|
0.45 |
|
|
|
|
|
|
|
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise prices for stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
$ |
35.75 |
|
|
$ |
22.85 |
|
|
$ |
25.55 |
|
|
$ |
26.95 |
|
|
$ |
27.49 |
|
Options granted during the nine months ended
September 30, 2006 |
|
$ |
42.99 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
42.99 |
|
Options forfeited during the nine months ended
September 30, 2006 |
|
$ |
|
|
|
$ |
22.55 |
|
|
$ |
21.47 |
|
|
$ |
|
|
|
$ |
22.36 |
|
Options expired during the nine months ended
September 30, 2006 |
|
$ |
|
|
|
$ |
|
|
|
$ |
28.28 |
|
|
$ |
32.44 |
|
|
$ |
32.12 |
|
Options exercised during the nine months ended
September 30, 2006 |
|
$ |
36.92 |
|
|
$ |
22.52 |
|
|
$ |
28.00 |
|
|
$ |
30.77 |
|
|
$ |
27.49 |
|
Outstanding at September 30, 2006 |
|
$ |
35.91 |
|
|
$ |
22.98 |
|
|
$ |
24.70 |
|
|
$ |
24.80 |
|
|
$ |
27.63 |
|
Vested at September 30, 2006 or expected to vest
in the future |
|
$ |
35.90 |
|
|
$ |
22.98 |
|
|
$ |
24.70 |
|
|
$ |
24.80 |
|
|
$ |
27.61 |
|
Exercisable at September 30, 2006 |
|
$ |
32.75 |
|
|
$ |
23.21 |
|
|
$ |
25.51 |
|
|
$ |
24.80 |
|
|
$ |
25.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining contractual term for
stock options (in years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
5.79 |
|
|
|
5.65 |
|
|
|
5.11 |
|
|
|
1.84 |
|
|
|
5.27 |
|
Vested at September 30, 2006 or expected to vest
in the future |
|
|
5.78 |
|
|
|
5.65 |
|
|
|
5.11 |
|
|
|
1.84 |
|
|
|
5.27 |
|
Exercisable at September 30, 2006 |
|
|
4.50 |
|
|
|
5.39 |
|
|
|
4.10 |
|
|
|
1.84 |
|
|
|
4.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value (dollars in thousands)
for stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised during the nine months ended September
30, 2006 |
|
$ |
1,232 |
|
|
$ |
7,564 |
|
|
$ |
20,137 |
|
|
$ |
1,084 |
|
|
$ |
30,017 |
|
Outstanding at September 30, 2006 |
|
$ |
18,590 |
|
|
$ |
20,552 |
|
|
$ |
65,607 |
|
|
$ |
4,235 |
|
|
$ |
108,984 |
|
Vested at September 30, 2006 or expected to vest
in the future |
|
$ |
18,426 |
|
|
$ |
20,540 |
|
|
$ |
65,472 |
|
|
$ |
4,235 |
|
|
$ |
108,673 |
|
Exercisable at September 30, 2006 |
|
$ |
4,827 |
|
|
$ |
17,056 |
|
|
$ |
32,816 |
|
|
$ |
4,235 |
|
|
$ |
58,934 |
|
During the nine months ended September 30, 2005, a total of 1,311,526 options were granted at
a weighted-average fair value of $6.92 per share determined in accordance with the provisions of
SFAS 123. The weighted-average grant date fair value of options
9
granted during the nine months ended September 30, 2006, determined in accordance with the
provisions of SFAS 123(R), was $11.57 per share. The fair values were estimated using the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2006 |
|
2005 |
Expected life (in years) |
|
|
3.7 |
|
|
|
3.0 |
|
Risk-free interest rate |
|
|
4.4 |
% |
|
|
4.4 |
% |
Volatility |
|
|
27.0 |
% |
|
|
27.0 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Restricted and deferred stock unit awards
During 2005, the Company began issuing restricted stock units with no exercise price to key
employees in place of stock options. During 2006, grants of restricted stock units were also made
to officers in addition to key employees. Approximately 77,110 of the restricted stock unit grants
during the nine months ended September 30, 2006, contain performance-based conditions which could
result in the actual amount of issuable restricted stock units to be between zero and 154,220 based
on the Companys full-year 2006 financial performance against certain targets. The weighted-average
value of the restricted stock units granted during the nine months ended September 30, 2006, was
$41.17 per share based on the market value of the Companys common stock at the date of grant. For
the nine months ended September 30, 2005, a total of 339,400 restricted stock units were granted at
a weighted-average value of $27.63 per share. The fair value of the restricted stock unit grants is
amortized to expense using the straight-line method over the vesting period. The restricted stock
units granted to officers during the nine months ended September 30, 2006 generally provide for
12.5% vesting on each of the first and second anniversaries of the date of grant and a final
vesting of 75% on the third anniversary of the date of grant, based on continued employment.
Restricted stock units granted to other key employees during the nine months ended September 30,
2006, generally provide for 25% vesting on the second anniversary of the date of grant and a final
vesting of 75% on the third anniversary of the date of grant, based on continued employment,
whereas restricted stock units granted prior to January 1, 2006, generally provide for 25% vesting
on each of the first and second anniversaries of the grant date and a final vesting of 50% on the
third anniversary of the grant date, based on continued employment.
Under a Compensation Program for Non-Employee Directors approved by the Board of Directors in
July 2005, non-employee directors are entitled to receive an annual grant of 6,000 deferred stock
units from the 2005 EQIP plan upon first being elected to the Board and a grant of 4,000 deferred
stock units annually thereafter (post-split basis). These units, which have no exercise price and
no expiration date, vest in one-fourth increments quarterly over the following year but cannot be
converted into common stock until the earlier of termination of Board service or three years,
although Board members have the ability to voluntarily defer conversion for a longer period of
time.
A summary of restricted stock unit award activity under the Companys stock compensation plans
as of September 30, 2006 and changes during the nine months ended September 30, 2006 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units |
|
|
2005 Equity |
|
Broad-Based |
|
Long-term |
|
|
|
|
Incentive |
|
Incentive |
|
Incentive |
|
Total All |
|
|
Plan |
|
Plan |
|
Plan |
|
Plans |
Units outstanding at December 31, 2005 |
|
|
36,500 |
|
|
|
208,400 |
|
|
|
84,800 |
|
|
|
329,700 |
|
Units granted |
|
|
313,460 |
|
|
|
|
|
|
|
|
|
|
|
313,460 |
|
Units forfeited |
|
|
(4,225 |
) |
|
|
(2,248 |
) |
|
|
(3,374 |
) |
|
|
(9,847 |
) |
Units vesting |
|
|
(2,250 |
) |
|
|
(54,636 |
) |
|
|
(21,216 |
) |
|
|
(78,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units outstanding at September 30, 2006 |
|
|
343,485 |
|
|
|
151,516 |
|
|
|
60,210 |
|
|
|
555,211 |
|
Units vested at September 30, 2006 or expected to vest in the future |
|
|
302,348 |
|
|
|
150,143 |
|
|
|
59,658 |
|
|
|
512,149 |
|
Units exercisable at September 30, 2006 (vested and deferred) |
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
|
35,000 |
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information |
|
|
2005 Equity |
|
Broad-Based |
|
Long-term |
|
|
|
|
Incentive |
|
Incentive |
|
Incentive |
|
Total All |
|
|
Plan |
|
Plan |
|
Plan |
|
Plans |
Stock-based compensation cost not yet recognized under the
straight-line method (dollars in thousands)1 |
|
$ |
7,487 |
|
|
$ |
2,220 |
|
|
$ |
932 |
|
|
$ |
10,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining expense recognition period (in years) |
|
|
2.00 |
|
|
|
0.91 |
|
|
|
0.92 |
|
|
|
1.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining contractual term for restricted stock units (in
years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
2.00 |
|
|
|
0.91 |
|
|
|
0.92 |
|
|
|
1.55 |
|
Vested at September 30, 2006 or expected to vest in the future |
|
|
2.00 |
|
|
|
0.90 |
|
|
|
0.91 |
|
|
|
1.55 |
|
Exercisable at September 30, 2006 (vested and deferred) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value for restricted stock units (dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units vesting during the nine months ended September 30, 2006 |
|
$ |
98 |
|
|
$ |
2,341 |
|
|
$ |
908 |
|
|
$ |
3,347 |
|
Outstanding at September 30, 2006 |
|
$ |
16,594 |
|
|
$ |
7,319 |
|
|
$ |
2,909 |
|
|
$ |
26,822 |
|
Vested at September 30, 2006 or expected to vest in the future |
|
$ |
14,607 |
|
|
$ |
7,253 |
|
|
$ |
2,882 |
|
|
$ |
24,742 |
|
Exercisable at September 30, 2006 (vested and deferred) |
|
$ |
1,691 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Additional amount of unrecognized expense if the maximum number
of performance-based restricted stock unit grants are made based on the
Companys financial performance against certain targets (dollars in
thousands) |
|
$ |
3,151 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,151 |
|
At September 30, 2006, 4,572,745 shares were reserved for future grants of options, deferred
stock units, restricted stock units and other awards. The Company may issue either treasury shares
or newly issued shares of its common stock in satisfaction of these awards.
