UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
|
|
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended March 31, 2009
|
OR
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
|
Commission
File Number 1-13884
Cameron
International Corporation
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
76-0451843
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
|
|
1333
West Loop South, Suite 1700, Houston, Texas
|
77027
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
713/513-3300
(Registrant’s
Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and
Former Fiscal Year, if Changed Since Last
Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
R
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes
£
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one)
Large
accelerated filer
R
Accelerated
filer
£
Non-accelerated filer
£
Smaller
reporting company
£
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
£
No
R
Number of
shares outstanding of issuer’s common stock as of April 24, 2009 was
216,976,712.
TABLE OF CONTENTS
PART I
— FINANCIAL INFORMATION
|
3
|
Item 1. Financial
Statements
|
3
|
Consolidated Condensed Results of
Operations
|
3
|
Consolidated Condensed Balance
Sheets
|
4
|
Consolidated Condensed Statements
of Cash Flows
|
5
|
Notes to Consolidated Condensed
Financial Statements
|
6
|
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
|
15
|
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
|
26
|
Item 4. Controls and
Procedures
|
28
|
PART II
— OTHER INFORMATION
|
28
|
Item 1. Legal
Proceedings
|
28
|
Item 1A. Risk
Factors
|
30
|
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
|
30
|
Item 3. Defaults Upon Senior
Securities
|
31
|
Item 4. Submission of Matters to
a Vote of Security Holders
|
31
|
Item 5. Other
Information
|
31
|
Item 6. Exhibits
|
32
|
SIGNATURES
|
32
|
PART
I — FINANCIAL INFORMATION
CAMERON
INTERNATIONAL CORPORATION
CONSOLIDATED CONDENSED RESULTS OF
OPERATIONS
(dollars
and shares in thousands, except per share data)
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
|
|
|
|
(unaudited)
|
|
REVENUES
|
|
$
|
1,257,023
|
|
|
$
|
1,339,254
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Cost
of sales (exclusive of depreciation and amortization shown separately
below)
|
|
|
843,658
|
|
|
|
965,359
|
|
Selling and administrative
expenses
|
|
|
164,618
|
|
|
|
157,346
|
|
Depreciation and
amortization
|
|
|
36,716
|
|
|
|
31,906
|
|
Interest income
|
|
|
(2,179
|
)
|
|
|
(6,143
|
)
|
Interest expense
|
|
|
24,541
|
|
|
|
10,311
|
|
Restructuring
expense
|
|
|
22,316
|
|
|
|
−
|
|
Total costs and
expenses
|
|
|
1,089,670
|
|
|
|
1,158,779
|
|
Income
before income taxes
|
|
|
167,353
|
|
|
|
180,475
|
|
Income
tax provision
|
|
|
(52,716
|
)
|
|
|
(57,494
|
)
|
Net
income
|
|
$
|
114,637
|
|
|
$
|
122,981
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.53
|
|
|
$
|
0.57
|
|
Diluted
|
|
$
|
0.52
|
|
|
$
|
0.53
|
|
Shares
used in computing earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
216,891
|
|
|
|
216,746
|
|
Diluted
|
|
|
219,996
|
|
|
|
230,466
|
|
(1)
|
Amounts
have been retrospectively revised as a result of the adoption, effective
January 1, 2009, of FASB Staff Position APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(including Partial Cash
Settlement).
|
The
accompanying notes are an integral part of these statements.
CAMERON
INTERNATIONAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars
in thousands, except shares and per share data)
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
|
(unaudited)
|
|
|
(as
revised)
(1)
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,442,021
|
|
|
$
|
1,621,046
|
|
Receivables,
net
|
|
|
950,958
|
|
|
|
950,362
|
|
Inventories,
net
|
|
|
1,508,500
|
|
|
|
1,336,925
|
|
Other
|
|
|
174,876
|
|
|
|
148,110
|
|
Total current
assets
|
|
|
4,076,355
|
|
|
|
4,056,443
|
|
Plant
and equipment, net
|
|
|
941,356
|
|
|
|
931,647
|
|
Goodwill
|
|
|
696,440
|
|
|
|
709,217
|
|
Other
assets
|
|
|
207,864
|
|
|
|
205,064
|
|
TOTAL ASSETS
|
|
$
|
5,922,015
|
|
|
$
|
5,902,371
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
184,656
|
|
|
$
|
161,279
|
|
Accounts
payable and accrued liabilities
|
|
|
1,791,349
|
|
|
|
1,854,384
|
|
Accrued
income taxes
|
|
|
88,562
|
|
|
|
95,545
|
|
Total current
liabilities
|
|
|
2,064,567
|
|
|
|
2,111,208
|
|
Long-term
debt
|
|
|
1,222,599
|
|
|
|
1,218,627
|
|
Deferred
income taxes
|
|
|
100,553
|
|
|
|
99,149
|
|
Other
long-term liabilities
|
|
|
123,381
|
|
|
|
128,860
|
|
Total liabilities
|
|
|
3,511,100
|
|
|
|
3,557,844
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01 per share, 400,000,000 shares authorized,
236,316,946 shares issued at March 31, 2009 (236,316,873 shares
issued
at December 31,
2008)
|
|
|
2,363
|
|
|
|
2,363
|
|
Capital in excess of par
value
|
|
|
1,253,813
|
|
|
|
1,254,593
|
|
Retained
earnings
|
|
|
1,924,550
|
|
|
|
1,809,913
|
|
Accumulated other elements of
comprehensive income
|
|
|
(133,732
|
)
|
|
|
(84,218
|
)
|
Less:
Treasury stock, 19,364,786 shares at March 31, 2009 (19,424,120 shares at
December 31, 2008)
|
|
|
(636,079
|
)
|
|
|
(638,124
|
)
|
Total stockholders’
equity
|
|
|
2,410,915
|
|
|
|
2,344,527
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
$
|
5,922,015
|
|
|
$
|
5,902,371
|
|
(1)
|
Amounts
have been retrospectively revised as a result of the adoption, effective
January 1, 2009, of FASB Staff Position APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(including Partial Cash
Settlement).
|
The
accompanying notes are an integral part of these statements.
CAMERON
INTERNATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars
in thousands)
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
(as
revised)
(1)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
114,637
|
|
|
$
|
122,981
|
|
Adjustments
to reconcile net income to net cash (used for) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
26,463
|
|
|
|
23,263
|
|
Amortization
|
|
|
10,253
|
|
|
|
8,643
|
|
Non-cash stock compensation
expense
|
|
|
7,750
|
|
|
|
9,996
|
|
Tax benefit of employee stock
compensation plan transactions and deferred income taxes
|
|
|
2,779
|
|
|
|
(797
|
)
|
Changes
in assets and liabilities, net of translation, acquisitions and non-cash
items:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(2,403
|
)
|
|
|
(61,197
|
)
|
Inventories
|
|
|
(187,849
|
)
|
|
|
(43,013
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(61,155
|
)
|
|
|
(30,652
|
)
|
Other assets and liabilities,
net
|
|
|
(38,757
|
)
|
|
|
15,155
|
|
Net cash (used for) provided by
operating activities
|
|
|
(128,282
|
)
|
|
|
44,379
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(48,952
|
)
|
|
|
(45,141
|
)
|
Acquisitions, net of cash
acquired
|
|
|
-
|
|
|
|
(57,512
|
)
|
Proceeds from sale of plant and
equipment
|
|
|
1,512
|
|
|
|
293
|
|
Net cash used for investing
activities
|
|
|
(47,440
|
)
|
|
|
(102,360
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Short-term loan borrowings,
net
|
|
|
23,005
|
|
|
|
170,536
|
|
Purchase of treasury
stock
|
|
|
(7,055
|
)
|
|
|
(120,420
|
)
|
Proceeds from stock option
exercises, net of tax payments from stock compensation plan
transactions
|
|
|
(1,123
|
)
|
|
|
927
|
|
Excess tax benefits from
employee stock compensation plan transactions
|
|
|
1,827
|
|
|
|
6,859
|
|
Principal payments on capital
leases
|
|
|
(2,010
|
)
|
|
|
(1,727
|
)
|
Net cash provided by financing
activities
|
|
|
14,644
|
|
|
|
56,175
|
|
Effect
of translation on cash
|
|
|
(17,947
|
)
|
|
|
6,252
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(179,025
|
)
|
|
|
4,446
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,621,046
|
|
|
|
739,916
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,442,021
|
|
|
$
|
744,362
|
|
(1)
|
Amounts
have been retrospectively revised as a result of the adoption, effective
January 1, 2009, of FASB Staff Position APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(including Partial Cash
Settlement).
|
The
accompanying notes are an integral part of these statements.
CAMERON
INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
Unaudited
Note
1: Basis of Presentation
The
accompanying Unaudited Consolidated Condensed Financial Statements of Cameron
International Corporation (the Company) have been prepared in accordance with
Rule 10-01 of Regulation S-X and do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Those adjustments, consisting of normal recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation of the financial information for the interim periods, have been
made. The results of operations for such interim periods are not necessarily
indicative of the results of operations for a full year. The Unaudited
Consolidated Condensed Financial Statements should be read in conjunction with
the Audited Consolidated Financial Statements and Notes thereto filed by the
Company on Form 10-K for the year ended December 31, 2008.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include, but are not limited to, estimates of total contract profit or
loss on certain long-term production contracts, estimated losses on accounts
receivable, estimated realizable value on excess and obsolete inventory,
contingencies, including tax contingencies, estimated liabilities for litigation
exposures and liquidated damages, estimated warranty costs, estimates related to
pension accounting, estimates related to the fair value of reporting units for
purposes of assessing goodwill for impairment, estimated proceeds from assets
held for sale and estimates related to deferred tax assets and liabilities,
including valuation allowances on deferred tax assets. Actual results could
differ materially from these estimates.
Certain
prior period amounts have been retrospectively revised as a result of the
adoption, effective January 1, 2009, of FASB Staff Position APB 14-1, Accounting
for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(including Partial Cash Settlement) (FSP APB 14-1). See Note 8 of the
Notes to Consolidated Condensed Financial Statements for additional
information.
Note
2: Recently Issued Accounting Pronouncements
Effective
January 1, 2009, the Company adopted Statement of Financial Accounting Standards
No. 141R, Business Combinations (SFAS 141R) and Statement of Financial
Accounting Standards No. 160, Accounting and Reporting of Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS
160). There was no material impact on the Company’s financial statements as of
January 1, 2009 as a result of adopting either statement, although it is
anticipated that SFAS 141R will significantly affect the Company’s accounting
for future business combinations. No business combinations were
completed during the first quarter of 2009 utilizing SFAS 141R.
The
Company adopted the provisions of Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (SFAS 157) relating to financial assets and
liabilities and other assets and liabilities carried at fair value on a
recurring basis as required on January 1, 2008. As allowed by FASB Staff
Position FAS 157-2, Effective Date of FASB Statement No. 157, the Company
deferred the adoption of SFAS 157 with respect to all remaining nonfinancial
assets and liabilities until January 1, 2009. There was no impact on the
Company’s financial statements at the time of adoption of the remaining
provisions of SFAS 157 as required on January 1, 2009; however, the Company does
expect that this new standard will impact certain aspects of its accounting for
business combinations on a prospective basis, including the determination of
fair values assigned to certain purchased assets and liabilities.
Note
3: Restructuring Expense
Included
in operating results for the first quarter of 2009 are employee severance and
related benefits and certain other costs totaling $22,316,000, primarily
associated with workforce reductions during the first quarter of 2009.
Approximately 300 employees worldwide were terminated in connection with these
reductions. At March 31, 2009, the Company has recorded a liability of
$16,674,000 for future payments still to be made to these former
employees.
Note
4: Receivables
Receivables
consisted of the following (in thousands):
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Trade
receivables
|
|
$
|
905,871
|
|
|
$
|
897,453
|
|
Other
receivables
|
|
|
62,608
|
|
|
|
62,557
|
|
Allowance
for doubtful accounts
|
|
|
(17,521
|
)
|
|
|
(9,648
|
)
|
Total receivables
|
|
$
|
950,958
|
|
|
$
|
950,362
|
|
Note
5: Inventories
Inventories consisted of the following
(in thousands):
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Raw
materials
|
|
$
|
150,899
|
|
|
$
|
126,649
|
|
Work-in-process
|
|
|
441,165
|
|
|
|
403,791
|
|
Finished
goods, including parts and subassemblies
|
|
|
1,072,480
|
|
|
|
931,168
|
|
Other
|
|
|
10,384
|
|
|
|
10,197
|
|
|
|
|
1,674,928
|
|
|
|
1,471,805
|
|
Excess
of current standard costs over LIFO costs
|
|
|
(115,995
|
)
|
|
|
(85,240
|
)
|
Allowances
|
|
|
(50,433
|
)
|
|
|
(49,640
|
)
|
Total inventories
|
|
$
|
1,508,500
|
|
|
$
|
1,336,925
|
|
Note
6: Plant and Equipment and Goodwill
Plant and
equipment consisted of the following (in thousands):
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Plant
and equipment, at cost
|
|
$
|
1,786,311
|
|
|
$
|
1,766,646
|
|
Accumulated
depreciation
|
|
|
(844,955
|
)
|
|
|
(834,999
|
)
|
Total plant and
equipment
|
|
$
|
941,356
|
|
|
$
|
931,647
|
|
Changes
in goodwill during the three months ended March 31, 2009 were as follows (in
thousands):
Balance
at December 31, 2008
|
|
$
|
709,217
|
|
Changes
primarily associated with adjustments to prior period purchase price
allocations
|
|
|
(7,886
|
)
|
Translation
and other
|
|
|
(4,891
|
)
|
Balance at March 31,
2009
|
|
$
|
696,440
|
|
Note
7: Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of the following (in
thousands):
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Trade
accounts payable and accruals
|
|
$
|
465,985
|
|
|
$
|
525,507
|
|
Salaries,
wages and related fringe benefits
|
|
|
121,914
|
|
|
|
164,411
|
|
Advances
from customers
|
|
|
881,122
|
|
|
|
855,872
|
|
Sales-related
costs and provisions
|
|
|
70,812
|
|
|
|
85,565
|
|
Payroll
and other taxes
|
|
|
44,955
|
|
|
|
39,409
|
|
Product
warranty
|
|
|
34,121
|
|
|
|
33,551
|
|
Fair
market value of derivatives
|
|
|
34,713
|
|
|
|
35,715
|
|
Other
|
|
|
137,727
|
|
|
|
114,354
|
|
Total accounts payable and
accrued liabilities
|
|
$
|
1,791,349
|
|
|
$
|
1,854,384
|
|
Activity
during the three months ended March 31, 2009 associated with the Company’s
product warranty accruals was as follows (in thousands):
Balance
December
31,
2008
|
|
Net
warranty
provisions
|
|
Charges
against
accrual
|
|
Translation
and
other
|
|
Balance
March
31,
2009
|
$33,551
|
|
7,316
|
|
(6,347)
|
|
(399)
|
|
$34,121
|
Note
8: Debt
The
Company’s debt obligations were as follows (in thousands):
|
|
March
31,
2009
|
|
|
December
31,
2008
(as
revised)
|
|
Short-term
borrowings under revolving credit facility
|
|
$
|
14,267
|
|
|
$
|
14,482
|
|
Senior
notes, net of $2,003 of unamortized original issue discount
at
March
31, 2009 ($2,028 at December 31, 2008)
|
|
|
747,997
|
|
|
|
747,972
|
|
1.5%
convertible debentures, net of $314 of conversion option discount
at
March
31, 2009 ($785 at December 31, 2008)
|
|
|
130,790
|
|
|
|
130,324
|
|
2.5%
convertible debentures, net of $34,083 of conversion option discount
at
March
31, 2009 ($37,758 at December 31, 2008)
|
|
|
465,917
|
|
|
|
462,242
|
|
Other
debt
|
|
|
33,848
|
|
|
|
10,941
|
|
Obligations
under capital leases
|
|
|
14,436
|
|
|
|
13,945
|
|
|
|
|
1,407,255
|
|
|
|
1,379,906
|
|
Current
maturities
|
|
|
(184,656
|
)
|
|
|
(161,279
|
)
|
Long-term
portion
|
|
$
|
1,222,599
|
|
|
$
|
1,218,627
|
|
Effective
January 1, 2009, the Company adopted FSP APB 14-1, which impacted the accounting
for the Company’s existing 1.5% convertible debentures due 2024 (1.5%
Convertible Debentures) and its 2.5% convertible debentures due 2026 (2.5%
Convertible Debentures). Upon the adoption of FSP APB 14-1, the Company’s
December 31, 2008 Consolidated Condensed Balance Sheet was retrospectively
revised to reflect the required accounting changes related to the 1.5% and 2.5%
Convertible Debentures as follows: (i) retained earnings has been decreased by
$40,831,000, (ii) the conversion option of the convertible debt totaling
$65,802,000 has been included as an increase in capital in excess of par value,
(iii) long-term debt has decreased by $37,758,000 for the 2.5% Convertible
Debentures and the current portion of long-term debt has decreased by $785,000
for the 1.5% Convertible Debentures and (iv) deferred income tax liabilities
have increased by $13,572,000. In addition, as a result of the
adoption of FSP APB 14-1, the Company’s Consolidated Condensed Results of
Operations statement was retrospectively revised to reflect $5,322,000 of higher
interest expense and $3,361,000 of lower net income, or $0.02 per
diluted share, for the three months ended March 31, 2008.
The
bifurcation of the assumed liability portion of the debt and the assumed portion
of the debt representing the conversion option was based on estimated market
borrowing rates of 4.85% and 5.9%, respectively, for debt instruments similar to
the 1.5% and 2.5% Convertible Debentures, excluding the conversion options in
those debentures. The 1.5% Convertible Debentures were issued in May and June
2004 and the 2.5% Convertible Debentures were issued in May 2006. The
conversion option discount assigned to the convertible debentures results in
effective interest expense equal to the non-convertible debt borrowing rates
mentioned above. This discount is being accreted to interest expense
over the estimated five-year life of the convertible debentures beginning at the
date of issuance. The estimated life is consistent with an option in
the debentures allowing holders to require the Company to repurchase the
debentures in whole or in part for principal plus accrued and unpaid interest
five years following the date of issuance.
As of
March 31, 2009, the Company has included the carrying value of its 1.5%
Convertible Debentures, totaling $130,790,000, in the current portion of
long-term debt in the Consolidated Condensed Balance Sheet as holders of these
debentures have the right to require the Company to repurchase them on May 15,
2009. The carrying value of the 2.5% Convertible Debentures, totaling
$465,917,000, has been classified as long-term debt in the March 31, 2009
Consolidated Condensed Balance Sheet as these debentures are not redeemable by
holders until June 2011.
At March
31, 2009, the Company had Pound Sterling borrowings outstanding totaling
£10,000,000, under its $585,000,000 multicurrency revolving credit facility at
an interest rate of 1.43% with a maturity date of April 20,
2009. Other debt, totaling $33,848,000 at March 31, 2009 consists
primarily of short-term borrowings at certain other international
locations.
Note
9: Employee Benefit Plans
Total net
benefit (income) expense associated with the Company’s defined benefit pension
plans consisted of the following (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$
|
559
|
|
|
$
|
1,607
|
|
Interest
cost
|
|
|
2,939
|
|
|
|
4,466
|
|
Expected
return on plan assets
|
|
|
(3,199
|
)
|
|
|
(5,944
|
)
|
Amortization
of prior service cost
|
|
|
2
|
|
|
|
(96
|
)
|
Amortization
of losses and other
|
|
|
1,355
|
|
|
|
2,500
|
|
Total net benefit
expense
|
|
$
|
1,656
|
|
|
$
|
2,533
|
|
Total net
benefit (income) expense associated with the Company’s postretirement benefit
plans consisted of the following (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$
|
2
|
|
|
$
|
1
|
|
Interest
cost
|
|
|
128
|
|
|
|
269
|
|
Amortization
of prior service cost
|
|
|
(223
|
)
|
|
|
(96
|
)
|
Amortization
of losses and other
|
|
|
(479
|
)
|
|
|
(371
|
)
|
Total net benefit
income
|
|
$
|
(572
|
)
|
|
$
|
(197
|
)
|
Note
10: Business Segments
The
Company’s operations are organized into three separate business segments –
Drilling & Production Systems (DPS), Valves & Measurement (V&M) and
Compression Systems (CS). Summary financial data by segment is as follows (in
thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
(as
revised)
|
|
Revenues:
|
|
|
|
|
|
|
DPS
|
|
$
|
805,256
|
|
|
$
|
864,819
|
|
V&M
|
|
|
316,138
|
|
|
|
344,501
|
|
CS
|
|
|
135,629
|
|
|
|
129,934
|
|
|
|
$
|
1,257,023
|
|
|
$
|
1,339,254
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes:
|
|
|
|
|
|
|
|
|
DPS
|
|
$
|
164,203
|
|
|
$
|
129,024
|
|
V&M
|
|
|
59,704
|
|
|
|
66,214
|
|
CS
|
|
|
16,356
|
|
|
|
18,688
|
|
Corporate &
other
|
|
|
(72,910
|
)
|
|
|
(33,451
|
)
|
|
|
$
|
167,353
|
|
|
$
|
180,475
|
|
Corporate &
other includes expenses associated with the Company’s Corporate office, as well
as all of the Company’s interest income, interest expense, certain litigation
expense managed by the Company’s General Counsel, foreign currency gains and
losses from certain intercompany lending activities managed by the Company’s
centralized Treasury function and all of the Company’s restructuring and stock
compensation expense.