Note 5: Receivables
Receivables consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Trade receivables |
|
$ |
669,039 |
|
|
$ |
560,638 |
|
Other receivables |
|
|
27,079 |
|
|
|
23,236 |
|
Allowances for doubtful accounts |
|
|
(9,139 |
) |
|
|
(9,775 |
) |
|
|
|
|
|
|
|
Total receivables |
|
$ |
686,979 |
|
|
$ |
574,099 |
|
|
|
|
|
|
|
|
Note 6: Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
115,170 |
|
|
$ |
97,035 |
|
Work-in-process |
|
|
291,146 |
|
|
|
214,730 |
|
Finished goods, including parts and subassemblies |
|
|
707,476 |
|
|
|
498,938 |
|
Other |
|
|
4,188 |
|
|
|
3,408 |
|
|
|
|
|
|
|
|
|
|
|
1,117,980 |
|
|
|
814,111 |
|
Excess of current standard costs over LIFO costs |
|
|
(49,877 |
) |
|
|
(37,829 |
) |
Allowances |
|
|
(63,901 |
) |
|
|
(70,473 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
1,004,202 |
|
|
$ |
705,809 |
|
|
|
|
|
|
|
|
11
Note 7: Plant and Equipment and Goodwill
Plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Plant and equipment, at cost |
|
$ |
1,297,487 |
|
|
$ |
1,147,422 |
|
Accumulated depreciation |
|
|
(698,869 |
) |
|
|
(621,707 |
) |
|
|
|
|
|
|
|
Total plant and equipment |
|
$ |
598,618 |
|
|
$ |
525,715 |
|
|
|
|
|
|
|
|
Changes in goodwill during the nine months ended September 30, 2006 were as follows (in
thousands):
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
577,042 |
|
Acquisition of Caldon Company and a remaining portion of the Dresser Acquired Businesses by the V&M segment |
|
|
17,921 |
|
Adjustment
to goodwill for the Dresser Acquired Businesses by the V&M
segment based upon a preliminary purchase
price allocation |
|
|
(29,324 |
) |
Impairment associated with a V&M legacy business to be closed |
|
|
(4,763 |
) |
Translation and other |
|
|
17,329 |
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
578,205 |
|
|
|
|
|
Note 8: Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Trade and other accounts payable |
|
$ |
387,334 |
|
|
$ |
356,395 |
|
Progress payments and cash advances from customers |
|
|
454,304 |
|
|
|
240,980 |
|
Accrued liabilities |
|
|
344,322 |
|
|
|
294,144 |
|
|
|
|
|
|
|
|
Total accounts payable and accrued liabilities |
|
$ |
1,185,960 |
|
|
$ |
891,519 |
|
|
|
|
|
|
|
|
Activity during the nine months ended September 30, 2006 associated with the Companys product
warranty accruals was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
Net |
|
Charges |
|
|
|
|
|
Balance |
|
|
December 31, |
|
warranty |
|
against |
|
Translation |
|
September 30, |
|
|
2005 |
|
provisions |
|
accrual |
|
and other |
|
2006 |
|
$25,030 |
|
|
13,015 |
|
|
|
(9,085 |
) |
|
|
1,008 |
|
|
$29,968 |
|
|
|
|
|
|
|
|
|
|
|
|
Note 9: Employee Benefit Plans
Total net benefit expense associated with the Companys defined benefit pension plans
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
2,026 |
|
|
$ |
1,949 |
|
|
$ |
6,078 |
|
|
$ |
5,848 |
|
Interest cost |
|
|
5,941 |
|
|
|
5,737 |
|
|
|
17,823 |
|
|
|
17,211 |
|
Expected return on plan assets |
|
|
(7,704 |
) |
|
|
(7,181 |
) |
|
|
(23,112 |
) |
|
|
(21,544 |
) |
Amortization of prior service cost |
|
|
(141 |
) |
|
|
(131 |
) |
|
|
(422 |
) |
|
|
(394 |
) |
Amortization of losses and other |
|
|
2,654 |
|
|
|
2,251 |
|
|
|
7,962 |
|
|
|
6,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net benefit expense |
|
$ |
2,776 |
|
|
$ |
2,625 |
|
|
$ |
8,329 |
|
|
$ |
7,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Total net benefit expense associated with the Companys postretirement benefit plans consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
6 |
|
|
$ |
6 |
|
Interest cost |
|
|
395 |
|
|
|
376 |
|
|
|
1,185 |
|
|
|
1,127 |
|
Amortization of prior service cost |
|
|
(102 |
) |
|
|
(97 |
) |
|
|
(306 |
) |
|
|
(291 |
) |
Amortization of gains and other |
|
|
(252 |
) |
|
|
(239 |
) |
|
|
(756 |
) |
|
|
(717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net benefit expense |
|
$ |
43 |
|
|
$ |
42 |
|
|
$ |
129 |
|
|
$ |
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10: Issuance of Convertible Debentures
On May 23, 2006, the Company issued $500,000,000 of twenty-year senior convertible debentures,
due June 15, 2026, that pay interest semi-annually at a rate of 2.5% on each June 15 and December
15, beginning December 15, 2006 (the 2.5% Convertible Debentures). The Company has the right to
redeem the 2.5% Convertible Debentures at any time on or after June 20, 2011, at principal plus
accrued and unpaid interest. Holders may require the Company to repurchase all or a portion of the
2.5% Convertible Debentures on June 15 of 2011, 2016 and 2021, or at any time the Company undergoes
a fundamental change as defined in the debenture agreement, for principal plus accrued and unpaid
interest. Prior to June 15, 2011, holders may also convert their debenture holdings into shares of
common stock at an initial conversion price of 14.1328 shares of common stock per $1,000 principal
amount, or $70.76 per share, only under the following circumstances:
|
|
|
during any quarter after June 30, 2006, if the closing price of the Companys common
stock exceeds 130% of the then current conversion price for at least 20 consecutive trading
days in the 30 consecutive trading day period ending on the last trading day of the
immediately preceding quarter; |
|
|
|
|
during the five business-day period after any five consecutive trading day period in
which the trading price per debentures for each day of the period was less than 97% of the
product of the last reported sales price of the Companys common stock and the current
conversion rate; |
|
|
|
|
upon the occurrence of specified corporate events; or |
|
|
|
|
upon receipt of a notice of redemption by the Company. |
Holders may also convert the 2.5% Convertible Debentures into shares of common stock at any
time on or after June 15, 2011 without meeting the above provisions. In either case involving
conversion by the holders, any amount due up to and including the principal amount of the debt and
accrued but unpaid interest will be satisfied in cash by the Company. The portion of the conversion
value of the debt in excess of principal may, at the option of the Company, be satisfied in either
cash or shares of the Companys common stock. The initial conversion rate is subject to adjustment
based on certain specified events or in the event the Company undergoes a fundamental change as
defined. As part of the offering of the 2.5% Convertible Debentures, the Company agreed to file a
shelf registration statement related to the resale of the debentures and the common stock issuable
upon conversion of the debentures within a specified period of time and to have the registration
statement become effective and maintain effectiveness during periods specified in the debenture
agreement. This registration statement was filed timely by the Company on August 14, 2006. If the
registration statement subsequently ceases to be effective, the Company could be subject to
liquidated damage payments of up to 0.50% per year on the principal amount of the 2.5% Convertible
Debentures, payable on June 15 and December 15 of each year during the period that the registration
statement is not effective, as defined in the debenture agreement. The Company plans to use a
portion of the proceeds from the offering to repay at maturity, or earlier, the $200,000,000
principal amount of 2.65% Senior Notes due 2007. Immediately following the offering, the Company
used approximately $190,220,000 of the proceeds to purchase 4,166,915 shares of the Companys
common stock at an average cost of $45.65 per share. Remaining proceeds from the offering are
available for acquisitions, further share repurchases and general corporate uses.
13
Note 11: Business Segments
The Companys operations are organized into three separate business segments DPS, V&M and
CS. Summary financial data by segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPS |
|
$ |
556,733 |
|
|
$ |
387,357 |
|
|
$ |
1,467,656 |
|
|
$ |
1,079,128 |
|
V&M |
|
|
305,988 |
|
|
|
155,690 |
|
|
|
876,523 |
|
|
|
424,689 |
|
CS |
|
|
116,071 |
|
|
|
93,566 |
|
|
|
322,038 |
|
|
|
275,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
978,792 |
|
|
$ |
636,613 |
|
|
$ |
2,666,217 |
|
|
$ |
1,779,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPS |
|
$ |
92,106 |
|
|
$ |
46,845 |
|
|
$ |
258,361 |
|
|
$ |
116,175 |
|
V&M |
|
|
56,992 |
|
|
|
27,645 |
|
|
|
112,347 |
|
|
|
70,666 |
|
CS |
|
|
10,092 |
|
|
|
6,898 |
|
|
|
32,615 |
|
|
|
16,614 |
|
Corporate & other |
|
|
(18,716 |
) |
|
|
(8,394 |
) |
|
|
(59,703 |
) |
|
|
(30,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
140,474 |
|
|
$ |
72,994 |
|
|
$ |
343,620 |
|
|
$ |
172,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & other includes expenses associated with the Companys Corporate office in Houston,
Texas, as well as all of the Companys interest income, interest expense, certain litigation
expense managed by the Companys General Counsel, foreign currency gains and losses from certain
short-term intercompany lending activities managed by the Companys centralized Treasury function
and stock compensation expense.
Note 12: Earnings Per Share
The calculation of basic and diluted earnings per share for each period presented was as
follows dollars and shares in thousands, except per share amounts (prior year amounts have been
revised to reflect the 2-for-1 stock split effective December 15, 2005):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
89,285 |
|
|
$ |
49,218 |
|
|
$ |
221,291 |
|
|
$ |
116,440 |
|
Add back interest on convertible debentures, net of tax |
|
|
|
|
|
|
47 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (assuming conversion of convertible debentures) |
|
$ |
89,285 |
|
|
$ |
49,265 |
|
|
$ |
221,301 |
|
|
$ |
116,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding (basic) |
|
|
111,576 |
|
|
|
112,274 |
|
|
|
113,845 |
|
|
|
109,577 |
|
Common stock equivalents |
|
|
1,695 |
|
|
|
1,497 |
|
|
|
1,705 |
|
|
|
1,385 |
|
Incremental shares from assumed conversion of convertible debentures |
|
|
1,913 |
|
|
|
456 |
|
|
|
1,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
115,184 |
|
|
|
114,227 |
|
|
|
117,311 |
|
|
|
110,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.80 |
|
|
$ |
0.44 |
|
|
$ |
1.94 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.78 |
|
|
$ |
0.43 |
|
|
$ |
1.89 |
|
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares and net income used in computing diluted earnings per share have been
calculated using the if-converted method for the Companys 1.75% Convertible Debentures during the
period they were outstanding in the nine months ended September 30, 2006 and during the three
months ended September 30, 2005. The 1.75% Convertible Debentures were anti-dilutive during the
nine months ended September 30, 2005.
The Companys 1.5% Convertible Debentures have been included in the calculation of diluted
earnings per share for the three and nine months ended September 30, 2006, since the average market
price of the Companys common stock exceeded the conversion value of the debentures during both
periods. The Companys 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, 2006, as the
conversion price of the debentures was in excess of the average market price of the Companys
common stock for both periods. During the three and nine months ended September 30, 2006, the
Company acquired 631,100 and 5,926,815 treasury shares at an average cost of $44.71 and $44.87 per
share, respectively. A total of 211,129 and 926,311 treasury shares were issued during the three
and nine month periods ended September 30, 2006, respectively, in satisfaction of stock option
exercises and vesting of restricted stock units.
14
Note 13: Comprehensive Income
The amounts of comprehensive income for the three and nine months ended September 30, 2006 and
2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income per Consolidated Condensed Results of Operations |
|
$ |
89,285 |
|
|
$ |
49,218 |
|
|
$ |
221,291 |
|
|
$ |
116,440 |
|
Foreign currency translation gain (loss)1 |
|
|
(7,806 |
) |
|
|
6,431 |
|
|
|
32,934 |
|
|
|
(36,324 |
) |
Change in fair value of derivatives accounted for as cash flow
hedges, net of tax and other |
|
|
(144 |
) |
|
|
1 |
|
|
|
9,538 |
|
|
|
(4,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
81,335 |
|
|
$ |
55,650 |
|
|
$ |
263,763 |
|
|
$ |
75,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
The significant changes in the Foreign currency translation gain (loss) relate
primarily to the Companys operations in the United Kingdom, Luxembourg, Norway and Brazil. |
The components of accumulated other elements of comprehensive income at September 30, 2006 and
December 31, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Amounts comprising accumulated other elements of comprehensive income: |
|
|
|
|
|
|
|
|
Accumulated foreign currency translation gain |
|
$ |
80,423 |
|
|
$ |
47,489 |
|
Accumulated adjustments to record minimum pension liabilities, net of tax |
|
|
(1,507 |
) |
|
|
(1,507 |
) |
Fair value of derivatives accounted for as cash flow hedges, net of tax and other |
|
|
1,020 |
|
|
|
(8,518 |
) |
|
|
|
|
|
|
|
Accumulated other elements of comprehensive income |
|
$ |
79,936 |
|
|
$ |
37,464 |
|
|
|
|
|
|
|
|
Note 14: Contingencies
The Company is subject to a number of contingencies, including environmental matters,
litigation and tax contingencies.
Environmental Matters
The Companys worldwide operations are subject to domestic and international regulations with
regard to air, soil and water quality as well as other environmental matters. The Company, through
its environmental management system and active third-party audit program, believes it is in
substantial compliance with these regulations.
The Company is currently identified as a potentially responsible party (PRP) with respect to
two sites designated for cleanup under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) or similar state laws. One of these sites is Osborne, Pennsylvania (a
landfill into which a predecessor of the Compression Systems operation in Grove City, Pennsylvania
deposited waste), where remediation is complete and remaining costs relate to ongoing ground water
treatment and monitoring. The other is believed to be a de minimis exposure. The Company is also
engaged in site cleanup under the Voluntary Cleanup Plan of the Texas Commission on Environmental
Quality at former manufacturing locations in Houston and Missouri City, Texas. Additionally, the
Company has discontinued operations at a number of other sites which had been active for many
years. The Company does not believe, based upon information currently available, that there are any
material environmental liabilities existing at these locations. At September 30, 2006, the
Companys consolidated balance sheet included a noncurrent liability of $7,985,000 for
environmental matters.