Note
11: Earnings Per Share
The
calculation of basic and diluted earnings per share for each period presented
was as follows (dollars and shares in thousands, except per share
amounts):
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
114,637
|
|
|
$
|
122,981
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (basic)
|
|
|
216,891
|
|
|
|
216,746
|
|
Common
stock equivalents
|
|
|
1,563
|
|
|
|
2,861
|
|
Incremental
shares from assumed conversion of convertible debentures
|
|
|
1,542
|
|
|
|
10,859
|
|
Diluted
shares
|
|
|
219,996
|
|
|
|
230,466
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.53
|
|
|
$
|
0.57
|
|
Diluted
earnings per share
|
|
$
|
0.52
|
|
|
$
|
0.53
|
|
The
Company’s 1.5% Convertible Debentures have been included in the calculation of
diluted earnings per share for the three months ended March 31, 2009 and
2008, since the average market price of the Company’s common stock exceeded the
conversion value of the debentures during both periods. The Company’s
2.5% Convertible Debentures have been included in the calculation of diluted
earnings per share for the three months ended March 31, 2008 for the same
reason. The 2.5% Convertible Debentures have not been included in the
calculation of diluted earnings per share for the three months ended
March 31, 2009, as the conversion price of the debentures was in excess of
the average market price of the Company’s common stock during the
period. During the three months ended March 31, 2009 and 2008, the Company
acquired 347,678 and 2,164,875 treasury shares at an average cost of $20.29 and
$46.61 per share, respectively. A total of 407,012 and 732,069 treasury shares
were issued during the three month period ended March 31, 2009 and 2008,
respectively, in satisfaction of stock option exercises and vesting of
restricted stock units.
Note
12: Comprehensive Income
The
amounts of comprehensive income for the three months ended March 31, 2009 and
2008 were as follows (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
|
|
Net
income per Consolidated Condensed Results of Operations
|
|
$
|
114,637
|
|
|
$
|
122,981
|
|
Foreign
currency translation gain (loss)
(1)
|
|
|
(45,847
|
)
|
|
|
41,886
|
|
Amortization
of net prior service credits related to the Company’s pension
and postretirement benefit
plans, net of tax
|
|
|
(140
|
)
|
|
|
(118
|
)
|
Amortization
of net actuarial losses related to the Company’s pension
and postretirement benefit
plans, net of tax
|
|
|
552
|
|
|
|
1,315
|
|
Change
in fair value of derivatives accounted for as cash flow hedges,
net
of tax
|
|
|
(4,079
|
)
|
|
|
(614
|
)
|
Comprehensive
income
|
|
$
|
65,123
|
|
|
$
|
165,450
|
|
(1)
|
The
“Foreign currency translation gain (loss)” relates primarily to the
Company’s operations in Malaysia, Canada, Luxembourg, France, Germany,
Italy, Ireland and the United
Kingdom.
|
The
components of accumulated other elements of comprehensive income at March 31,
2009 and December 31, 2008 were as follows (in thousands):
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Accumulated
foreign currency translation gain (loss)
|
|
$
|
(50,920
|
)
|
|
$
|
(5,073
|
)
|
Prior
service credits, net, related to the Company’s pension and postretirement
benefit plans, net of tax
|
|
|
3,496
|
|
|
|
3,636
|
|
Actuarial
losses, net, related to the Company’s pension and postretirement benefit
plans, net of tax
|
|
|
(42,172
|
)
|
|
|
(42,724
|
)
|
Change
in fair value of derivatives accounted for as cash flow hedges,
net
of tax
(1)
|
|
|
(44,136
|
)
|
|
|
(40,057
|
)
|
Accumulated other elements of
comprehensive income
|
|
$
|
(133,732
|
)
|
|
$
|
(84,218
|
)
|
(1)
|
Approximately
$10,896,000 (after tax) of accumulated other elements of comprehensive
income is expected to be recognized in earnings during the next twelve
months.
|
Note
13: Contingencies
The
Company is subject to a number of contingencies, including environmental
matters, litigation and tax contingencies.
Environmental
Matters
The
Company’s worldwide operations are subject to regulations with regard to air,
soil and water quality as well as other environmental matters. The Company,
through its environmental management system and active third-party audit
program, believes it is in substantial compliance with these
regulations.
The
Company is currently identified as a potentially responsible party (PRP) with
respect to three sites designated for cleanup under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) or similar state
laws. One of these sites is Osborne, Pennsylvania (a landfill into which a
predecessor of the CS operation in Grove City, Pennsylvania deposited waste),
where remediation is complete and remaining costs relate to ongoing ground water
treatment and monitoring. Of the other two, one is believed to be a
de minimis exposure and the other recently settled for a de minimis amount. The
Company is also engaged in site cleanup under the Voluntary Cleanup Plan of the
Texas Commission on Environmental Quality at former manufacturing locations in
Houston and Missouri City, Texas. 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 March
31, 2009, the Company’s consolidated balance sheet included a noncurrent
liability of approximately $6,484,000 for environmental matters.
Legal
Matters
In 2001,
the Company discovered that contaminated underground water from the former
manufacturing site in Houston referenced above had migrated under an adjacent
residential area. Pursuant to applicable state regulations, the Company notified
the affected homeowners. Concerns over the impact on property values of the
underground water contamination and its public disclosure led to a number of
claims by homeowners.
The
Company has entered into a number of individual settlements and has settled a
class action lawsuit. Twenty-one of the individual settlements were made in the
form of agreements with homeowners that obligated the Company to reimburse them
for any estimated decline in the value of their homes at time of sale due to
potential buyers’ concerns over contamination or, in the case of some
agreements, to purchase the property after an agreed marketing period. Three of
these agreements have had no claims made under them yet. The Company has also
settled ten other property claims by homeowners who have sold their properties.
In addition, the Company has settled Valice v. Cameron Iron Works, Inc. (80th
Jud. Dist. Ct., Harris County, filed June 21, 2002), which was filed and settled
as a class action. Pursuant to the settlement, the homeowners who remained part
of the class are entitled to receive a cash payment of approximately 3% of the
2006 appraised value of their property or reimbursement of any diminution in
value of their property due to contamination concerns at the time of any sale.
To date, 72 homeowners have elected the cash payment.
Of the
258 properties included in the Valice class, there were 21 homeowners who opted
out of the class settlement. Three suits were filed regarding this
matter by non-settling homeowners. All three cases have now been
resolved. The remaining homeowners who opted out of the class action
settlement have made claims that the contaminated underground water has reduced
property values and are seeking recovery of alleged actual and exemplary damages
for the alleged loss of property value. These homeowners have retained
legal counsel but have not yet filed suit.
One of
the suits filed but now resolved involved a claim for bodily injury, which claim
was dismissed by summary judgment. The Company remains of the opinion that
there is no health risk to area residents as a result of the
contamination.
The
Company believes, based on its review of the facts and law, that any potential
exposure from existing agreements, the class action settlement or other actions
that have been or may be filed, will not have a material adverse effect on its
financial position or results of operations. The Company’s consolidated balance
sheet included a liability of $15,135,000 for these matters as of March 31,
2009.
The
Company has been named as a defendant in a number of multi-defendant,
multi-plaintiff tort lawsuits since 1995. At March 31, 2009, the Company’s
consolidated balance sheet included a liability of approximately $3,187,000 for
such cases, including estimated legal costs. The Company believes, based on its
review of the facts and law, that the potential exposure from these suits will
not have a material adverse effect on its consolidated results of operations,
financial condition or liquidity.
Regulatory
Contingencies
In
January 2007, the Company underwent a Pre-Assessment Survey as part of a Focused
Assessment Audit initiated by the Regulatory Audit Division of the U.S. Customs
and Border Protection, Department of Homeland Security. The
Pre-Assessment Survey resulted in a finding that the Company had deficiencies in
its U.S. Customs compliance process and had underpaid customs
duties. The Company has taken corrective action and has closed out
all matters regarding duties owed for import entries processed from September
29, 2001 through October 5, 2007. The Company expects that the final
assessment compliance period will encompass import activity during the second
quarter of 2009. The field work for the Focused Assessment Audit is
expected to commence in the second quarter of 2010.
In July
2007, the Company was one of a number of companies to receive a letter from the
Criminal Division of the U.S. Department of Justice (DOJ) requesting information
on their use of a freight forwarder and customs clearance broker. The DOJ is
inquiring into whether certain of the services provided to the Company by the
freight forwarder may have involved violations of the U.S. Foreign Corrupt
Practices Act (FCPA). The Company is conducting an internal investigation in
response, as discussed below, and is providing the requested information to the
DOJ.
The
Company engaged special counsel reporting to the Audit Committee of the Board of
Directors to conduct an investigation into its dealings with the freight
forwarder to determine if any payment made to or by the freight forwarder and
customs clearing broker on the Company’s behalf constituted a violation of the
FCPA. The investigation is also looking into activities of Company employees and
agents with respect to immigration matters and importation permitting. To date,
the special counsel has found that the Company utilized certain services in
Nigeria offered by the customs broker that appear to be similar to services that
have been under review by the DOJ. Special counsel is reviewing these and other
services and activities to determine whether they were conducted in compliance
with all applicable laws and regulations. Special counsel is also reviewing the
extent, if any, of the Company’s knowledge, and its involvement in the
performance, of these services and activities and whether the Company fulfilled
its obligations under the FCPA.
In
addition, the U.S. Securities and Exchange Commission (SEC) is conducting an
informal inquiry into the same matters currently under review by the DOJ. As
part of this inquiry the SEC has requested that the Company provide to them the
information and documents that have been requested by and are being provided to
the DOJ. The Company is cooperating fully with the SEC, as it is doing with the
DOJ, and is providing the requested materials. At this stage of the internal
investigation, the Company cannot predict the ultimate outcome of either the
internal investigation or the government inquiries. The Company has also
undertaken an enhanced compliance training effort for its personnel, including
foreign operations personnel dealing with customs clearance regulations and
hired a Chief Compliance Officer in September 2008 to oversee and direct all
legal compliance matters for the Company.
Tax
Contingencies
The
Company has legal entities in over 35 countries, each of which has various tax
filing requirements. The Company prepares its tax filings in a manner
which it believes is consistent with such filing requirements; however, some of
the tax laws and regulations to which the Company is subject require
interpretation and/or judgment. Although the Company believes that the tax
liabilities for periods ending on or before the balance sheet date have been
adequately provided for in the financial statements, to the extent that a taxing
authority believes that the Company has not prepared its tax filings in
accordance with the authority’s interpretation of the tax laws/regulations, the
Company could be exposed to additional taxes.
Note 14: Financial and Derivative Instruments and Hedging
Activities
The
Company’s financial instruments consist primarily of cash and cash equivalents,
trade receivables, trade payables, derivative instruments and debt instruments.
The book values of cash and cash equivalents, trade receivables, trade payables,
derivative instruments and floating-rate debt instruments are considered to be
representative of their respective fair values. Certain cash equivalents have
also been valued based on quoted market prices which are considered to be Level
1 market inputs as defined in SFAS 157.