Legal Matters
As discussed in Environmental Matters above, the Company is engaged in site cleanup at a
former manufacturing site in Houston, Texas. In 2001, the Company discovered that contaminated
underground water at this site had migrated to an adjacent residential area. Pursuant to applicable
state regulations, the Company notified the affected homeowners. The Company has entered into 21
written agreements with residents over the past four years that obligated the Company to either
reimburse sellers in the area for the estimated decline in value due to potential buyers concerns
over contamination or, in the case of some of these agreements, to purchase the
15
property after an agreed marketing period. Four of these agreements have had no claims made
under them as yet. One property purchased by the Company has been exchanged for commercial property
of approximately equal value. In addition, the Company has settled eight other property claims by
homeowners. The Company entered into these agreements for the purpose of mitigating the potential
impact of the disclosure of the environmental issue. It was the Companys intention to stabilize
property values in the affected area to avoid or mitigate future claims. Although the Company has
continued to negotiate with homeowners on a case by case basis, the Company no longer offers these
agreements in advance of sale. The Company has had expenses and losses of approximately $8,300,000
since 2002 related to the various agreements with homeowners. The Company has filed for
reimbursement under an insurance policy purchased specifically for this exposure but has not
recognized any potential reimbursement in its consolidated financial statements. The Companys
financial statements at September 30, 2006 reflect an approximate $152,000 liability for its
estimated exposure under the outstanding agreements with homeowners. There are approximately 150
homes in the affected area with an estimated aggregate appraised value of $150,000,000. The
homeowners that have settled with the Company have no further claims on these properties. An
unknown number of these properties have sold with no Company support, but with disclosure of the
contamination and, therefore, likely have no further claims. The Companys remediation efforts are
resulting in a lower level of contamination than when originally disclosed to the homeowners. The
Company is unable to predict future market values of homes in the affected areas and how potential
buyers of such homes may view the underground contamination in making a purchase decision.
The Company is a named defendant in two lawsuits regarding this contamination. In Valice v.
Cooper Cameron Corporation (80th Jud. Dist. Ct., Harris County, filed June 21, 2002), filed as a
class action, the plaintiffs claim that the contaminated underground water has reduced property
values and threatens the health of the area residents. The complaint filed seeks an analysis of the
contamination, reclamation and recovery of actual damages for the loss of property value. The
Company is of the opinion that there is no health risk to area residents and that the lawsuit
essentially reflects concerns over a possible decline in property value. A preliminary settlement
proposal that had been presented to the Court, under which homeowners in the affected area would be
indemnified for a loss of property value, if any, due to the contamination upon any sale, attracted
insufficient support from members of the putative class due primarily to concern over the period of
time this proposed indemnity would be available. The Company and counsel for the putative class
are negotiating revised terms of the proposed indemnity. However, there remain significant
unresolved issues relating to a settlement of this matter including a fairness opinion rendered by
the Court and the ability of the plaintiffs to obtain approval of sufficient numbers of the members
of the putative class. The Company cannot, therefore, conclude as to the probability at this point
in time whether a revised settlement will be ultimately agreed to and approved. While there
remains uncertainty related to the ultimate outcome of this matter, the Company has recorded, as
its best estimate, an $8,500,000 liability for this matter as of September 30, 2006.
The other suit pending regarding this matter, Moldovan v. Cameron International Corporation
(165th Jud. Dist. Ct., Harris County, filed October 23, 2006), was filed by six members
of the putative Valice class who opted-out of the settlement proposal originally presented in that
matter. The complaint filed makes the same claims as those made in the Valice lawsuit and seeks
recovery of actual and exemplary damages for the loss of property value.
The Company believes any potential exposure from existing agreements and any settlement of the
pending actions, or, based on its review of the facts and law, any potential exposure from these,
or similar, suits will not have a material adverse effect on its financial position or results of
operations.
The Company had been named as a defendant in a suit brought by a purchaser of an option to
purchase a parcel of the same former manufacturing site, Silber/I-10 Venture Ltd., f/k/a
Rocksprings Ltd. v. Falcon Interests Realty Corp., Cooper Industries Inc. and Cooper Cameron
Corporation (212th Judicial District Court, Galveston County, filed August 15, 2002) that alleged
fraud and breach of contract regarding the environmental condition of the parcel under option. The
parties have settled this matter and the case has been dismissed. Based on the Asset Transfer
Agreement pursuant to which Cooper Industries, Inc. (Cooper) spun-off the Company, Cooper has made
a claim of approximately $2,500,000 against the Company for reimbursement of its legal fees and
settlement costs with respect to this matter. The Company is of the opinion it is not required to
make this reimbursement and intends to vigorously defend itself.
The Company has been named as a defendant in a number of multi-defendant, multi-plaintiff tort
lawsuits since 1995. At September 30, 2006, the Companys consolidated balance sheet included a
liability of approximately $4,161,000 for such cases, including estimated legal costs.
The Company believes, based on its review of the facts and law, that the potential exposure
from the remaining suits will not have a material adverse effect on its financial condition or
liquidity.
16
Tax Contingencies
The Company has operations in over 35 countries. As a result, the Company is subject to various tax
filing requirements in these countries. The Company prepares its tax filings in a manner which it
believes is consistent with such filing requirements. However, some of the tax laws and regulations
which the Company is subject to are subject to interpretation and/or judgment. Although the Company
believes that the tax liability 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 authoritys interpretation
of the tax laws/regulations, the Company could be exposed to additional taxes.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
In addition to the historical data contained herein, this document includes forward-looking
statements regarding future market strength, order levels, revenues and earnings of the Company,
as well as expectations regarding cash flows, future capital spending and the Companys ability
to issue additional debt or refinance its existing debt, made in reliance upon the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The Companys actual results
may differ materially from those described in forward-looking statements. These statements are
based on current expectations of the Companys performance and are subject to a variety of factors,
some of which are not under the control of the Company, which can affect the Companys results of
operations, liquidity or financial condition. Such factors may include overall demand for, and
pricing of, the Companys products; the size and timing of orders; the Companys ability to
successfully execute large subsea projects it has been awarded; the Companys ability to convert
backlog into revenues on a timely and profitable basis; the Companys ability to successfully
implement its capital expenditures program; the impact of acquisitions the Company has made or may
make; changes in the price of (and demand for) oil and gas in both domestic and international
markets; raw material costs and availability; political and social issues affecting the countries
in which the Company does business; fluctuations in currency markets worldwide; and variations in
global economic activity. In particular, current and projected oil and gas prices historically have
generally affected customers spending levels and their related purchases of the Companys products
and services. Additionally, changes in oil and gas price expectations may impact the Companys
financial results due to changes in cost structure, staffing or spending levels. See additional
factors discussed in Factors That May Affect Financial Condition and Future Results contained
herein.
Because the information herein is based solely on data currently available, it is subject to
change as a result of changes in conditions over which the Company has no control or influence, and
should not therefore be viewed as assurance regarding the Companys 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 2006 COMPARED TO THIRD QUARTER 2005
Consolidated Results
The Companys net income for the third quarter of 2006 totaled $89.3 million, or $0.78 per
diluted share, compared to $49.2 million, or $0.43 per diluted share, in the third quarter of 2005.
The results for the third quarter of 2006 include pre-tax charges of $3.6 million, or $0.02 per
diluted share, for acquisition integration activities associated with the operations of the Flow
Control segment of Dresser, Inc. that were acquired in late 2005 and early 2006 (the Dresser
Acquired Businesses).
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board Statement No. 123(R), Share-Based Payment (SFAS 123(R)) using
the modified-prospective-transition method. Under SFAS 123(R), stock based compensation expense
recognized during the three months ended September 30, 2006 totaled $4.6 million, of which $2.0
million related to outstanding restricted and deferred stock unit grants and $2.6 million related
to unvested outstanding stock option grants. There was no material cumulative effect of adopting
SFAS 123(R). Prior to January 1, 2006, the Company accounted for stock-based payments under APB
Opinion 25, Accounting for Stock-Based Compensation. During the third quarter of 2005, a total of
$0.5 million in stock-based compensation expense was recognized related to the amortization of the
fair value of restricted stock unit grants. Options granted under the Companys equity compensation
plans had an exercise price equal to the market value of the underlying common stock on the date of
grant and all terms were fixed, accordingly, no expense was recognized under APB Opinion 25. During
2005, the Company began issuing restricted stock unit grants with no exercise price to key
employees in place of stock options and, as more fully described in Note 4 of the Notes to
Consolidated Condensed Financial Statements, also made restricted stock unit grants to officers in
addition to key employees during the first quarter of 2006, some of which contain performance-based
conditions. At September 30, 2006, approximately $11.0 million and $10.6 million of compensation
costs remain to be recognized over the next 0.79 and 1.55 years relating to the grant date fair
value of unvested stock option grants and unvested restricted stock unit grants, respectively.
Revenues
Revenues for the third quarter of 2006 totaled $978.8 million, an increase of 53.7% from
$636.6 million in the third quarter of 2005. Revenues increased in each of the Companys segments
and across all product lines. The increase was driven primarily by high oil and gas prices, which
have led to increased drilling and production activities and demand for new equipment. Entities
acquired since the beginning of the third quarter of 2005 accounted
for approximately $116.3
million, or 34.0% of the growth in revenues. A discussion of revenue by segment may be found below.
18
Costs and Expenses
Cost of sales (exclusive of depreciation and amortization) for the third quarter of 2006
totaled $685.0 million, an increase of 52.3% from $449.8 million in the third quarter of 2005. As a
percentage of revenues, cost of sales decreased from 70.7% in the third quarter of 2005 to 70.0% in
the third quarter of 2006. The decrease is due primarily to lower warranty costs, primarily caused
by the absence of a provision recorded in the third quarter of 2005 related to certain equipment
shipped for a project in West Africa, and lower inventory obsolescence provisions, primarily
relating to the absence of additional charges taken in the third quarter of 2005 to adjust
inventory at DPS to its estimated realizable value (a combined 2.0 percentage-point decrease).
This was partially offset by (i) lower product margins on drilling and subsea equipment due largely
to an increased number of large project sales in the current period, which typically carry a lower
margin as compared to the Companys traditional product sales (a
1.0 percentage-point increase) and
(ii) the impact of the Dresser Acquired Businesses, which historically have incurred a higher cost
of sales to revenue ratio than the Companys legacy businesses
(a 0.2 percentage-point increase).
Selling and administrative expenses for the third quarter of 2006 were $126.8 million, an
increase of $32.2 million or 34.0% from $94.6 million in the third quarter of 2005. Acquisitions of
new entities in the past year accounted for $12.1 million of the increase. Additionally, with the
adoption of SFAS 123(R), effective January 1, 2006, the Company recognized $4.6 million of stock
compensation expense in the third quarter of 2006 compared to $0.5 million in the third quarter of
2005. The remainder of the increase is due primarily to higher headcount and other employee-related
costs and higher activity levels throughout the Company.
Depreciation and amortization for the third quarter of 2006 totaled $25.2 million, an increase
of $6.4 million, or 34.0%, from $18.8 million for the third quarter of 2005. Newly acquired
entities accounted for approximately $2.6 million of the increase with the remaining increase due
primarily to higher levels of capital spending.
Interest income for the third quarter of 2006 was $8.9 million compared to $3.5 million in the
third quarter of 2005. The increase of $5.4 million is primarily attributable to higher short-term
interest rates and higher invested cash balances due primarily to the issuance of $500 million of
convertible debt in May 2006.
Interest expense for the third quarter of 2006 totaled $6.7 million, an increase of $2.8
million from $3.9 million in the third quarter of 2005. The increase is primarily attributable to
the issuance of $500 million of convertible debt in May 2006.
During the third quarter of 2006, acquisition integration costs totaling $3.6 million were
incurred in connection with the integration of the Dresser Acquired Businesses primarily into the
operations of the V&M segment. The costs incurred were for employee relocation, plant
rearrangement, plant and facility consolidation and other integration costs.
The income tax provision in the third quarter of 2006 was $51.2 million compared to $23.8
million for the same period in 2005. The effective tax rate for the third quarter of 2006 was 36.4%
compared to 32.6% in the third quarter of 2005. The increase in the effective tax rate is primarily
attributable to an increased amount of forecasted full-year earnings in higher tax rate
jurisdictions.