In order
to mitigate the effect of exchange rate changes, the Company will often attempt
to structure sales contracts to provide for collections from customers in the
currency in which the Company incurs its manufacturing costs. In certain
instances, the Company will enter into forward foreign currency exchange
contracts to hedge specific large anticipated receipts or disbursements in
currencies for which the Company does not traditionally have fully offsetting
local currency expenditures or receipts. The Company was party to a number of
long-term foreign currency forward contracts at March 31, 2009, some of which
extend through 2011. The purpose of the majority of these contracts was to hedge
large anticipated non-functional currency cash flows on major subsea, drilling,
valve or other equipment contracts involving the Company’s United States
operations and its wholly-owned subsidiaries in Brazil, Italy, Romania,
Singapore and the United Kingdom. The Company determines the fair value of its
outstanding foreign currency forward contracts based on quoted exchange rates
for the respective currencies applicable to similar
instruments. These quoted exchange rates are considered to be Level 2
observable market inputs as defined in SFAS 157. Information relating
to the contracts, which have been accounted for as cash flow hedges as of March
31, 2009 follows:
Total
volume of notional currencies bought (sold) on open derivative contracts as of
March 31, 2009 was as follows (in thousands):
Notional currency
:
|
|
Currency Amount
|
|
|
|
USD
|
|
(225,974)
|
GBP
|
|
4,465
|
EUR
|
|
22,590
|
NOK
|
|
15,593
|
RON
|
|
21,711
|
MYR
|
|
4,955
|
SGD
|
|
3,960
|
The fair value of
derivative financial instruments recorded in the Company’s Consolidated
Condensed Balance Sheet at March 31, 2009 was as follows (in
thousands):
|
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Derivatives
designated as hedging instruments:
|
Foreign
exchange
contracts
|
|
Current
assets
|
|
$
3,563
|
|
Current
liabilities
|
|
$
(34,713)
|
|
|
Non-current
assets
|
|
−
|
|
Non-current
liabilities
|
|
(6,175)
|
Total
derivatives designated as hedging instruments
|
|
|
|
$
3,563
|
|
|
|
$
(40,888)
|
|
The
Company had no derivative financial instruments outstanding at March 31, 2009
that were not designated as hedging instruments.
The
effects of derivative financial instruments on the Company’s Consolidated
Condensed Results of Operations Statement for the three months ended March 31,
2009 were as follows (in thousands):
|
|
Effective
Portion
|
|
Ineffective
Portion and Other
|
|
Derivatives
in Cash Flow Hedging Relationships
|
|
Amount
of
Gain
(Loss) Recognized in OCI on Derivatives
|
|
Location
of
Gain
(Loss) Reclassified from Accumulated OCI into Income
|
|
Amount
of
Gain
(Loss) Reclassified from Accumulated OCI into Income
|
|
Location
of
Gain
(Loss) Recognized in Income on Derivatives
|
|
Amount
of
Gain
(Loss) Recognized in Income on Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
$
|
(7,966
|
)
|
Revenues
|
|
$
|
(7,308
|
)
|
Cost
of goods sold-ineffective portion
|
|
$
|
(97)
|
|
|
|
|
|
|
Cost
of
goods
sold
|
|
|
(2,120
|
)
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
(49
|
)
|
|
|
|
|
|
Total
|
|
$
|
(7,966
|
)
|
|
|
$
|
(9,477
|
)
|
|
|
$
|
(97)
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
In addition to the historical data
contained herein, this document
includes “forward-looking
statements” regarding future market strength, order
levels, revenues and earnings of the
Company, as well as expectations regarding
cash flows and future capital
spending made in reliance upon the safe
harbor provisions of the Private
Securities Litigation Reform Act of 1995. The
Company’s actual results may differ
materially from those described in
forward-looking
statements. These statements are based on current expectations
of the Company’s performance
and are subject to a variety of factors, some of
which are not under the control of
the Company, which can affect the Company’s
results of operations, liquidity or
financial condition. Such factors may
include overall demand for, and
pricing of, the Company’s products; the size
and timing of orders; the Company’s
ability to successfully execute large
subsea and drilling systems projects
it has been awarded; the Company’s ability to convert backlog
into revenues on a timely and
profitable basis; the Company’s ability to
successfully implement its capital
expenditures program; the impact of
acquisitions the Company has made or
may make; changes in the price of (and
demand for) oil and gas in both
domestic and international markets; raw
material costs and availability;
political and social issues affecting the
countries in which the Company does
business; fluctuations in currency markets
worldwide; and variations in global
economic activity. In particular, current
and projected oil and gas prices
historically have generally affected
customers’ spending levels and their
related purchases of the Company’s
products and
services. Additionally, changes in oil and gas price
expectations
may impact
the Company’s financial results due to changes in cost structure,
staffing or spending
levels. See additional factors discussed in “Factors That
May Affect Financial
Condition and Future Results” contained herein.
Because the information herein is
based solely on data currently
available, it is subject to change
as a result of changes in conditions over
which the Company has no control or
influence, and should not therefore be
viewed as assurance regarding the
Company’s future performance. Additionally,
the Company is not obligated to make
public indication of such changes unless
required under applicable disclosure
rules and regulations.
FIRST
QUARTER 2009 COMPARED TO FIRST QUARTER 2008
Consolidated Results
-
The
Company’s net income for the first quarter of 2009 totaled $114.6 million, or
$0.52 per diluted share, compared to $123.0 million, or $0.53 per diluted share,
for the first quarter of 2008. The Company’s consolidated condensed
results of operations for the first quarter of 2008 and the consolidated
condensed balance sheet as of December 31, 2008 have been retrospectively
revised to reflect the adoption of FASB Staff Position ABP 14-1 (FSP ABP 14-1),
effective January 1, 2009. FSP ABP 14-1 was issued by the Financial
Accounting Standards Board in May 2008 to clarify the accounting for convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlements). The FSP requires issuers of these instruments to
separately account for the related liability and equity components in a manner
that will reflect an issuer’s nonconvertible debt borrowing rate in its reported
interest expense. Retrospective revision of the financial statements
for prior periods is required under FSP APB 14-1. As a result of the
adoption of this new standard, the Company’s consolidated net income for the
first quarter of 2008 has been retrospectively revised from $0.55 per diluted
share as previously reported to $0.53 per diluted share.
Included
in operating results for the first quarter of 2009 are employee severance,
related benefit and certain other costs totaling $22.3 million, or $0.07 per
diluted share, associated with workforce reductions during the first quarter of
2009.
Revenues
Revenues
for the first quarter of 2009 totaled $1.3 billion, a decrease of $82.2 million,
or 6.1%, from $1.3 billion for the first quarter of 2008. Drilling
& Production Systems (DPS) segment revenues declined 6.9%, accounting for
nearly 72% of the decrease in consolidated revenues. Valves &
Measurement (V&M) segment revenues were down 8.2%, largely reflecting
weakness in activity levels in the U.S. and Canadian markets while Compression
Systems (CS) segment revenues increased 4.4%, mainly on the strength of
shipments from backlog in the centrifugal compression equipment product
line. Included in consolidated revenues for the first quarter of 2009
are $15.4 million of fees associated with cancellation of existing
orders.
During
the first quarter of 2009, over 55% of the Company’s revenue was reflected in
entities with functional currencies other than the U.S. dollar. In
translating these entities’ functional currency income statements to U.S.
dollars for consolidation purposes, an increase in the value of the U.S. dollar
compared to the applicable functional currency will result in a lower amount of
U.S. dollar revenues and costs for the same amount of functional currency
revenues and costs. The net reduction in revenue due to the stronger
U.S. dollar against these other foreign currencies, which were partially offset
by approximately $23.1 million in incremental revenues generated by businesses
acquired since the first quarter of 2008, accounted for nearly two-thirds of the
decrease in consolidated revenues during the first quarter of 2009 as compared
to the same period in 2008.
Costs
and Expenses
Cost of
sales (exclusive of depreciation and amortization) for the first quarter of 2009
totaled $843.7 million, a decrease of $121.7 million, or 12.6%, from $965.4
million for the first quarter of 2008. Cost of sales as a percent of
revenues decreased from 72.1% for the three months ended March 31, 2008 to 67.1%
for the three months ended March 31, 2009. References to margins in
this Management’s Discussion and Analysis of Financial Condition and Results of
Operations refers to Revenues minus Cost of Sales (exclusive of depreciation and
amortization) as shown separately on the Company’s Consolidated Condensed
Results of Operations statement for the three-month periods ended March 31, 2009
and 2008. The decrease in the ratio of cost of sales to revenues was
attributable primarily to (i) a 3.5 percentage-point decline in the
ratio related to subsea equipment, due largely to deliveries or milestone
achievements that carried higher margins than in the first quarter of 2008, and
(ii) higher margins for major drilling projects in the first quarter of 2009 as
compared to the same period in 2008 (a 1.3 percentage-point decrease in the
ratio of cost of sales to revenues).
Selling
and administrative expenses for the three months ended March 31, 2009 were
$164.6 million as compared to $157.3 million for the three months ended March
31, 2008, an increase of $7.3 million, or 4.6%. As a percentage of
revenues, selling and administrative costs increased from 11.7% for the first
quarter of 2008 to 13.1% for the first quarter of 2009. Absent the
effects of a stronger U.S. dollar and newly acquired businesses as described
above, selling and administrative costs increased nearly 10% as compared to the
prior year. The increase was mainly attributable to (i) a provision
taken in the first quarter of 2009 totaling nearly $7.8 million relating to
uncertainty regarding collection of receivables from a U.S.-based customer and
(ii) the effects of higher headcount and facility costs added during the latter
part of 2008. These increases were partially offset by the absence in
2009 of charges taken in the first quarter of 2008 for a dispute on a historical
acquisition and for non-income related taxes in South America and the effect of
lower noncash stock compensation expense, totaling in aggregate approximately
$8.2 million.
Depreciation
and amortization expense for the first quarter of 2009 was $36.7 million, an
increase of $4.8 million from $31.9 million for the first quarter of
2008. The increase was primarily the result of higher depreciation
expense associated with increased levels of capital spending in recent periods
for new machinery and equipment, as well as higher amortization related to
spending on the Company’s enterprise-wide information technology assets and for
other acquired intangible assets.
Interest
income totaled $2.2 million for the three months ended March 31, 2009 compared
to $6.1 million for the three months ended March 31, 2008. The
decrease is due primarily lower short-term interest rates during the first
quarter of 2009 as compared to the first quarter of 2008, partially offset by
higher levels of invested cash balances during the first quarter of
2009.
Interest
expense was $24.5 million for the three months ended March 31, 2009 compared to
$10.3 million for the three months ended March 31, 2008, an increase of $14.2
million. Interest expense for the first quarter of 2008 has been
retrospectively revised from $5.0 million to $10.3 million to reflect $5.3
million of additional interest expense for the first quarter of 2008 associated
with the adoption of FSP ABP 14-1 described above. Interest expense
during the first quarter of 2009 relating to the adoption of FSP ABP 14-1
totaled $4.1 million. The primary reason for the increase in interest
expense was due to $12.6 million of additional interest associated with the
issuance of $450.0 million of 6.375% senior notes and $300.0 million of 7.0%
senior notes in June 2008.
The
income tax provision for the three months ended March 31, 2009 was $52.7 million
compared to $57.5 million for the three months ended March 31,
2008. The effective tax rates during the first quarters of 2009 and
2008 were 31.5% and 31.9%, respectively. The decrease in the
effective tax rate for the first quarter of 2009 as compared to the first
quarter of 2008 was due to an increase in the estimated percentage of total
full-year income in lower tax rate jurisdictions in 2009 as compared to
2008.
Revenues
and income before income taxes for the DPS, V&M and CS segments are
discussed in more detail below.
Segment Results
-
DPS
Segment
|
|
Quarter
Ended
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
$
|
805.3
|
|
|
$
|
864.8
|
|
|
$
|
(59.5
|
)
|
|
|
(6.9
|
)%
|
Income
before income taxes
|
|
$
|
164.2
|
|
|
$
|
129.0
|
|
|
$
|
35.2
|
|
|
|
27.3
|
%
|
DPS
segment revenues for the first quarter of 2009 totaled $805.3 million, a
decrease of $59.5 million, or 6.9%, from $864.8 million for the first quarter of
2008. Over 60% of the decrease was attributable to the effects of a
stronger U.S. dollar against certain other foreign currencies for the same
reasons as mentioned under “Consolidated Results – Revenues” above, partially
offset by the incremental impact of revenues generated from businesses acquired
since the first quarter of 2008. Absent the effects of a stronger
U.S. dollar and newly acquired businesses, the remaining decrease was the result
of a 7% decline in subsea equipment sales and a 2% decrease in surface equipment
sales partially offset by a 5% increase in drilling equipment
sales. The decrease in subsea equipment sales was almost entirely due
to a lower level of shipments and activity relating to major offshore
projects. A decline in surface equipment sales in the Eastern
European, African and Caspian Sea regions more than offset higher demand in this
product line in Latin America, primarily Mexico, and higher aftermarket repair
activity. Higher demand for spares and aftermarket repair activity accounted for
nearly all of the increase in sales of drilling equipment during the first
quarter of 2009 as compared to the first quarter of 2008. Revenues
associated with oil, gas and water separation applications were relatively flat
in the first quarter of 2009 as compared to the same period last
year.
Income
before income taxes totaled $164.2 million for the three months ended March 31,
2009 compared to $129.0 million for the three months ended March 31, 2008, an
increase of $35.2 million, or 27.3%. Cost of sales as a percent of
revenues decreased from 74.7% in the first quarter of 2008 to 67.7% in the first
quarter of 2009. The decrease in the ratio of cost of sales to revenues
was due primarily to (i) a 2.1 percentage-point decrease in the ratio due to an
improvement in margins on large drilling projects and (ii) a 4.7
percentage-point decline in the ratio for subsea equipment due largely to the
absence in the first quarter of 2009 of sales recorded in the first quarter of
2008 for certain large lower-margin subsea projects.
Selling
and administrative expenses for the first quarter of 2009 totaled $75.6 million,
an increase of $3.2 million, or 4.4%, from $72.4 million during the comparable
period of 2008. Absent the effects of a stronger U.S. dollar and
newly acquired businesses as described above, selling and administrative costs
increased nearly 14% as compared to the prior year. The increase was
mainly attributable to the effects of higher headcount and facility costs added
during the latter part of 2008. Offsetting these increases was the
absence in the first quarter of 2009 of a $2.4 million charge taken in the first
quarter of 2008 for non-income related taxes in South America.
Depreciation
and amortization increased $2.5 million, from $17.6 million for the three months
ended March 31, 2008 to $20.1 million for the three months ended March 31,
2009. The increase was primarily the result of higher depreciation
expense associated with increased levels of capital spending in periods prior to
the first quarter of 2009 for new machinery and equipment and higher
amortization of other acquired intangible assets.
V&M
Segment
|
|
Quarter
Ended
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
$
|
316.1
|
|
|
$
|
344.5
|
|
|
$
|
(28.4
|
)
|
|
|
(8.2
|
)%
|
Income
before income taxes
|
|
$
|
59.7
|
|
|
$
|
66.2
|
|
|
$
|
(6.5
|
)
|
|
|
(9.8
|
)%
|
Revenues
of the V&M segment for the first quarter of 2009 totaled $316.1 million as
compared to $344.5 million in the first quarter of 2008, a decline of $28.4
million, or 8.2%. Nearly 55% of the decrease was attributable to the
effects of a stronger U.S. dollar against certain other foreign currencies for
the same reasons as mentioned under “Consolidated Results – Revenues” above,
partially offset by the incremental impact of revenues generated from businesses
acquired since the first quarter of 2008. Absent the effects of a
stronger U.S. dollar and newly acquired businesses, a decrease in sales of
distributed valves and of measurement products due largely to the impact of a
decrease in market activity in the United States and Canada accounted for nearly
all of the remaining sales decline. Revenues from the segment’s
engineered valves, process valves and aftermarket product lines were mostly flat
during the first quarter of 2009 as compared to the first quarter of
2008.
Income
before income taxes totaled $59.7 million for the first quarter of 2009, a
decrease of $6.5 million, or 9.8%, compared to $66.2 million for the first
quarter of 2008. Cost of sales as a percent of revenues decreased
from 66.3% in the first quarter of 2008 to 65.8% in the first quarter of
2009. The decrease in the ratio was due primarily to (i) improved
product margins largely resulting from favorable sourcing of raw materials and
sales mix changes (approximately a 0.6 percentage-point decrease) and (ii) a
one-time positive impact from reversing certain accrued costs relating to an
historical acquisition (approximately a 0.6 percentage-point
decrease). These decreases were partially offset by (i) the impact of
relatively fixed indirect production costs in relation to a lower revenue base
(approximately a 0.5 percentage-point increase) and (ii) higher product warranty
costs, which increased the ratio of cost of sales to revenues by 0.3 percentage
points.
Selling
and administrative expenses for the first quarter of 2009 were $39.9 million, a
decrease of $2.2 million, or 5.3%, as compared to $42.1 million in the first
quarter of 2008. Nearly two-thirds of the decrease was attributable
to the effects of a stronger U.S. dollar against certain other foreign
currencies as described above, partially offset by the impact of costs incurred
by newly acquired businesses. The remaining decrease was largely
attributable to efforts taken in recent periods to reduce employee related
costs.
Depreciation
and amortization increased $0.7 million from $7.8 million in the first quarter
of 2008 to $8.5 million in the first quarter of 2009. The increase
was due largely to higher capital spending in periods prior to the first quarter
of 2009.
CS Segment
|
|
Quarter
Ended
|
|
|
|
|
(dollars
in millions)
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
$
|
135.6
|
|
|
$
|
129.9
|
|
|
$
|
5.7
|
|
|
|
4.4
|
%
|
Income
before income taxes
|
|
$
|
16.4
|
|
|
$
|
18.7
|
|
|
$
|
(2.3
|
)
|
|
|
(12.5
|
)%
|
CS
segment revenues for the three months ended March 31, 2009 totaled $135.6
million, an increase of $5.7 million, or 4.4%, from $129.9 million for the three
months ended March 31, 2008. All of the improvement was attributable to a 6%
increase in sales of centrifugal compression equipment. Sales of
reciprocating equipment were flat in the first quarter of 2009 as compared to
the first quarter of 2008. In the centrifugal compression equipment
product line, a 15% increase in shipments of engineered units, primarily for
engineered air and gas compression applications, resulting from high order
levels in prior periods and a 13% increase in aftermarket revenues, primarily
from higher parts sales, more than offset a 28% decline in deliveries of plant
air machines due to declining order levels in the fourth quarter of 2008 and the
first quarter of 2009, as well as the absence in the current year of certain
large shipments to customers in Asia that were made during the first quarter of
2008.
Income
before income taxes for the CS segment totaled $16.4 million for the first
quarter of 2009 compared to $18.7 million for the first quarter of 2008, a
decrease of $2.3 million, or 12.5%. Cost of sales as a percent of revenues
declined from 69.3% in the first quarter of 2008 as compared to 66.4% for the
same period in 2009. The decline in the ratio of cost of sales to
revenues was due primarily to (i) a mix shift mainly to higher sales of
higher-margin centrifugal compression equipment along with improved product
pricing (resulting in an approximate 2.7 percentage-point decrease in the cost
ratio) and (ii) the impact of an improvement in margins in the Superior
Compressor product line (resulting in an approximate 1.2 percentage-point
decrease in the cost ratio). These declines were partially offset by
higher inventory obsolescence and warranty provisions which added 1.0 percentage
points to the ratio of cost of sales to revenues.
Selling
and administrative expenses for the three months ended March 31, 2009 totaled
$25.0 million, an increase of $7.4 million, or 42.3%, from $17.6 million during
the comparable period of 2008. The increase was primarily attributable to a
provision taken in the first quarter of 2009 totaling nearly $7.8 million
relating to uncertainty regarding collection of receivables from a U.S.-based
customer.
Depreciation
and amortization increased $0.6 million or 16.1%, from $3.6 million for the
first quarter of 2008 to $4.2 million for the first quarter of 2009. The
increase was primarily the result of higher levels of capital spending in
periods prior to the first quarter of 2009.
Corporate
Segment
The
Corporate segment’s loss before income taxes was $72.9 million in the first
quarter of 2009 as compared to $33.4 million in the first quarter of
2008. The loss before income taxes for the Corporate segment for the
first quarter of 2008 was retrospectively revised from $28.1 million to $33.4
million to reflect $5.3 million of additional interest expense for the first
quarter of 2008 associated with the adoption of FSP ABP 14-1 described above
under “Consolidated Results”. The adoption of FSP ABP 14-1, effective
January 1, 2009, required the Company to retrospectively revise its 2008
financial statements for consistency with the results for the first quarter of
2009 reported under this new accounting standard.
Selling
and administrative expenses for the first quarter of 2009 totaled $24.1 million,
a decrease of $1.1 million, or 4.6%, from $25.2 million during the comparable
period of 2008. The primary reasons for the decrease were (i) lower
noncash stock compensation expense of $2.2 million for the three months ended
March 31, 2009 compared to the same period in 2008, (ii) the absence in the
first quarter of 2009 of a $3.6 million charge taken in the first quarter of
2008 related to a dispute on an historical acquisition and (iii) lower
management incentive costs of $0.7 million. These decreases were
offset by the absence in the first quarter of 2009 of a $5.8 million reduction
in expense recorded in the first quarter of 2008 relating to one of the
Company’s non-U.S. defined benefit pension plans.
Depreciation
and amortization expense totaled $3.9 million for the three months ended March
31, 2009 as compared to $2.8 million for the same period in 2008, an increase of
$1.1 million. The increase is due largely to increased amortization
from higher capital spending in periods prior to the first quarter of 2009 on
the Company’s enterprise-wide information technology assets.
The
decrease in interest income, the increase in interest expense and restructuring
expense incurred during the first quarter of 2009 as compared to the same period
in 2008 are discussed in “Consolidated Results” above.
ORDERS
AND BACKLOG
Orders
were as follows (dollars in millions):
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
DPS
|
|
$
|
626.9
|
|
|
$
|
1,399.7
|
|
|
$
|
(772.8
|
)
|
|
|
(55.2
|
)%
|
V&M
|
|
|
233.2
|
|
|
|
366.5
|
|
|
|
(133.3
|
)
|
|
|
(36.4
|
)%
|
CS
|
|
|
123.2
|
|
|
|
188.4
|
|
|
|
(65.2
|
)
|
|
|
(34.6
|
)%
|
|
|
$
|
983.3
|
|
|
$
|
1,954.6
|
|
|
$
|
(971.3
|
)
|
|
|
(49.7
|
)%
|
Orders
for the first quarter of 2009 decreased $971.3 million, or 49.7%, from the first
quarter of 2008. In addition, approximately $26.5 million of orders
were cancelled by customers during the first quarter of 2009.