Segment Results
DPS Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September 30, |
|
Increase |
(dollars in millions) |
|
2006 |
|
2005 |
|
$ |
|
% |
Revenues |
|
$ |
556.7 |
|
|
$ |
387.4 |
|
|
$ |
169.3 |
|
|
|
43.7 |
% |
Income before income taxes |
|
$ |
92.1 |
|
|
$ |
46.8 |
|
|
$ |
45.3 |
|
|
|
96.6 |
% |
Revenues of the DPS segment during the third quarter of 2006 totaled $556.7 million, an
increase of 43.7% from $387.4 million in the third quarter of 2005. Sales of drilling products
increased 53.4%, surface sales were up 32.0%, subsea equipment sales increased 45.5% and sales of
oil, gas and water separation applications were up 45.0%. The increase in drilling sales reflects
generally higher demand for new land blowout preventers (BOPs) and increased aftermarket activity
as well as the impact of deliveries for certain major drilling projects in the third quarter of
2006. Surface sales increased across all regions due to increased demand for the Companys
products, driven by strong commodity prices and high activity levels. Subsea equipment sales were
up in the third quarter of 2006 as compared to the third quarter of 2005 due primarily to
deliveries for a large project offshore West Africa. Revenues
19
associated with an oil separation application to be used on a floating offshore storage
platform offshore Brazil accounted for the majority of the increase in the oil, gas and water
separation application product line.
Income before income taxes for the third quarter of 2006 totaled $92.1 million, an increase of
96.6% from $46.8 million in the third quarter of 2005. Cost of sales as a percent of revenues
declined from 72.4% in the third quarter of 2005 to 70.9% for the comparable period of 2006. The
decline is primarily attributable to (i) lower provisions for excess inventory primarily related to
the absence of additional charges taken in the third quarter of 2005 to adjust inventory to its
estimated realizable value (a 2.3 percentage-point decrease) and (ii) lower warranty costs,
primarily related to the absence of a provision in the third quarter of 2005 related to certain
equipment shipped for a project in West Africa (a 0.9 percentage-point decrease). This was
partially offset by lower margins on drilling and subsea equipment due largely to an increased
number of large project sales in the current period which typically carry a lower margin as
compared to the Companys traditional product sales (a 1.6 percentage-point increase).
Selling and administrative costs in the DPS segment totaled $56.5 million for the third
quarter of 2006, an increase of $7.4 million, or 15.1%, compared to the third quarter of 2005.
Increased headcount and activity levels in the selling and marketing operations of DPS in order to
support the expansion of the business accounted for a majority of the increase in costs.
Depreciation and amortization expense in DPS for the third quarter of 2006 was $13.5 million
as compared to $10.8 million for the third quarter of 2005, an increase of $2.7 million or 25.0%.
The increase is due primarily to higher levels of capital spending.
V&M Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September 30, |
|
Increase |
(dollars in millions) |
|
2006 |
|
2005 |
|
$ |
|
% |
Revenues |
|
$ |
306.0 |
|
|
$ |
155.7 |
|
|
$ |
150.3 |
|
|
|
96.5 |
% |
Income before income taxes |
|
$ |
57.0 |
|
|
$ |
27.6 |
|
|
$ |
29.4 |
|
|
|
106.2 |
% |
Revenues of the V&M segment for the third quarter of 2006 totaled $306.0 million, an increase
of 96.5% from $155.7 million in the third quarter of 2005. Acquisitions accounted for approximately
$116.3 million, or 77.3% of the increase. Engineered product sales more than tripled in the third
quarter of 2006 compared to the third quarter of 2005. Approximately 92.3% of the increase was
attributable to the addition of the Dresser Acquired Businesses in late 2005 and early 2006, with
the remainder reflecting higher activity levels due to strong conditions in the energy markets.
Sales of distributed products were up 43.4% for the three months ended September 30, 2006, with
more than one-half of the increase due to newly acquired entities. The remaining increase reflects
strong demand in the U.S. due to increased demand for the Companys products driven by high
commodity prices and rig count levels. Sales of equipment for the process markets increased 95.9%.
Approximately 24.0% of the increase was the result of newly acquired entities with the remainder
attributable mainly to new liquefied natural gas (LNG) projects internationally.
Income before income taxes totaled $57.0 million in the third quarter of 2006, an increase of
106.2% from $27.6 million for the comparable period of 2005. Cost of sales as a percent of revenues
increased from 65.4% in the third quarter of 2005 to 66.0% in the third quarter of 2006. The
increase was due primarily to the Dresser Acquired Businesses, which
caused a 3.4 percentage-point
increase as these businesses incur a higher cost of sales to revenue ratio than V&Ms legacy
businesses. This increase was partially offset by (i) better margins on the segments legacy
products, primarily engineered and distributed products, which had the effect of lowering the cost
of sales to revenue ratio by 2.1 percentage points and (ii) the application of manufacturing
overhead and certain other costs to a larger revenue base (a 0.6 percentage-point decrease).
Selling and administrative expense increased by $15.3 million or 69.3% in the third quarter of
2006 as compared to the third quarter of 2005. Approximately $12.1 million of the increase is
attributable to newly acquired entities. The remaining increase was caused by higher headcount
levels in the legacy businesses and higher employee incentive costs due to strong business activity
levels.
Depreciation and amortization in the V&M segment increased by $2.7 million in the third
quarter of 2006 as compared to the third quarter of 2005. The increase is primarily attributable to
newly acquired entities.
V&M incurred $2.7 million of acquisition integration costs in the third quarter of 2006 as a
result of integrating the Dresser Acquired Businesses into the segments operations. These costs
are described in Consolidated Results above.
20
CS Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
September 30, |
|
Increase |
(dollars in millions) |
|
2006 |
|
2005 |
|
$ |
|
% |
Revenues |
|
$ |
116.1 |
|
|
$ |
93.6 |
|
|
$ |
22.5 |
|
|
|
24.1 |
% |
Income before income taxes |
|
$ |
10.1 |
|
|
$ |
6.9 |
|
|
$ |
3.2 |
|
|
|
46.3 |
% |
Revenues of the CS segment for the third quarter of 2006 totaled $116.1 million, an increase
of 24.1% from $93.6 million in the third quarter of 2005. Gas compression sales increased 30.1%,
over one-half of which was attributable to higher shipments of Superior compressors due to strong
order rates within the past year and a large shipment to a customer in the Far East during the
third quarter of 2006. The remaining increase primarily reflects strong demand for aftermarket
parts due to high equipment utilization by customers, which is generating increased equipment
servicing needs. Sales of air compression equipment increased 21.8% due mainly to (i) higher
shipments of new engineered units and plant air machines, reflecting strong demand for machines
designed to meet customers air separation needs and (ii) the introduction of new product lines.
Income before income taxes totaled $10.1 million in the third quarter of 2006, an increase of
46.3% from $6.9 million in the comparable period of 2005. Cost of sales as a percent of revenues
increased from 72.1% in the third quarter of 2005 to 75.3% in the third quarter of 2006. The
increase was due primarily to (i) a sales mix shift to lower-margin new unit sales as well as low
margins on a large shipment to a customer in the Far East (a 1.4 percentage-point increase), (ii)
higher subcontract costs due to increased business activity and start-up costs at a new facility (a
1.1 percentage-point increase) and (iii) the impact of higher manufacturing overhead costs which
increased at a greater rate than the rate of increase in revenues (a 1.9 percentage-point
increase). These increases were partially offset by the impact of quality initiatives and improved
inventory management practices, which led to a decrease in warranty, scrap and inventory
obsolescence costs (a 1.4 percentage-point decline).
Selling and administrative expenses declined by $1.4 million in the third quarter of 2006 as
compared to the third quarter of 2005.
Depreciation and amortization expense for the CS segment declined by $0.2 million to $3.1
million in the third quarter of 2006 from $3.3 million in the third quarter of 2005. The decline
was mainly attributable to the absence of depreciation expense relating to exiting one of the
segments facilities during 2005.
Acquisition integration costs of $0.9 million were incurred by CS during the third quarter of
2006. The costs incurred relate to the relocation of certain CS facilities into one of the
locations acquired in connection with the acquisition of the Dresser Acquired Businesses.
Corporate Segment
The Corporate segments loss before income taxes was $18.7 million in the third quarter of
2006 as compared to $8.4 million in the third quarter of 2005. The increase in the segments loss
before income taxes was due primarily to (i) $4.1 million of additional expense relating to
employee stock compensation programs recognized in accordance with SFAS 123(R), which was adopted
January 1, 2006, (ii) $1.4 million of additional bonus and other incentive costs mainly related to
improvements in the Companys financial results for the third quarter of 2006 as compared to the
third quarter of 2005, (iii) an additional provision of $2.0 million related to environmental
contamination at a former manufacturing facility and (iv) other higher employment-related costs,
employee travel and higher promotional and marketing costs.
The increases in interest income and interest expense during the third quarter of 2006 as
compared to the same period in 2005 are discussed in Consolidated Results above.
21
ORDERS
Orders were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
September 30, |
|
|
Increase |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
DPS |
|
$ |
833.3 |
|
|
$ |
595.5 |
|
|
$ |
237.8 |
|
|
|
39.9 |
% |
V&M |
|
|
297.1 |
|
|
|
176.0 |
|
|
|
121.1 |
|
|
|
68.8 |
|
CS |
|
|
133.0 |
|
|
|
117.3 |
|
|
|
15.7 |
|
|
|
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,263.4 |
|
|
$ |
888.8 |
|
|
$ |
374.6 |
|
|
|
42.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders for the third quarter of 2006 totaled $1,263.4 million, an increase of 42.1% compared
to $888.8 million for the third quarter of 2005.
DPS segment orders for the third quarter of 2006 were $833.3 million, an increase of 39.9%
from $595.5 million in the third quarter of 2005. Drilling orders were up 180.1% and surface orders
increased 21.4% during the third quarter of 2006 as compared to the third quarter of 2005. These
increases were partially offset by a 4.1% decline in subsea orders and a decrease of 30.9% in
orders for oil, gas and water separation applications. The increase in drilling orders primarily
reflects a number of awards received in the third quarter of 2006 associated with major drilling
projects related to higher rig construction activity as compared to only one major project award in
the third quarter of 2005. Surface orders showed increases in all regions except Latin America due
to increased demand for the Companys products driven by higher activity levels and high commodity
prices. The decline in orders for oil, gas and water separation applications is mainly
attributable to a $56 million project award received in the third quarter of 2005 relating to
equipment for use on a floating offshore storage platform offshore Brazil. The absence of a
similar-sized significant order in 2006 was partially offset by a large award received in the third
quarter of 2006 for a water treatment application in Canada as well as a general increase in
activity levels due to high commodity prices.
Third quarter 2006 orders in the V&M segment were $297.1 million, an increase of 68.8%
compared to orders of $176.0 million in the third quarter of 2005. Newly acquired entities
accounted for $106.9 million, or 88.3% of the increase. Engineered product line orders nearly
tripled in the third quarter of 2006 as compared to the third quarter of 2005. The addition of the
Dresser Acquired Businesses accounted for approximately 93.7% of the increase with the remaining
increase due to higher demand in the segments legacy operations resulting from increased demand
for the Companys products driven by higher commodity prices. Orders for distributed products grew
by 5.1% in the third quarter of 2006 as compared to the same period in 2005. Absent the impact of
newly acquired entities, distributed product orders were down 13.7% as weakness in the Canadian
markets more than offset higher demand in the United States. Process equipment orders increased
87.0% with newly acquired entities accounting for 41.6% of the increase. The remaining increase was
primarily attributable to new LNG projects internationally.
Orders in the CS segment for the third quarter 2006 totaled $133.0 million, an increase of
13.4% from $117.3 million in the third quarter of 2005. Orders in the gas compression market
decreased 5.2% due primarily to a large order in the third quarter of 2005 from a major customer
for Ajax units. There were no comparable large orders for this product line in the third quarter of
2006. Partially offsetting this were higher international orders for Superior compressors and
higher parts orders compared to the prior year quarter. Orders in the air compression market
increased 37.1% due mainly to strong worldwide demand for engineered machines designed to meet
customers air and gas separation needs.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005
Consolidated Results
The Companys net income for the nine months ended September 30, 2006 totaled $221.3 million,
or $1.89 per diluted share, compared to $116.4 million, or $1.05 per diluted share, in the nine
months ended September 30, 2005. The results for the first nine months of 2006 include (i) pre-tax
charges of $22.8 million, or $0.12 per diluted share, for acquisition integration costs associated
with the Dresser Acquired Businesses that were purchased in late 2005 and early 2006, (ii) pre-tax
foreign currency gains of $11.0 million, or $0.06 per diluted share, primarily relating to
short-term intercompany loans made to certain of the Companys European subsidiaries in connection
with the acquisition of the Dresser Acquired Businesses and (iii) a pre-tax charge of $8.5 million,
or $0.05 per diluted share, for a class action lawsuit related to environmental contamination at a
former manufacturing facility (see Note 14 of the Notes to Consolidated Condensed Financial
Statements).