DPS
segment orders for the first quarter of 2008 totaled $626.9 million, a decrease
of $772.8 million, or 55.2%, from $1.4 billion for the first quarter of 2008.
Orders for subsea equipment were down nearly 80% in the first quarter of 2009 as
compared to the same period in 2008 as the awards received in the first three
months of 2008 for certain major subsea project offshore West Africa, totaling
nearly $650 million, did not reoccur in the current period. Surface equipment
orders decreased 32% in the first three months of 2009 when compared to the same
period in 2008 primarily due to the decline in North American, European, Asian
and Caspian Sea rig counts as a result of lower commodity prices for oil and
natural gas. Orders for oil, gas and water separation applications were down 45%
in the first quarter of 2009 when compared to the same period in 2008 due to
large awards in 2008 in North America and the Middle East that did not repeat in
2009, as well as strong aftermarket business in 2008 in the European and Asia
Pacific regions that did not repeat in 2009. Slightly offsetting these
decreases, orders for drilling equipment were up 7% during the first three
months of 2009 when compared to the similar period in 2008, due to new land
equipment awards in the Middle East.
The
V&M segment had orders of $233.2 million in the first quarter of 2009, a
decrease of $133.3 million, or 36.4%, from $366.5 million for the comparable
period in 2008. Orders decreased in all product lines during the first quarter
of 2009 as compared to the same period in 2008 as follows: (i) distributed
product orders decreased 56% as a result of softness in the North American
market as compared to 2008 activity levels, (ii) orders for engineered valves
decreased 38% due to a lack of large project awards as compared to the first
quarter of 2008, (iii) orders in the process valve product line decreased 30%
due to lower project activity, (iv) orders for aftermarket parts and services
declined 18% primarily due to high order levels in 2008 from customers in Canada
that did not repeat in 2009 and (v) excluding the effect of orders from a newly
acquired business, orders for measurement products decreased nearly 17% over the
similar period in 2008 reflecting lower awards in Canada and in the United
States, mainly for nuclear applications.
Orders in
the CS segment for the first quarter of 2009 totaled $123.2 million, a decrease
of $65.2 million, or 34.6%, from $188.4 million in the first quarter of 2008.
Centrifugal compression equipment orders declined nearly 70% in the first three
months of 2009 when compared to the similar period in 2008, whereas
reciprocating compression equipment orders increased 16% in the first three
months of 2009, partially offsetting these decreases. The global market decline
that began in late 2008 contributed significantly to the decline in centrifugal
compression equipment orders for Plant Air and engineered products.
Additionally, awards for engineered products decreased 84% due to a robust order
environment in early 2008 for air separation units that did not repeat in 2009
due to market weakness, orders for plant air equipment declined 45% and orders
for aftermarket parts and services decreased by more than one-third when
compared to the prior period, due largely to a delay in receiving large awards
in Europe and Canada. Orders within the reciprocating compression equipment line
showed strong demand for Superior Compressors in the first quarter of 2009 as
compared to the same period in 2008 with an increase of 115%, due to a large
award in 2009 for packaged compressors in Europe. Awards for Ajax units
increased nearly 13% as a result of large awards in Latin America during the
first quarter of 2009.
Backlog
was as follows (dollars in millions):
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
DPS
|
|
$
|
4,195.3
|
|
|
$
|
3,751.2
|
|
|
$
|
444.1
|
|
|
|
11.8
|
%
|
V&M
|
|
|
650.1
|
|
|
|
711.7
|
|
|
|
(61.6
|
)
|
|
|
(8.7
|
)
%
|
CS
|
|
|
425.5
|
|
|
|
436.5
|
|
|
|
(11.0
|
)
|
|
|
(2.5
|
)
%
|
|
|
$
|
5,270.9
|
|
|
$
|
4,899.4
|
|
|
$
|
371.5
|
|
|
|
7.6
|
%
|
Liquidity
and Capital Resources
The
Company’s cash and cash equivalents decreased by $179.0 million to $1.4 billion
at March 31, 2009 as compared to $1.6 billion at December 31, 2008. The main
reasons for the decrease were (i) cash used for operations of $128.3 million and
(ii) cash used for capital expenditures of $49.0 million.
During
the first three months of 2009, the Company used $128.3 million of cash from
operations as compared to generating $44.4 million for the same period in 2008.
Cash totaling approximately $290.2 million was utilized in the first three
months of 2009 to increase working capital compared to $119.7 million utilized
during the same period in 2008. Cash used for working capital during
the first three months of 2009 primarily resulted from a build in inventory
levels in the Company’s project-related drilling and subsea businesses during
the first quarter of 2009, along with a reduction in accounts payable and
accrued liabilities.
The
Company utilized $47.4 million of cash for investing activities during the first
three months of 2009 as compared to $102.4 million used during the same period
in 2008. Most of the decrease was due to the Company not acquiring any
businesses during the first three months of 2009 as compared to $57.5 million
spent for the acquisition of three businesses during the first three months of
2008.
During
the first three months of 2009, the Company’s financing activities generated
$14.6 million of cash compared to $56.2 million of cash generated during the
first three months of 2008. The Company borrowed $170.5 million, mostly against
its then-existing $350.0 million multicurrency revolving credit facility, during
the first quarter of 2008 as compared to borrowings by certain international
locations of approximately $23.0 million during the first quarter of 2009.
Additionally, the Company spent $120.4 million of cash in the first three months
of 2008 to acquire 2,164,875 shares of treasury stock at an average cost of
$46.61 as compared to $7.1 million spent in the first three months of 2009 for
347,678 shares at an average cost of $20.29.
The
Company expects to spend an estimated $200 million for capital equipment and
facilities during 2009 in connection with its program of improving manufacturing
efficiency and expanding capacity. Cash on hand and future expected
operating cash flows will be utilized to fund the remainder of the Company’s
2009 capital spending program.
On a
longer-term basis, the Company issued $450.0 million principal amount of 6.375%
10-year senior notes and $300.0 million principal amount of 7.0% 30-year senior
notes in June 2008. The Company also has outstanding a principal amount of
$131.1 million of 1.5% convertible debentures in addition to a principal amount
of $500.0 million of 2.5% convertible debentures at March 31, 2009. Holders of
the 1.5% convertible debentures could require the Company to redeem them
beginning in May 2009. Holders of the Company’s 2.5% convertible
debentures could also require the Company to redeem them beginning in
June 2011.
The
Company notified the holders of its 1.5% convertible debentures of their rights
under the terms of the debentures to request conversion of those debentures as
of May 15, 2009 (the “conversion date”). Accordingly, the Company
may be required to repay in cash 100% of the principal amount of any debentures
converted during the conversion period. Additionally, the value of
any debentures converted that is in excess of the principal amount will be
satisfied through the issuance of additional shares of the Company’s common
stock.
Despite
the current uncertainty and volatility in the credit markets, the Company
believes, based on its current financial condition, existing backlog levels and
current expectations for future market conditions, including future order
levels, that it will be able to meet its short- and longer-term liquidity needs
with the existing $1.4 billion of cash on hand, expected cash flow from future
operating activities and amounts available under its $585 million five-year
multicurrency revolving credit facility, expiring April 14, 2013.
Factors
That May Affect Financial Condition and Future Results
The
current turmoil and uncertainty in the public and private credit markets could
adversely impact the ability of its customers to finance future purchases of
equipment or could adversely impact the Company’s ability to finance the
Company's future operational and capital needs.
The
public and private credit markets in the United States and around the world are
currently severely constricted due to economic concerns regarding past mortgage
and other lending practices, current housing values and the present state of
various world economies. The current uncertainty and turmoil in the credit
markets has in certain cases, negatively impacted the ability of customers to
finance purchases of the Company’s equipment and is expected to continue, in the
short-term, to negatively impact sales, profitability and operating cash flows
of the Company. Although the Company does not currently anticipate a need to
access the credit markets for new financing in the short-term, a prolonged
constriction on future lending by banks or investors could also result in higher
interest rates on future debt obligations of the Company or could restrict the
Company’s ability to obtain sufficient financing to meet its long-term
operational and capital needs or could limit its ability in the future to
consummate significant business acquisitions to be paid for in
cash.
Downturns
in the oil and gas industry have had, and will likely in the future have, a
negative effect on the Company’s sales and profitability.
Demand
for most of the Company’s products and services, and therefore its revenues,
depends to a large extent upon the level of capital expenditures related to oil
and gas exploration, production, development, processing and transmission.
Recent declines in oil and gas prices have negatively affected the level of
these activities by the Company’s customers and have, in certain instances,
resulted in the cancellation, modification or rescheduling of existing
orders. Additionally, the Company expects that the substantial
decline in oil and gas prices during the latter half of 2008, which has
continued into the first quarter of 2009, combined with the currently
constricted credit markets, will continue to affect future short-term spending
by the Company’s customers during the remainder of 2009 and will negatively
impact the Company’s revenues and profitability for the remainder of
2009.
Factors
that contribute to the volatility of oil and gas prices include, but are not
limited to, the following:
•
|
demand
for oil and gas, which is impacted by economic and political conditions
and weather;
|
•
|
the
ability of the Organization of Petroleum Exporting Countries (OPEC) to set
and maintain production levels and pricing;
|
•
|
the
level of production from non-OPEC countries;
|
•
|
policies
regarding exploration and development of oil and gas
reserves;
|
•
|
the
political environments of oil and gas producing regions, including the
Middle East.
|
Cancellation
of orders in backlog are possible
The
Company has already experienced cancellations of orders in backlog and may
experience more. The Company is typically protected against financial losses
related to products and services it has provided prior to any cancellation.
However, if the Company’s customers continue to cancel existing purchase orders,
future profitability could be further negatively impacted.
At March
31, 2009, the Company had a backlog of orders for equipment to be used on
deepwater drilling rigs of approximately $795.4 million, including approximately
$292.2 million of equipment ordered for rigs whose construction was not
supported by a pre-existing contract with an operator. The Company
has experienced cancellations of existing orders in both its project and certain
of its base businesses during recent quarters. If oil and gas prices continue to
decline or stay at current levels for an extended period of time, further order
cancellations or delays in expected shipment dates may occur.
The
inability of the Company to deliver its backlog on time could affect the
Company’s future sales and profitability and its relationships with its
customers.
At March
31, 2009, the Company’s backlog was $5.3 billion, one of the highest levels in
its history. The ability to meet customer delivery schedules for this backlog is
dependent on a number of factors including, but not limited to, access to the
raw materials required for production, an adequately trained and capable
workforce, project engineering expertise for large subsea projects, sufficient
manufacturing plant capacity and appropriate planning and scheduling of
manufacturing resources. Many of the contracts the Company enters into with its
customers require long manufacturing lead times and contain penalty or incentive
clauses relating to on-time delivery. A failure by the Company to deliver in
accordance with customer expectations could subject the Company to financial
penalties or loss of financial incentives and may result in damage to existing
customer relationships. Additionally, the Company bases its earnings guidance to
the financial markets on expectations regarding the timing of delivery of
product currently in backlog. Failure to deliver backlog in accordance with
expectations could negatively impact the Company’s financial performance and
thus cause adverse changes in the market price of the Company’s outstanding
common stock and other publicly-traded financial instruments.
The
Company has embarked on a significant capital expansion program.
For 2009,
the Company expects full-year capital expenditures of approximately $200.0
million. To the extent this program of upgrading machine tools, manufacturing
technologies, processes and facilities in order to improve efficiency and
address expected market demand for the Company’s products causes disruptions in
the Company’s plants, or the needed machine tools or facilities are not
delivered and installed or in use as currently expected, the Company’s ability
to deliver existing or future backlog may be negatively impacted. In addition,
if the program does not result in the expected efficiencies, future
profitability may be negatively impacted.
Execution
of subsea systems projects exposes the Company to risks not present in its
surface business.
This
market is significantly different from the Company’s other markets since subsea
systems projects are significantly larger in scope and complexity, in terms of
both technical and logistical requirements. Subsea projects (i) typically
involve long lead times, (ii) typically are larger in financial scope, (iii)
typically require substantial engineering resources to meet the technical
requirements of the project and (iv) often involve the application of existing
technology to new environments and in some cases, new technology. The Company’s
subsea business unit received orders in the amount of $175.7 million during the
first three months of 2009. Several of the orders in backlog are
substantially more complex and involve substantially more risk than previous
projects. To the extent the Company experiences unplanned efficiencies or
difficulties in meeting the technical and/or delivery requirements of the
projects, the Company’s earnings or liquidity could be positively or negatively
impacted. The Company accounts for its subsea projects, as well as separation
and drilling projects, using SOP 81-1. In accordance with SOP 81-1, the Company
estimates the expected margin on these projects and recognizes this margin as
units are completed. Factors that may affect future project costs and margins
include the ability to properly execute the engineering and design phases
consistent with our customers’ expectations, production efficiencies, and
availability and costs of labor, materials and subcomponents. These factors can
significantly impact the accuracy of the Company’s estimates and materially
impact the Company’s future period earnings. If the Company experiences cost
underruns or overruns, the expected margin could increase or decline. In
accordance with SOP 81-1, the Company would record a cumulative adjustment to
increase or reduce the margin previously recorded on the related project. Subsea
projects accounted for approximately 12.5% of total revenues for the three
months ended March 31, 2009. As of March 31, 2009, the Company had a subsea
systems project backlog of approximately $2.0 billion.
Fluctuations
in worldwide currency markets can impact the Company’s
profitability.
The
Company has established multiple “Centers of Excellence” facilities for
manufacturing such products as subsea trees, subsea chokes, subsea production
controls and BOPs. These production facilities are located in the United
Kingdom, Brazil and other European and Asian countries. To the extent the
Company sells these products in U.S. dollars, the Company’s profitability is
eroded when the U.S. dollar weakens against the British pound, the euro, the
Brazilian real and certain Asian currencies, including the Singapore dollar.
Alternatively, profitability is enhanced when the dollar strengthens against
these same currencies.
The
Company’s worldwide operations expose it to instability and changes in economic
and political conditions, foreign currency fluctuations, trade and investment
regulations and other risks inherent to international business.
The
economic risks of doing business on a worldwide basis include the
following:
|
•
|
volatility
in general economic, social and political
conditions;
|
|
•
|
differing
tax rates, tariffs, exchange controls or other similar
restrictions;
|
|
•
|
changes
in currency rates;
|
|
•
|
inability
to repatriate income or capital;
|
|
•
|
reductions
in the number or capacity of qualified personnel;
and
|
As an
example, it has been publicly reported that certain oilfield service companies
have experienced recent disputes and difficulties in their business dealings
with the national oil company of Venezuela. While Cameron has experienced a
recent slowdown in payments owed to it by the national oil company of Venezuela,
the Company has not experienced the extent of difficulties in its business
relationship with this company that certain other oilfield service companies
have been reported to have had. Total customer revenues earned by the Company’s
wholly-owned subsidiaries in Venezuela for the year ended December 31, 2008
totaled $27.8 million. At March 31, 2009, the Company had a backlog of unfilled
subsea orders totaling $147.0 million with the national oil company of
Venezuela.
In
addition, Cameron has manufacturing and service operations that are essential
parts of its business in other developing countries and economically and
politically volatile areas in Africa, Latin America, Russia and other countries
that were part of the Former Soviet Union, the Middle East, and Central and
Southeast Asia. The Company also purchases a large portion of its raw materials
and components from a relatively small number of foreign suppliers in developing
countries. The ability of these suppliers to meet the Company’s demand could be
adversely affected by the factors described above.
The
Company is subject to trade regulations that expose the Company to potential
liability.
Doing
business on a worldwide basis also puts the Company and its operations at risk
due to political risks and the need for compliance with the laws and regulations
of many jurisdictions. These laws and regulations impose a range of restrictions
and/or duties on importation and exportation, operations, trade practices, trade
partners and investment decisions. The Company has received inquiries regarding
its compliance with certain such laws and regulations from several U.S. federal
agencies.
The
Company does business and has operations in a number of developing countries
that have relatively underdeveloped legal and regulatory systems when compared
to more developed countries. Several of these countries are generally perceived
as presenting a higher than normal risk of corruption, or a culture where
requests for improper payments are not discouraged. Maintaining and
administering an effective U.S. Foreign Corrupt Practices Act (FCPA) compliance
program in these environments presents greater challenges to the Company than is
the case in other, more developed countries. With respect to FCPA compliance,
the Company received and responded to a voluntary request for information in
September 2005 from the U.S. Securities and Exchange Commission (SEC) regarding
certain of the Company’s West African activities.
As
discussed in Note 13 of the Notes to Consolidated Financial Statements, in July
2007, the Company was one of a number of companies to receive a letter from the
Criminal Division of the U.S. Department of Justice (DOJ) requesting information
on its use of a customs clearance broker. The DOJ is inquiring into whether
certain of the services provided to the Company by the customs clearance broker
may have involved violations of the FCPA. The Company is conducting an internal
investigation in response, as discussed below, and is providing the requested
information to the DOJ.
The
Company engaged special counsel reporting to the Audit Committee of the Board of
Directors to conduct an investigation into its dealings with the customs
clearance broker in Nigeria and Angola to determine if any payments made to or
by the customs clearance broker on the Company’s behalf constituted a violation
of the FCPA. The investigation is also looking into activities of Company
employees and agents with respect to immigration matters and importation
permitting in Nigeria. To date, the special counsel has found that the Company
utilized certain services in Nigeria offered by the customs clearance broker
that appear to be similar to services that have been under review by the DOJ.
Similar issues do not appear to be present in Angola. Special counsel is
reviewing these and other services and activities to determine whether they were
conducted in compliance with all applicable laws and regulations. Special
counsel is also reviewing the extent, if any, of the Company’s knowledge, and
its involvement in the performance, of these services and activities, and
whether the Company fulfilled its obligations under the FCPA.
In
addition, the SEC is conducting an informal inquiry into the same matters
currently under review by the DOJ. As part of this inquiry, the SEC has
requested that the Company provide to them the information and documents that
have been requested by and are being provided to the DOJ. The Company is
cooperating fully with the SEC, as it is doing with the DOJ, and is providing
the requested materials. Both agencies have requested, and been granted, an
extension of the statute of limitations with respect to matters under review
until January 2010. At this stage of the internal investigation, the Company
cannot predict the ultimate outcome of either the internal investigation or the
government inquiries. The Company has also undertaken an enhanced compliance
training effort for its personnel, including foreign operations personnel
dealing with customs clearance regulations, and hired a Chief Compliance Officer
in September 2008 to oversee and direct all legal compliance matters for the
Company.
Compliance
with U.S. regulations on trade sanctions and embargoes also poses a risk to the
Company since its business is conducted on a worldwide basis through various
entities.
The
Company has received a number of inquiries from U.S. governmental agencies
regarding compliance with these regulations. On March 25, 2009, the
Company received a letter from the Office of Global Security Risk of the U.S.
Securities and Exchange Commission inquiring into the status of our withdrawal
from conducting business in or with Iran, Syria and Sudan. In
mid-2006, the Company adopted a policy which prohibited doing business with
these and other U.S. embargoed countries and restricted its non-U.S.
subsidiaries and persons from taking new orders from those countries, though the
Company allowed them to honor then existing contracts if they were, in the
opinion of non-U.S. counsel, binding and enforceable in accordance with their
terms and would subject a Company entity to damages for a failure to perform
thereunder, provided such contracts could, in fact, be performed without any
U.S. person or entity involvement and otherwise in accordance with existing U.S.
regulations. The Company’s records show that its non-U.S. entities made
deliveries of approximately $3.1 million to Iran and $1.5 million to Syria and
no deliveries to Sudan in 2008, nor were there any deliveries to these countries
in the first quarter of 2009. The Company is examining these
deliveries to confirm they were in compliance with its policy and is actively
monitoring present and future performance of its non-U.S. entitles to ensure
compliance. In connection with our decision to cease doing business
with these countries, one of our non-U.S. subsidiaries divested its interest in
a joint venture doing business in Iran to an Iranian national in 2006 in
exchange for an $11.4 million receivable. The first installment was
paid in the amount of $600 thousand during the first quarter of
2009. The Company does not do business with this venture, and has had
no recent correspondence regarding collection of future installments due from
this venture. If future installments are not received, the Company
will have to re-evaluate the collectability of this receivable. The
Company also received an inquiry from this same office regarding essentially the
same matters in 2006. In December 2008, the Company received an
inquiry from the U.S. Department of Treasury’s Office of Foreign Assets Control
regarding a bank guaranty the Company attempted to establish for a sale to a
Burmese entity, to which the Company has responded and received no follow up to
date.
In
January 2007, the Company underwent a Pre-Assessment Survey as part of a Focused
Assessment Audit initiated by the Regulatory Audit Division of the U.S. Customs
and Border Protection, Department of Homeland Security. The Pre-Assessment
Survey resulted in a finding that the Company had deficiencies in its U.S.
Customs compliance process and had underpaid customs duties. The Company has
taken corrective action and will close out all matters regarding duties owed for
import entries processed from September 29, 2001 through October 5,
2007. The Company expects that the final assessment compliance period
will encompass import activity during the second half of 2009. The
fieldwork for the focused Assessment Audit is expected to commence in the second
quarter of 2010.
The
Company is subject to environmental, health and safety laws and regulations that
expose the Company to potential liability.
The
Company’s operations are subject to a variety of national and state, provisional
and local laws and regulations, including laws and regulations relating to the
protection of the environment. The Company is required to invest financial and
managerial resources to comply with these laws and expects to continue to do so
in the future. To date, the cost of complying with governmental regulation has
not been material, but the fact that such laws or regulations are frequently
changed makes it impossible for the Company to predict the cost or impact of
such laws and regulations on the Company’s future operations. The modification
of existing laws or regulations or the adoption of new laws or regulations
imposing more stringent environmental restrictions could adversely affect the
Company.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
The
Company is currently exposed to market risk from changes in foreign currency
rates and changes in interest rates. A discussion of the Company’s
market risk exposure in financial instruments follows.