22
The Company recognized $16.0 million of stock-based compensation expense during the nine
months ended September 30, 2006, of which $7.8 million related to outstanding restricted and
deferred stock unit grants and $8.2 million related to unvested outstanding stock option grants.
Prior to January 1, 2006, the Company accounted for stock-based payments under APB Opinion 25.
During the first nine months of 2005, a total of $1.5 million in stock-based compensation expense
was recognized related to the amortization of the fair value of restricted stock unit grants.
Accordingly, as a result of adopting SFAS 123(R), the Companys income before income taxes and
earnings per diluted share were $8.2 million and $0.05 lower, respectively, than if the Company had
continued to account for share-based compensation under APB Opinion No. 25.
Revenues
Revenues for the nine months ended September 30, 2006 totaled $2,666.2 million, an increase of
49.8% from $1,779.3 million for the nine months ended September 30, 2005. Revenues increased in
each of the Companys segments and across all product lines. The increase was driven primarily by
high oil and gas prices, which have led to increased drilling and production activities and demand
for new equipment. Entities acquired since the beginning of 2005 accounted for approximately
$369.0 million, or 41.6% of the growth in revenues. A discussion of revenue by segment may be
found below.
Costs and Expenses
Cost of sales (exclusive of depreciation and amortization) for the first nine months of 2006
totaled $1,852.9 million, an increase of 44.8% from $1,280.0 million in the first nine months of
2005. As a percentage of revenues, cost of sales decreased from 71.9% in the first nine months of
2005 to 69.5% in the comparable period of 2006. The decrease is due primarily to (i) a mix shift
and the impact of price increases in excess of costs on DPS and V&M legacy products (a 0.7
percentage-point decrease), (ii) lower inventory obsolescence provisions in 2006 as 2005 included a
$7.8 million charge related to a change in the estimated recovery value of certain slow-moving
inventory (a 0.6 percentage-point decrease), (iii) lower warranty costs, largely attributable to a
favorable settlement of a warranty issue on a subsea project, which reduced warranty expense by
$9.9 million in the first nine months of 2006, including a $3.6 million reduction in the liability
recorded in the first nine months of 2006 (a 0.6 percentage-point decrease) and (iv) the
application of manufacturing overhead and other costs to a larger
revenue base (a 2.3
percentage-point decrease). These decreases were partially offset by the addition of the Dresser
Acquired Businesses, which caused a 1.6 percentage-point increase as these businesses incur a
higher cost of sales to revenue ratio than the Companys legacy businesses.
Selling and administrative expenses for the first nine months of 2006 were $377.0 million, an
increase of $108.2 million or 40.2% from $268.8 million in the first nine months of 2005.
Acquisitions of new entities in the past year accounted for $49.1 million of the increase.
Additionally, with the adoption of SFAS 123(R), effective January 1, 2006, the Company recognized
$16.0 million of stock-based compensation expense in the first nine months of 2006 compared to $1.5
million in the first nine months of 2005. During the first nine months of 2006, the Company also
recognized an $8.5 million charge for a class action lawsuit related to environmental contamination
at a former manufacturing facility. The remainder of the increase is attributable to higher
headcount levels, higher employee incentive costs and other cost increases associated with the
expansion of the business.
Depreciation and amortization for the first nine months of 2006 totaled $72.4 million, an
increase of $14.9 million or 26.0%, from $57.5 million for the first nine months of 2005. The
increase is primarily attributable to newly acquired entities and higher levels of capital
spending.
Interest income for the first nine months of 2006 was $16.7 million compared to $8.7 million
in the first nine months of 2005. The increase of $8.0 million is primarily attributable to higher
short-term interest rates and higher invested cash balances due primarily to the issuance of $500
million of convertible debt in May 2006 and positive operating cash flows.
Interest expense for the first nine months of 2006 totaled $14.2 million, an increase of $5.2
million from $9.0 million for the first nine months of 2005. Approximately $4.4 million of the
increase is attributable to the issuance of $500 million of convertible debt in May 2006.
During the first nine months of 2006, acquisition integration costs totaling $22.8 million
were incurred in connection with the integration of the Dresser Acquired Businesses primarily into
the operations of the V&M segment. Approximately $10.5 million of the costs relate to non-cash
asset impairment charges and $4.0 million relates to employee severance at a legacy facility being
closed as a result of the acquisition. The remaining costs are for employee stay bonuses, employee
relocation, plant rearrangement, plant and facility consolidation and other integration costs (see
Note 3 of the Notes to Consolidated Condensed Financial Statements).
23
The income tax provision in the first nine months of 2006 was $122.3 million compared to $56.1
million for the first nine months of 2005. The effective tax rate for the first nine months of 2006
was 35.6% compared to 32.5% in the first nine months of 2005. The increase in the effective tax
rate is primarily attributable to an increased amount of forecasted full-year earnings in higher
tax rate jurisdictions.
Segment Results
DPS Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Increase |
(dollars in millions) |
|
2006 |
|
2005 |
|
$ |
|
% |
Revenues |
|
$ |
1,467.7 |
|
|
$ |
1,079.1 |
|
|
$ |
388.6 |
|
|
|
36.0 |
% |
Income before income taxes |
|
$ |
258.4 |
|
|
$ |
116.2 |
|
|
$ |
142.2 |
|
|
|
122.4 |
% |
DPS segment revenues for the nine months ended September 30, 2006 totaled $1,467.7 million, an
increase of 36.0% compared to $1,079.1 million during the nine months ended September 30, 2005.
Sales of drilling products increased 37.9%, surface sales were up 37.7%, subsea equipment sales
increased 35.8% and sales of oil, gas and water separation applications were up 19.6%. The
increase in drilling sales reflects generally higher demand for BOPs and increased aftermarket
activity as well as the impact of deliveries for certain major drilling projects in the first nine
months of 2006 as compared to the same period in 2005 which had no major project deliveries.
Surface sales increased across all regions due to increased demand for the Companys products
driven by strong commodity prices and record high backlog levels. Subsea equipment sales were up
in the first nine months of 2006 as compared to the first nine months of 2005 due primarily to
large projects offshore West Africa. Revenues associated with an oil separation application to be
used on a floating offshore storage platform offshore Brazil accounted for the majority of the
increase in the oil, gas and water separation application product line.
Income before income taxes for the first nine months of 2006 totaled $258.4 million, an
increase of 122.4% from $116.2 million in the first nine months of 2005. Cost of sales as a percent
of revenues declined from 73.4% in the nine months ended September 30, 2005 to 69.3% for the
comparable period of 2006. The reduction was due primarily to (i) price increases in excess of raw
material cost increases (a 0.6 percentage-point decrease), (ii) lower warranty costs, driven
largely by the favorable settlement of a warranty issue on a subsea project, which reduced warranty
expense in the first nine months of 2006 compared to the first nine
months of 2005 by $9.9 million,
including a $3.6 million reduction in the warranty liability recorded in the first nine months of
2006 (a 1.0 percentage-point decrease), (iii) lower inventory obsolescence provisions in 2006 as
2005 included a $7.8 million charge related to a change in the estimated recovery value of certain
slow-moving inventory (a 0.8 percentage-point decrease) and (iv) the application of manufacturing
overhead to a larger revenue base (a 1.6 percentage-point decrease).
Selling and administrative expenses for the first nine months of 2006 totaled $155.6 million,
an increase of $17.3 million or 12.5%, from $138.3 million for the first nine months of 2005.
Increased headcount and activity levels in the selling and marketing operations of DPS in order to
support the expansion of the business accounted for a majority of the increase in costs.
Depreciation and amortization expense for the first nine months of 2006 was $36.6 million as
compared to $32.6 million for the first nine months of 2005, an increase of $4.0 million or 12.3%.
The increase is primarily attributable to higher capital spending since the beginning of 2005.
V&M Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Increase |
(dollars in millions) |
|
2006 |
|
2005 |
|
$ |
|
% |
Revenues |
|
$ |
876.5 |
|
|
$ |
424.7 |
|
|
$ |
451.8 |
|
|
|
106.4 |
% |
Income before income taxes |
|
$ |
112.3 |
|
|
$ |
70.7 |
|
|
$ |
41.6 |
|
|
|
59.0 |
% |
Revenues of the V&M segment for the first nine months of 2006 totaled $876.5 million, an
increase of 106.4% from $424.7 million for the same period in 2005. Acquisitions accounted for
approximately $369.0 million, or 81.7% of the increase. Engineered product line sales more than
tripled in the first nine months of 2006 as compared to the first nine months of 2005.
Approximately 89.4% of the increase was attributable to the addition of the Dresser Acquired
Businesses in late 2005 and early 2006, with the remainder primarily reflecting increased demand
for the Companys products driven by higher activity levels in the United States due to strong
conditions in the energy markets. Sales of distributed products were up 45.2% for the nine months
ended September 30,
24
2006. Approximately 38.8% of the increase was due to newly acquired entities with the
remainder caused by strong demand in the segments legacy businesses due to high commodity prices
and rig count levels. Sales of equipment for the process markets increased 64.1%. Approximately
45.7% of the increase was the result of newly acquired entities with the remainder attributable
mainly to new LNG projects internationally
Income before income taxes totaled $112.3 million in the first nine months of 2006, an
increase of approximately 59.0% from $70.7 million in the first nine months of 2005. Cost of sales
as a percent of revenues increased from 67.1% in the first nine months of 2005 to 69.2% in the
first nine months of 2006. The increase was due primarily to the Dresser Acquired Businesses, which
caused a 7.4 percentage-point increase as these businesses incur a higher cost of sales to revenue
ratio than V&Ms legacy businesses. This increase was partially offset by (i) favorable pricing and
a mix shift in the first nine months of 2006 to higher-margin process valve and aftermarket sales,
which had a combined effect of lowering the cost of sales to revenue
ratio by 2.5 percentage points
and (ii) the application of manufacturing overhead to a larger revenue base on the segments legacy
operations, which positively impacted this ratio by approximately 2.7 percentage points.
Selling and administrative expenses for V&M increased $54.4 million, or 93.0%, in the first
nine months of 2006 as compared to the same period in the prior year.
Approximately $49.1 million
of the increase was due to entities acquired in late 2005 and early 2006. The remaining increase
was caused by higher headcount levels in the legacy businesses and higher employee incentive costs
due to strong business activity levels.
Depreciation and amortization in the V&M segment increased by $12.3 million in the first nine
months of 2006 to $23.0 million from $10.7 million in the comparable period in 2005. The increase
is primarily attributable to newly acquired entities.
V&M incurred $21.8 million of acquisition integration costs in the first nine months of 2006
as a result of integrating the Dresser Acquired Businesses into the segments operations. These
costs are described in Consolidated Results above.
CS Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Increase |
(dollars in millions) |
|
2006 |
|
2005 |
|
$ |
|
% |
Revenues |
|
$ |
322.0 |
|
|
$ |
275.5 |
|
|
$ |
46.5 |
|
|
|
16.9 |
% |
Income before income taxes |
|
$ |
32.6 |
|
|
$ |
16.6 |
|
|
$ |
16.0 |
|
|
|
96.3 |
% |
Revenues in the CS segment for the nine months ended September 30, 2006 totaled $322.0
million, an increase of 16.9% compared to $275.5 million for the nine months ended September 30,
2005. Gas compression sales increased 19.6%, nearly three-quarters of which was driven by higher
demand for new units resulting from strong natural gas prices and higher backlog levels at the
beginning of the current year. The remaining increase was the result of increased sales of
aftermarket parts. Sales in the air compression market were up 12.7% due mainly to increased demand
for engineered units to meet customers air and gas separation needs.
Income before income taxes totaled $32.6 million in the first nine months of 2006, an increase
of 96.3% from $16.6 million in the comparable period of 2005. Cost of sales as a percent of
revenues increased from 73.4% in the first nine months of 2005 to 73.6% in the comparable period of
2006. Rising material costs in excess of price increases as well as increased subcontract costs due
to higher volume levels contributed to a 2.4 percentage-point increase in the ratio of cost of
sales to revenues. This impact was mostly offset by the application of relatively fixed
manufacturing overhead costs to a larger revenue base, which decreased the ratio of cost of sales
to revenue by approximately 2.3 percentage points.
Selling and administrative costs declined $2.1 million, or 5.0%, in the first nine months of
2006 as compared to the same period in the prior year. The decline was primarily attributable to
the absence of certain restructuring costs incurred during 2005 related to one of the segments
facilities.
Depreciation and amortization expense for the CS segment declined by $3.0 million, or 23.8%,
to $9.6 million in the first nine months of 2006 from $12.6 million during the comparable period of
2005. The decline was mainly attributable to (i) assets which became fully depreciated over the
past year, (ii) the absence of depreciation expense relating to exiting one of the segments
facilities during 2005 and (iii) the absence of a $1.8 million write-down recorded in the first
nine months of 2005 associated with the retirement of various plant and equipment relating to a
plant consolidation within the segment.
25
Acquisition integration costs of $1.0 million were incurred by CS during the first nine months
of 2006. The costs incurred relate to the relocation of certain CS facilities into one of the
locations acquired in connection with the acquisition of the Dresser Acquired Businesses.
Corporate Segment
The Corporate segments loss before income taxes totaled $59.7 million for the first nine
months of 2006 as compared to $30.9 million in the first nine months of 2005. Included in the loss
for the first nine months of 2006 was a foreign currency gain of $7.7 million relating primarily to
short-term intercompany loans made to the Companys European subsidiaries in connection with the
acquisition of the Dresser Acquired Businesses in late 2005. More than offsetting this gain were
additional selling and administrative costs of $38.6 million consisting primarily of (i) $14.5
million of additional expense relating to employee stock compensation programs, recognized in
accordance with SFAS 123(R), which was adopted January 1, 2006, (ii) higher litigation expenses in
the first nine months of 2006 due to an $8.5 million charge for a class action lawsuit related to
environmental contamination at a former manufacturing facility and (iii) $6.9 of additional bonus
and other payments to employees mainly related to improvements in the Companys financial results
for the first nine months of 2006 compared to the same period in 2005. The remaining increase
primarily relates to other higher employment-related costs, employee travel and other promotional
and marketing costs.
Depreciation and amortization in the Corporate segment increased by $1.6 million to $3.2
million for the nine months ended September 30, 2006 compared to $1.6 million for the nine months
ended September 30, 2005. The increase was due primarily to higher levels of capital spending.
The increases in interest income and interest expense during the nine months ended September
30, 2006 as compared to the same period in 2005 are discussed in Consolidated Results above.
ORDERS & BACKLOG
Orders were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Increase |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
DPS |
|
$ |
2,487.6 |
|
|
$ |
1,840.7 |
|
|
$ |
646.9 |
|
|
|
35.1 |
% |
V&M |
|
|
973.0 |
|
|
|
482.2 |
|
|
|
490.8 |
|
|
|
101.8 |
|
CS |
|
|
397.7 |
|
|
|
352.8 |
|
|
|
44.9 |
|
|
|
12.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,858.3 |
|
|
$ |
2,675.7 |
|
|
$ |
1,182.6 |
|
|
|
44.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders for the first nine months of 2006 were $3,858.3 million, an increase of 44.2% from
$2,675.7 million for the first nine months of 2005.
DPS segment orders for the first nine months of 2006 totaled $2,487.6 million, an increase of
35.1% compared to $1,840.7 million for the first nine months of 2005. Drilling orders were up
264.1% and surface orders increased 23.8% during the first nine months of 2006 as compared to the
first nine months of 2005. These increases were partially offset by a 35.3% decline in subsea
orders and a decrease of 5.3% in orders for oil, gas and water separation applications. The
increase in drilling orders primarily reflects a thirteen-fold increase in the amount of awards
received associated with major drilling projects resulting from higher rig construction activity.
Surface orders showed double digit increases in all regions except Latin America due to increased
demand for the Companys products driven by higher activity levels and high commodity prices. The
decline in subsea orders primarily reflects the absence in the first nine months of 2006 of a
$350.0 million award received in the second quarter of 2005 for a project in the West African
market. The decline in orders for oil, gas and water separation applications is mainly
attributable to a $56.0 million project award received in the first nine months of 2005 relating to
equipment for use on a floating offshore storage platform offshore Brazil. The absence of a
similar-sized significant order in 2006 was partially offset by other large awards received in the
first nine months of 2006 for oil and water separation applications in Canada, the Middle East and
the Far East and a general increase in activity levels due to high commodity prices.
The V&M segment had orders of $973.0 million in the first nine months of 2006, more than
double the order level of $482.2 million in the comparable period of 2005. Acquisitions accounted
for approximately $337.9 million, or 68.8% of the increase. Engineered product line orders
increased 176.8% in the first nine months of 2006 as compared to the first nine months of 2005. The
addition of the Dresser Acquired Businesses accounted for
approximately 86.4% of the increase with
the remaining increase due to
26
higher demand from the segments legacy operations driven by higher commodity prices. Orders
for distributed products increased 39.4% in the nine months ended September 30, 2006 as compared to
the same period in 2005 with newly acquired entities accounting for 37.7% of the gain. The
remaining increase reflects increased market activity in the segments legacy operations due to
higher commodity prices and higher rig count levels. Process equipment orders more than doubled in
the first nine months of 2006 with newly acquired entities accounting for 35.4% of the increase.
The remaining increase in orders was primarily attributable to new LNG projects internationally.
Orders taken by the CS segment in the first nine months of 2006 totaled $397.7 million, an
increase of 12.7% from $352.8 million for the first nine months of 2005. Orders in the gas
compression market were up 2.7% primarily due to higher demand for aftermarket parts and an
increase in demand internationally for Superior compressors. This increased demand more than offset
a decline in orders for Ajax units from the high levels recorded in the first nine months of 2005.
Orders in the air compression market were up 25.7%, driven mainly by a 41.1% increase in demand for
engineered units designed primarily to meet customers air separation needs.
Backlog was as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Increase |
|
DPS |
|
$ |
2,535.1 |
|
|
$ |
1,503.6 |
|
|
$ |
1,031.5 |
|
V&M |
|
|
598.2 |
|
|
|
469.0 |
|
|
|
129.2 |
|
CS |
|
|
255.2 |
|
|
|
183.2 |
|
|
|
72.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,388.5 |
|
|
$ |
2,155.8 |
|
|
$ |
1,232.7 |
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
The Companys cash and cash equivalents increased by $357.7 million to $719.7 million at
September 30, 2006 compared to $362.0 million at December 31, 2005. The main reasons for the
increase were the issuance of $500.0 million of convertible debt in May 2006, positive cash flow
from operations for the nine months ended September 30, 2006, totaling $210.2 million and proceeds
from stock option exercises of $38.5 million. These cash inflows were used to purchase more than
5.9 million shares of treasury stock since the beginning of the year at a cost of $265.9 million,
or $44.87 per share, for capital expenditures of $108.9 million and for acquisitions totaling $35.9
million.
During the first nine months of 2006, the Company generated $210.2 million of cash from
operations as compared to $283.8 million for the same period in 2005. The primary reason for the
decrease was the need for increased working capital during the first nine months of 2006 as a
result of the record level of backlog at September 30, 2006 and the 44.2% increase in orders for
the nine months ended September 30, 2006 as compared to the same period in the prior year. The
increased level of cash utilized for working capital was partially offset by higher levels of
earnings and adjustments to earnings for non-cash charges to arrive at net cash provided by
operations during the first nine months of 2006 as compared to the first nine months of 2005.
During the first nine months of 2006, net income was $221.3 million, an increase of $104.9
million from $116.4 million in the first nine months of 2005. The factors leading to this increase
in earnings were discussed previously. Additionally certain adjustments to net income to arrive at
net cash provided by operating activities such as depreciation, amortization, stock-based
compensation expense, asset write-offs, provisions for deferred income taxes and other items
totaled $150.9 million for the first nine months of 2006, an increase of $68.2 million from $82.7
for the first nine months of 2005. Increased levels of working capital consumed $161.9 million
during the nine months ended September 30, 2006. For the nine months ended September 20, 2005,
working capital reductions contributed $84.6 million to cash flow from operations. During the first
nine months of 2006, $80.3 million of cash was utilized in connection with an increase in
receivables attributable to higher sales volume levels. An increase in inventories needed to meet
growing customer demands, as demonstrated by high order and backlog levels, consumed $277.7 million
of cash in the first nine months of 2006. A $25.4 million increase in deposits with vendors and
higher levels of prepaid expenses due to increased business activity levels were largely
responsible for a $40.8 million utilization of cash from other assets and liabilities during the
first nine months of 2006. These increased needs for cash were partially offset by higher levels of
accounts payable and accrued liabilities at September 30, 2006 as compared to December 31, 2005,
mainly due to a $213.3 million increase in progress payments and cash advances during the period.
For the nine months ended September 30, 2005, increased levels of accounts payable and accrued
liabilities, mainly due to higher levels of progress payments and cash advances, and higher
accruals for current income tax liabilities more than offset cash utilized to fund increases in
inventory and receivables.
The Company utilized $134.2 million of cash for investing activities during the first nine
months of 2006 compared to $162.5 million during the same period in 2005. Capital spending during
the first nine months of 2006 was $108.9 million compared to $43.8
27
for the same period in 2005. The increased level of spending reflects the Companys
intentions to address capacity issues arising from higher manufacturing levels caused by increased
demand from customers. The Company also made two acquisitions during the first quarter of 2006,
spending $21.6 million to acquire a remaining business from Dresser Inc. and $13.1 million on the
acquisition of Caldon Company, a business which is additive to the Companys existing flow
measurement line of products. Most of the Dresser Acquired Businesses were previously purchased in
late 2005. Additionally, a small asset acquisition totaling $1.2 million was made during the third
quarter of 2006.
During the first nine months of 2006, the Companys financing activities generated $275.2
million of cash compared to $136.4 million generated during the first nine months of 2005. The
Company issued $500.0 million of 2.5% twenty-year convertible debentures in May 2006. The Company
used the proceeds of this debt offering and existing cash on hand to acquire more than 5.9 million
shares of treasury stock at a total cost of $265.9 million during the first nine months of 2006,
including $190.2 million which was used for share purchases immediately following the debt
offering. Proceeds from stock option exercises and excess tax benefits available to the Company
from stock option exercises and vesting of restricted stock units contributed $45.0 million of
additional cash proceeds from financing activities during the nine months ended September 30, 2006.
During the nine months ended September 30, 2005, the Company generated $136.4 million of cash from
financing activities due primarily to $165.5 million in proceeds from stock option exercises offset
by (i) $14.8 million used to redeem a portion of the Companys 1.75% debentures and (ii) $9.4
million relating to the purchase of 164,500 shares of treasury stock.
In the short-term, future cash flows will be required to fund capital spending for the
remainder of the year, currently estimated to be approximately $175.0 million to $185.0 million for
the full year of 2006. Additionally, the Company plans to utilize the remaining proceeds from the
2.5% convertible debt offering to repay its Senior Notes, currently totaling $200.0 million face
value, upon maturity in April 2007, or earlier.
On a longer-term basis, the Company has outstanding $238.0 million of 1.5% convertible
debentures. Holders of these debentures could require the Company to redeem them beginning in May
2009. Holders of the Companys newly issued 2.5% convertible debentures could also require the
Company to redeem them beginning in June 2011. The Company believes, based on its current financial
condition, existing backlog levels and current expectations for future market conditions, that it
will be able to meet its short- and longer-term liquidity needs through additional debt issuances
or refinancing or with cash generated from operating activities, existing cash balances on hand and
amounts available under its $350.0 million five-year multicurrency revolving credit facility,
expiring October 12, 2010, subject to certain extension provisions.
Factors That May Affect Financial Condition and Future Results
The acquisition of certain businesses of the Flow Control segment of Dresser, Inc. exposes the
Company to integration risk.
The acquisition of certain businesses from Dresser is the largest acquisition the Company has
made and will require a substantial amount of integration into V&Ms operations. To the extent this
integration takes longer than expected, costs more than expected or does not result in the
operational improvement expected, the Companys financial performance and liquidity may be
negatively impacted. Through September 30, 2006, the Company has incurred $22.8 million of costs
attributable to the integration of these operations, primarily into the V&M segment.
The inability of the Company to deliver its backlog on time could affect the Companys future
sales and profitability and its relationships with its customers.
At September 30, 2006, backlog reached $3.4 billion, a record level for the Company. The
ability to meet customer delivery schedules for this backlog is dependent on a number of factors
including, but not limited to, access to the raw materials required for production, an adequately
trained and capable workforce, project engineering expertise for certain large projects, sufficient
manufacturing plant capacity and appropriate planning and scheduling of manufacturing resources.
Many of the contracts the Company enters into with its customers require long manufacturing lead
times and contain penalty or incentive clauses relating to on-time delivery. A failure by the
Company to deliver in accordance with customer expectations could subject the Company to financial
penalties or loss of financial incentives and may result in damage to existing customer
relationships. Additionally, the Company bases its earnings guidance to the financial markets on
expectations regarding the timing of delivery of product currently in backlog. Failure to deliver
backlog in accordance with expectations could negatively impact the Companys financial performance
and thus cause adverse changes in the market price of the Companys outstanding common stock and
other publicly-traded financial instruments.
28
The Company is embarking on a significant capital expansion program.
In 2006, the Company expects full-year capital expenditures of approximately $175.0 million to
$185.0 million to upgrade its machine tools, manufacturing technologies, processes and facilities
in order to improve its efficiency and address current and expected market demand for the Companys
products. To the extent this program causes disruptions in the Companys plants, the Companys
ability to deliver existing or future backlog may be negatively impacted. In addition, if the
program does not result in the expected efficiencies, future profitability may be negatively
impacted.
Execution of subsea systems projects exposes the Company to risks not present in its surface
business.
This market is significantly different from the Companys 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. These projects accounted for approximately
9.4% of total revenues in the first nine months of 2006. To the extent the Company experiences
difficulties in meeting the technical and/or delivery requirements of the projects, the Companys
earnings or liquidity could be negatively impacted. As of September 30, 2006, the Company had a
subsea systems backlog of approximately $424.7 million.
Increases in the cost of and the availability of metals used in the Companys manufacturing
processes could negatively impact the Companys profitability.
Beginning in the latter part of 2003 and continuing into 2006, commodity prices for items such
as nickel, molybdenum and heavy metal scrap that are used to make the steel alloys required for the
Companys products increased significantly. Certain of the Companys suppliers have passed these
increases on to the Company. The Company has implemented price increases intended to offset the
impact of the increase in commodity prices. However, if customers do not accept these price
increases, future profitability will be negatively impacted. In addition, the Companys vendors
have informed the Company that lead times for certain raw materials are being extended. To the
extent such change negatively impacts the Companys ability to meet delivery requirements of its
customers, the financial performance of the Company may suffer.
Downturns in the oil and gas industry have had, and may in the future have, a negative effect on
the Companys sales and profitability.
Demand for most of the Companys products and services, and therefore its revenues, depends to
a large extent upon the level of capital expenditures related to oil and gas exploration,
production, development, processing and transmission. Declines, as well as anticipated declines, in
oil and gas prices could negatively affect the level of these activities. Factors that contribute
to the volatility of oil and gas prices include the following:
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demand for oil and gas, which is impacted by economic and political conditions and
weather; |
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the ability of the Organization of Petroleum Exporting Countries (OPEC) to set and
maintain production levels and pricing; |
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the level of production from non-OPEC countries; |
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policies regarding exploration and development of oil and gas reserves; |
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the political environments of oil and gas producing regions, including the Middle East; |
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the depletion rates of gas wells in North America; and |
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advances in exploration and development technology. |
Fluctuations in worldwide currency markets can impact the Companys 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 and other European and Asian countries. To the extent
the Company sells these products in U.S. dollars, the Companys profitability is eroded when the
U.S. dollar weakens against the British pound, the euro and certain Asian currencies, including the
Singapore dollar.
29
In connection with the acquisition of the Dresser Acquired Businesses in late 2005 and early
2006, the Company entered into a number of short-term loans between certain wholly-owned
subsidiaries to finance the acquisition cost and working capital needs of certain of Dressers
international operations. Due to a significant weakening of the U.S. dollar in the second quarter
of 2006, the Company recognized a significant currency gain relating to these euro-denominated
loans made by a United States-based entity. Except for this impact in the second quarter of 2006,
the Companys gain or loss on foreign currency dominated transactions in other periods has not been
material.
Cancellation of orders could affect the Companys future sales and profitability.
Cameron accepts purchase orders that may be subject to cancellation, modification or
rescheduling. Changes in the economic environment and the financial condition of the oil and gas
industry could result in customer requests for modification, rescheduling or cancellation of
contractual orders. The Company is typically protected against financial losses related to products
and services it has provided prior to any cancellation. However, if the Companys customers cancel
existing purchase orders, future profitability may be negatively impacted.
The Companys international operations expose it to instability and changes in economic and
political conditions, foreign currency fluctuations, trade and investment regulations and other
risks inherent to international business.
The risks of international business include the following:
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volatility in general economic, social and political conditions; |
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differing tax rates, tariffs, exchange controls or other similar restrictions; |
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changes in currency rates; |
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inability to repatriate income or capital; |
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compliance with, and changes in, domestic and foreign laws and regulations that impose a
range of restrictions on operations, trade practices, trade partners and investment
decisions. From time to time, the Company receives inquiries regarding its compliance with
such laws and regulations. The Company received a voluntary request for information dated
September 2, 2005 from the U.S. Securities and Exchange Commission regarding certain of the
Companys West African activities and has responded to this request. The Company believes it
has complied with all applicable laws and regulations with respect to its activities in this
region. Additionally, the U.S. Department of Treasurys Office of Foreign Assets Control
made an inquiry regarding U.S. involvement in a United Kingdom subsidiarys commercial and
financial activity relating to Iran in September 2004 and the U.S. Department of Commerce
made an inquiry regarding sales by another United Kingdom subsidiary to Iran in February
2005. The Company responded to these two inquiries and has not received any additional
requests related to these matters; |
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reductions in the number or capacity of qualified personnel; and |
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seizure of equipment. |
Cameron has manufacturing and service operations that are essential parts of its business in
developing countries and economically and politically volatile areas in Africa, Latin America,
Russia and other countries that were part of the Former Soviet Union, the Middle East, and Central
and South East Asia. The Company also purchases a large portion of its raw materials and components
from a relatively small number of foreign suppliers in developing countries. The ability of these
suppliers to meet the Companys demand could be adversely affected by the factors described above.
Compression Systems aftermarket revenues associated with legacy equipment are declining.
During 2005, approximately 35% of Compression Systems revenues came from the sale of
replacement parts for equipment that the Company no longer manufactures. Many of these units have
been in service for long periods of time, and are gradually being replaced. As this installed base
of legacy equipment declines, the Companys potential market for parts orders is also reduced. In
recent years, the Companys revenues from replacement parts associated with legacy equipment have
declined nominally.
30
Changes in the equity and debt markets impact pension expense and funding requirements for the
Companys defined benefit plans.
The Company accounts for its defined benefit pension plans in accordance with Statement of
Financial Accounting Standards No. 87, Employers Accounting for Pensions, (SFAS 87), which
requires that amounts recognized in the financial statements be determined on an actuarial basis. A
significant element in determining the Companys pension income or expense in accordance with SFAS
87 is the expected return on plan assets. The assumed long-term rate of return on assets is applied
to a calculated value of plan assets which results in an estimated return on plan assets that is
included in current year pension income or expense. The difference between this expected return and
the actual return on plan assets is deferred and amortized against future pension income or
expense. Due to the weakness in the overall equity markets from 2000 through 2002, the plan assets
earned a rate of return substantially less than the assumed long-term rate of return during this
period. As a result, expense associated with the Companys pension plans has increased
significantly from the level recognized historically.
Additionally, SFAS 87 requires the recognition of a minimum pension liability to the extent
the assets of the plans are below the accumulated benefit obligation of the plans. In order to
avoid recognizing this minimum pension liability, the Company contributed approximately $5.0
million to its pension plans during the first nine months of 2006, $13.7 million in 2005, $18.2
million in 2004 and $18.7 million in 2003. If the Companys pension assets perform poorly in the
future or interest rates decrease, the Company may be required to recognize a minimum pension
liability in the future or fund additional amounts to the pension plans.
The Company is subject to environmental, health and safety laws and regulations that expose the
Company to potential liability.
The Companys 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 Companys 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 Companys market risk exposure in financial
instruments follows.
Foreign Currency Exchange Rates
As described more fully under Factors That May Affect Financial Condition and Future Results
Fluctuations in worldwide currency markets can impact the Companys profitability above, the
Company has short-term intercompany loans and intercompany balances outstanding at September 30,
2006 denominated in currencies different from the functional currency of at least one of the
parties. These transactions subject the Companys financial results to risk from changes in foreign
currency exchange rates. Other than the second quarter of 2006, these amounts had not resulted in
recognition of a material foreign currency gain or loss due to fluctuations in the applicable
exchange rates.
A large portion of the Companys 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 Companys financial performance may be affected by changes in
foreign currency exchange rates or weak economic conditions in these markets. Overall, the Company
generally is a net receiver of Pounds Sterling and Canadian dollars and, therefore, benefits from a
weaker U.S. dollar with respect to these currencies. Typically, the Company is a net payer of euros
and Norwegian krone as well as other currencies such as the Singapore dollar and the Brazilian
real. A weaker U.S. dollar with respect to these currencies may have an adverse effect on the
Company. For each of the last three years, the Companys gain or loss from foreign
currency-denominated transactions has not been material, except as noted above.
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 in currencies for
which the Company does not traditionally have fully offsetting local currency expenditures. The
Company was party to a number of long-term foreign currency forward contracts at September 30,
2006. The purpose of the majority of these contracts was to hedge large
31
anticipated non-functional currency cash flows on major subsea or drilling contracts involving
the Companys United States operations and its wholly-owned subsidiary in the United Kingdom.
Information relating to the contracts and the fair value recorded in the Companys Consolidated
Balance Sheet at September 30, 2006 follows:
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Year of Contract Expiration |
(amounts in millions except exchange rates) |
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2006 |
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2007 |
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2008 |
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2009 |
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Total |
Sell USD/Buy GBP: |
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|
Notional amount to sell (in U.S. dollars) |
|
$ |
28.4 |
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$ |
65.4 |
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$ |
11.0 |
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$ |
2.6 |
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|
$ |
107.4 |
|
Average GBP to USD contract rate |
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1.8113 |
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1.8091 |
|
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1.8039 |
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1.7989 |
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|
1.8089 |
|
Average GBP to USD forward rate at September 30, 2006 |
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1.8736 |
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1.8744 |
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1.8718 |
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1.8693 |
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1.8738 |
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Fair value at September 30, 2006 in U.S. dollars |
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$ |
3.8 |
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Buy Euro/Sell GBP: |
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Notional amount to buy (in euros) |
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7.6 |
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16.0 |
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0.9 |
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24.5 |
|
Average GBP to EUR contract rate |
|
|
1.4027 |
|
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|
1.3902 |
|
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|
1.3693 |
|
|
|
1.3450 |
|
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|
1.3933 |
|
Average GBP to EUR forward rate at September 30, 2006 |
|
|
1.4734 |
|
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|
1.4631 |
|
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|
1.4464 |
|
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1.4262 |
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|
1.4657 |
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Fair value at September 30, 2006 in U.S. dollars |
|
|
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$ |
(1.6 |
) |
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Buy NOK/Sell GBP: |
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Notional amount to buy (in Norwegian krone) |
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7.7 |
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20.7 |
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0.6 |
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29.0 |
|
Average GBP to NOK contract rate |
|
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11.3641 |
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11.2999 |
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11.2173 |
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11.3152 |
|
Average GBP to NOK forward rate at September 30, 2006 |
|
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12.1998 |
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12.1110 |
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11.9940 |
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12.1321 |
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Fair value at September 30, 2006 in U.S. dollars |
|
|
|
|
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|
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|
|
|
|
|
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|
$ |
(0.3 |
) |
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Buy Euro/Sell USD: |
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|
|
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Notional amount to buy (in euros) |
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|
17.0 |
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|
20.3 |
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6.2 |
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|
|
43.5 |
|
Average EUR to USD contract rate |
|
|
1.2697 |
|
|
|
1.2846 |
|
|
|
1.2974 |
|
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|
|
|
|
1.2806 |
|
Average EUR to USD forward rate at September 30, 2006 |
|
|
1.2735 |
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|
1.2830 |
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|
1.2964 |
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|
1.2812 |
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Fair value at September 30, 2006 in U.S. dollars |
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|
$ |
|
|
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 Companys 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 value of the Companys senior notes due 2007 is principally dependent on changes in
prevailing interest rates. The fair values of the 1.5% and 2.5% convertible senior debentures are
principally dependent on both prevailing interest rates and the Companys current share price as it
relates to the initial conversion price of the respective instruments.
The Company has various other long-term debt instruments, but believes that the impact of
changes in interest rates in the near term will not be material to these instruments.
32
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 Companys Disclosure Committee
and the Companys management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Companys 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 Companys disclosure
controls and procedures were effective as of September 30, 2006 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 SECs 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 Companys management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
During the third quarter of 2006, the Company converted to a new financial consolidation
system for use in accumulating its financial data in order to meet its internal management
reporting as well as external financial reporting needs. Additionally, the Company converted
another Italian entity added as part of the businesses acquired from Dresser in late 2005 to its
SAP enterprise-wide software systems that are used to manage the Companys procurement,
manufacturing, accounting and reporting needs. Other than previously described, no other changes
have been made in the Companys internal controls over financial reporting during the three months
ended September 30, 2006, that have materially affected or are reasonably likely to materially
affect the Companys internal controls over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to a number of contingencies, including environmental matters,
litigation and tax contingencies.
Environmental Matters
The Companys worldwide operations are subject to domestic and international regulations with
regard to air, soil and water quality as well as other environmental matters. The Company, through
its environmental management system and active third-party audit program, believes it is in
substantial compliance with these regulations.
The Company is currently identified as a potentially responsible party (PRP) with respect to
two sites designated for cleanup under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) or similar state laws. One of these sites is Osborne, Pennsylvania (a
landfill into which a predecessor of the Compression Systems operation in Grove City, Pennsylvania
deposited waste), where remediation is complete and remaining costs relate to ongoing ground water
treatment and monitoring. The other is believed to be a de minimis exposure. The Company is also
engaged in site cleanup under the Voluntary Cleanup Plan of the Texas Commission on Environmental
Quality at former manufacturing locations in Houston and Missouri City, Texas. Additionally, the
Company has discontinued operations at a number of other sites which had been active for many
years. The Company does not believe, based upon information currently available, that there are any
material environmental liabilities existing at these locations. At September 30, 2006, the
Companys consolidated balance sheet included a noncurrent liability of $8.0 million for
environmental matters.
Legal Matters
As discussed in Environmental Matters above, the Company is engaged in site cleanup at a
former manufacturing site in Houston, Texas. In 2001, the Company discovered that contaminated
underground water at this site had migrated to an adjacent residential area. Pursuant to applicable
state regulations, the Company notified the affected homeowners. The Company has entered into 21
written agreements with residents over the past four years that obligated the Company to either
reimburse sellers in the area for the estimated decline in value due to potential buyers concerns
over contamination or, in the case of some of these agreements, to purchase the property after an
agreed marketing period. Four of these agreements have had no claims made under them as yet. One
property purchased by the Company has been exchanged for commercial property of approximately equal
value. In addition, the Company has settled eight other property claims by homeowners. The Company
entered into these agreements for the purpose of mitigating the potential impact of the disclosure
of the environmental issue. It was the Companys intention to stabilize property values in the
33
affected area to avoid or mitigate future claims. Although the Company has continued to
negotiate with homeowners on a case by case basis, the Company no longer offers these agreements in
advance of sale. The Company has had expenses and losses of approximately $8.3 million since 2002
related to the various agreements with homeowners. The Company has filed for reimbursement under an
insurance policy purchased specifically for this exposure but has not recognized any potential
reimbursement in its consolidated financial statements. The Companys financial statements at
September 30, 2006 reflect an approximate $0.2 million liability for its estimated exposure under
the outstanding agreements with homeowners. There are approximately 150 homes in the affected area
with an estimated aggregate appraised value of $150.0 million. The homeowners that have settled
with the Company have no further claims on these properties. An unknown number of these properties
have sold with no Company support, but with disclosure of the contamination and, therefore, likely
have no further claims. The Companys remediation efforts are resulting in a lower level of
contamination than when originally disclosed to the homeowners. The Company is unable to predict
future market values of homes in the affected areas and how potential buyers of such homes may view
the underground contamination in making a purchase decision.
The Company is a named defendant in two lawsuits regarding this contamination. In Valice v.
Cooper Cameron Corporation (80th Jud. Dist. Ct., Harris County, filed June 21, 2002), filed as a
class action, the plaintiffs claim that the contaminated underground water has reduced property
values and threatens the health of the area residents. The complaint filed seeks an analysis of the
contamination, reclamation and recovery of actual damages for the loss of property value. The
Company is of the opinion that there is no health risk to area residents and that the lawsuit
essentially reflects concerns over a possible decline in property value. A preliminary settlement
proposal that had been presented to the Court, under which homeowners in the affected area would be
indemnified for a loss of property value, if any, due to the contamination upon any sale, attracted
insufficient support from members of the putative class due primarily to concern over the period of
time this proposed indemnity would be available. The Company and counsel for the putative class
are negotiating revised terms of the proposed indemnity. However, there remain significant
unresolved issues relating to a settlement of this matter including a fairness opinion rendered by
the Court and the ability of the plaintiffs to obtain approval of sufficient numbers of the members
of the putative class. The Company cannot, therefore, conclude as to the probability at this point
in time whether a revised settlement will be ultimately agreed to and approved. While there
remains uncertainty related to the ultimate outcome of this matter, the Company has recorded, as
its best estimate, an $8.5 million liability for this matter as of September 30, 2006.
The other suit pending regarding this matter, Moldovan v. Cameron International Corporation
(165th Jud. Dist. Ct., Harris County, filed October 23, 2006), was filed by six members
of the putative Valice class who opted-out of the settlement proposal originally presented in that
matter. The complaint filed makes the same claims as those made in the Valice lawsuit and seeks
recovery of actual and exemplary damages for the loss of property value.
The Company believes any potential exposure from existing agreements and any settlement of the
pending actions, or, based on its review of the facts and law, any potential exposure from these,
or similar, suits will not have a material adverse effect on its financial position or results of
operations.
The Company had been named as a defendant in a suit brought by a purchaser of an option to
purchase a parcel of the same former manufacturing site, Silber/I-10 Venture Ltd., f/k/a
Rocksprings Ltd. v. Falcon Interests Realty Corp., Cooper Industries Inc. and Cooper Cameron
Corporation (212th Judicial District Court, Galveston County, filed August 15, 2002) that alleged
fraud and breach of contract regarding the environmental condition of the parcel under option. The
parties have settled this matter and the case has been dismissed. Based on the Asset Transfer
Agreement pursuant to which Cooper Industries, Inc. (Cooper) spun-off the Company, Cooper has made
a claim of approximately $2.5 million against the Company for reimbursement of its legal fees and
settlement costs with respect to this matter. The Company is of the opinion it is not required to
make this reimbursement and intends to vigorously defend itself.
The Company has been named as a defendant in a number of multi-defendant, multi-plaintiff tort
lawsuits since 1995. At September 30, 2006, the Companys consolidated balance sheet included a
liability of approximately $4.2 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 the remaining suits will not have a material adverse effect on its financial condition or
liquidity.
Tax Contingencies
The Company has operations in over 35 countries. As a result, the Company is subject to various tax
filing requirements in these countries. The Company prepares its tax filings in a manner which it
believes is consistent with such filing requirements. However,
34
some of the tax laws and regulations which the Company is subject to are subject to interpretation
and/or judgment. Although the Company believes that the tax liability 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 authoritys interpretation of the tax laws/regulations, the Company could be
exposed to additional taxes.
Item 1A. Risk Factors
The information set forth under the caption Factors That May Affect Financial Condition and
Future Results on pages 28-31 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 Companys Board of Directors changed the number of shares of the
Companys 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.
Additionally, on May 22, 2006, the Companys Board of Directors approved repurchasing shares of the
Companys common stock with the proceeds remaining from the Companys 2.5% Convertible Debenture
offering, after taking into account a planned repayment of $200.0 million principal amount of the
Companys outstanding 2.65% Senior Notes due 2007. This authorization is in addition to the
10,000,000 shares described above.
Purchases pursuant to the 10,000,000 share Board authorization may be made by way of open
market purchases, directly or indirectly, for the Companys own account or through commercial banks
or financial institutions and by the use of derivatives such as a sale or put on the Companys
common stock or by forward or economically equivalent transactions. Shares of common stock
purchased and placed in treasury during the three months ended September 30, 2006 under the Boards
two authorization programs described above are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
number of |
|
|
|
|
|
|
|
|
|
|
|
Total number |
|
|
shares that may |
|
|
|
|
|
|
|
|
|
|
|
of shares |
|
|
yet be |
|
|
|
|
|
|
|
|
|
|
|
purchased as |
|
|
purchased |
|
|
|
Total number |
|
|
|
|
|
|
part of all |
|
|
under all |
|
|
|
of shares |
|
|
Average price |
|
|
repurchase |
|
|
repurchase |
|
Period |
|
purchased |
|
|
paid per share |
|
|
programs (a) |
|
|
programs (b) |
|
7/1/06 7/31/06 |
|
|
112,700 |
|
|
$ |
44.77 |
|
|
|
7,027,215 |
|
|
|
9,141,393 |
|
8/1/06 8/31/06 |
|
|
|
|
|
$ |
|
|
|
|
7,027,215 |
|
|
|
9,245,404 |
|
9/1/06 9/30/06 |
|
|
518,400 |
|
|
$ |
44.70 |
|
|
|
7,545,615 |
|
|
|
8,710,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
631,100 |
|
|
$ |
44.71 |
|
|
|
7,545,615 |
|
|
|
8,710,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
All share purchases during the three months ended September 30, 2006 were done through open
market transactions. |
|
(b) |
|
At September 30, 2006, 2,088,705 shares are yet to be purchased under the May 2006 Board
authorization, based on the most recent closing price of the Companys common stock at that
date of $48.31 per share. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
(a) |
|
Information Not Previously Reported in a Report on Form 8-K. |
None
(b) |
|
Material Changes to the Procedures by Which Security Holders May Recommend Board Nominees. |
35
There have been no material changes to the procedures enumerated in the Companys definitive
proxy statement filed on Schedule 14A with the Securities and Exchange Commission on March 27,
2006 with respect to the procedures by which security holders may recommend nominees to the
Companys Board of Directors.
Item 6. Exhibits
Exhibit 31.1
Certifications
Exhibit 31.2
Certifications
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.
36
SIGNATURES
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 7, 2006 |
Cameron
International Corporation
(Registrant)
|
|
|
/s/ Franklin Myers
|
|
|
Franklin Myers |
|
|
Senior Vice President & Chief
Financial Officer and authorized to sign on behalf of the Registrant |
|
37
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
31.1
|
|
Certifications |
|
|
|
31.2
|
|
Certifications |
|
|
|
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. |
38