Foreign
Currency Exchange Rates
A large
portion of the Company’s operations consist of manufacturing and sales
activities in foreign jurisdictions, principally in Europe, Canada, West Africa,
the Middle East, Latin America and the Pacific Rim. As a result, the
Company’s financial performance may be affected by changes in foreign currency
exchange rates in these markets. Overall, for those locations where
the Company is a net receiver of local non-U.S. dollar currencies, Cameron
generally benefits from a weaker U.S. dollar with respect to those
currencies. Alternatively, for those locations where the Company is a
net payer of local non-U.S. dollar currencies, a weaker U.S. dollar with respect
to those currencies will generally have an adverse impact on the Company’s
financial results. The impact on the Company’s financial results of
gains or losses arising from foreign currency-denominated transactions, if
material, has been described in Part I, Item 2, Management’s Discussion and
Analysis of Financial Condition and Results of Operations for the periods
covered by this report.
In order
to mitigate the effect of exchange rate changes, the Company will often attempt
to structure sales contracts to provide for collections from customers in the
currency in which the Company incurs its manufacturing costs. In certain
instances, the Company will enter into foreign currency forward contracts to
hedge specific large anticipated receipts or payments in currencies for which
the Company does not traditionally have fully offsetting local currency
expenditures or receipts. The Company was party to a number of
long-term foreign currency forward contracts at March 31, 2009. The
purpose of the majority of these contracts was to hedge large anticipated
non-functional currency cash flows on major subsea, drilling or valve contracts
involving the Company’s United States operations and its wholly-owned
subsidiaries in Brazil, Ireland, Italy, Romania, Singapore and the United
Kingdom. Information relating to the contracts, which have been
accounted for as cash flow hedges under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
and the fair values recorded in the Company’s Consolidated Balance Sheets at
March 31, 2009 follows:
|
|
March
31, 2009
|
|
|
|
|
|
|
Year
of Contract Expiration
|
|
|
|
|
(amounts
in millions except exchange rates)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Total
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
BRL/Sell EUR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to sell (in
EUR)
|
|
|
19.5
|
|
|
|
2.6
|
|
|
|
−
|
|
|
|
22.1
|
|
|
|
23.1
|
|
Average BRL to EUR contract
rate
|
|
|
2.5842
|
|
|
|
2.6702
|
|
|
|
−
|
|
|
|
2.5942
|
|
|
|
2.5889
|
|
Average BRL to EUR at March 31,
2009
|
|
|
3.1910
|
|
|
|
3.2784
|
|
|
|
−
|
|
|
|
3.2012
|
|
|
|
3.4544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at March 31, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5.5
|
)
|
|
$
|
(8.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
EUR/Sell GBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to buy (in
EUR)
|
|
|
27.4
|
|
|
|
8.1
|
|
|
|
0.7
|
|
|
|
36.2
|
|
|
|
49.5
|
|
Average GBP to EUR
contract rate
|
|
|
0.8120
|
|
|
|
0.8054
|
|
|
|
0.8120
|
|
|
|
0.8105
|
|
|
|
0.7992
|
|
Average GBP to EUR at
March 31, 2009
|
|
|
0.9250
|
|
|
|
0.9252
|
|
|
|
0.9268
|
|
|
|
0.9251
|
|
|
|
0.9611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at March 31, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.9
|
|
|
$
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy
GBP/Sell USD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to buy (in
GBP)
|
|
|
1.5
|
|
|
|
1.6
|
|
|
|
1.4
|
|
|
|
4.5
|
|
|
|
4.9
|
|
Average USD to GBP contract
rate
|
|
|
1.6686
|
|
|
|
1.6849
|
|
|
|
1.6735
|
|
|
|
1.6761
|
|
|
|
1.6774
|
|
Average USD to GBP at March 31,
2009
|
|
|
1.4335
|
|
|
|
1.4358
|
|
|
|
1.4344
|
|
|
|
1.4346
|
|
|
|
1.4467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at March 31, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.1
|
)
|
|
$
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
BRL/Buy USD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to buy (in
USD)
|
|
|
10.0
|
|
|
|
−
|
|
|
|
−
|
|
|
|
10.0
|
|
|
|
10.0
|
|
Average BRL to USD contract
rate
|
|
|
1.9409
|
|
|
|
−
|
|
|
|
−
|
|
|
|
1.9409
|
|
|
|
1.9409
|
|
Average BRL to USD at March 31,
2009
|
|
|
2.3573
|
|
|
|
−
|
|
|
|
−
|
|
|
|
2.3573
|
|
|
|
2.4403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at March 31, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.8
|
|
|
$
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
USD/Buy EUR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to sell (in
USD)
|
|
|
90.6
|
|
|
|
24.6
|
|
|
|
−
|
|
|
|
115.2
|
|
|
|
117.8
|
|
Average USD to EUR contract
rate
|
|
|
1.4562
|
|
|
|
1.4694
|
|
|
|
−
|
|
|
|
1.4590
|
|
|
|
1.5069
|
|
Average USD to EUR at March 31,
2009
|
|
|
1.3259
|
|
|
|
1.3280
|
|
|
|
−
|
|
|
|
1.3264
|
|
|
|
1.3929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at March 31, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10.4
|
)
|
|
$
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
USD/Buy GBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount to sell (in
USD)
|
|
|
90.0
|
|
|
|
37.8
|
|
|
|
2.3
|
|
|
|
130.1
|
|
|
|
156.1
|
|
Average USD to GBP contract
rate
|
|
|
1.7850
|
|
|
|
1.8932
|
|
|
|
1.8721
|
|
|
|
1.8167
|
|
|
|
1.9155
|
|
Average USD to GBP at
March 31, 2009
|
|
|
1.4335
|
|
|
|
1.4357
|
|
|
|
1.4352
|
|
|
|
1.4342
|
|
|
|
1.4498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at March 31, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(27.3
|
)
|
|
$
|
(37.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Currencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at March 31, 2009 in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.7
|
)
|
|
$
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rates
The
Company is subject to interest rate risk on its long-term fixed interest rate
debt and, to a lesser extent, variable-interest rate
borrowings. Variable-rate debt, where the interest rate fluctuates
periodically, exposes the Company’s cash flows to variability due to changes in
market interest rates. Fixed-rate debt, where the interest rate is
fixed over the life of the instrument, exposes the Company to changes in the
fair value of its debt due to changes in market interest rates and to the risk
that the Company may need to refinance maturing debt with new debt at a higher
rate.
The
Company manages its debt portfolio to achieve an overall desired position of
fixed and floating rates and may employ interest rate swaps as a tool to achieve
that goal. The major risks from interest rate derivatives include
changes in the interest rates affecting the fair value of such instruments,
potential increases in interest expense due to market increases in floating
interest rates and the creditworthiness of the counterparties in such
transactions.
The fair
values of the short-term borrowings under the Company’s revolving credit
facility, the 6.375% 10-year Senior Notes and the 7.0% 30-year Senior Notes are
principally dependent on prevailing interest rates. The fair values of the 1.5%
and 2.5% convertible debentures are principally dependent on both prevailing
interest rates and the Company’s current share price as it relates to the
initial conversion price of the respective instruments. Since the
Company typically borrows or renews its outstanding borrowings under its
revolving credit facility at current interest rates for 30-day periods, changes
in interest rates tend to impact the Company’s cash flows over time more so than
the fair market value of this portion of the Company’s debt.
The
Company has various other short- and long-term borrowings, but believes that the
impact of changes in interest rates in the near term will not be material to
these instruments.
Item
4. Controls and Procedures
In
accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried
out an evaluation, under the supervision and with the participation of the
Company’s Disclosure Committee and the Company’s management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures, as of
the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective as of March 31, 2009
to ensure that information required to be disclosed by the Company that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and
that information required to be disclosed in the reports that the Company files
or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. There were no material changes in the Company’s internal control
over financial reporting during the quarter ended March 31, 2009.
Item 1. Legal Proceedings
The
Company is subject to a number of contingencies, including environmental
matters, litigation and tax contingencies.
Environmental
Matters
The
Company’s worldwide operations are subject to regulations with regard to air,
soil and water quality as well as other environmental matters. The Company,
through its environmental management system and active third-party audit
program, believes it is in substantial compliance with these
regulations.
The
Company is currently identified as a potentially responsible party (PRP) with
respect to three sites designated for cleanup under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) or similar state
laws. One of these sites is Osborne, Pennsylvania (a landfill into which a
predecessor of the CS operation in Grove City, Pennsylvania deposited waste),
where remediation is complete and remaining costs relate to ongoing ground water
treatment and monitoring. Of the other two, one is believed to be a de minimis
exposure and the other recently settled for a de minimis amount. The
Company is also engaged in site cleanup under the Voluntary Cleanup Plan of the
Texas Commission on Environmental Quality at former manufacturing locations in
Houston and Missouri City, Texas. 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 March
31, 2009, the Company’s consolidated balance sheet included a noncurrent
liability of approximately $6.5 million for environmental matters.
Legal
Matters
In 2001,
the Company discovered that contaminated underground water from the former
manufacturing site in Houston referenced above had migrated under an adjacent
residential area. Pursuant to applicable state regulations, the Company notified
the affected homeowners. Concerns over the impact on property values of the
underground water contamination and its public disclosure led to a number of
claims by homeowners.
The
Company has entered into a number of individual settlements and has settled a
class action lawsuit. Twenty-one of the individual settlements were made in the
form of agreements with homeowners that obligated the Company to reimburse them
for any estimated decline in the value of their homes at time of sale due to
potential buyers’ concerns over contamination or, in the case of some
agreements, to purchase the property after an agreed marketing period. Three of
these agreements have had no claims made under them yet. The Company has also
settled ten other property claims by homeowners who have sold their properties.
In addition, the Company has settled Valice v. Cameron Iron Works, Inc. (80th
Jud. Dist. Ct., Harris County, filed June 21, 2002), which was filed and settled
as a class action. Pursuant to the settlement, the homeowners who remained part
of the class are entitled to receive a cash payment of approximately 3% of the
2006 appraised value of their property or reimbursement of any diminution in
value of their property due to contamination concerns at the time of any sale.
To date, 72 homeowners have elected the cash payment.
Of the
258 properties included in the Valice class, there were 21 homeowners who opted
out of the class settlement. Three suits were filed regarding this
matter by non-settling homeowners. All three cases have now been
resolved. The remaining homeowners who opted out of the class action
settlement have made claims that the contaminated underground water has reduced
property values and are seeking recovery of alleged actual and exemplary damages
for the alleged loss of property value. These homeowners have retained
legal counsel but have not yet filed suit.
One of
the suits filed but now resolved involved a claim for bodily injury, which claim
was dismissed by summary judgment. The Company remains of the opinion that
there is no health risk to area residents as a result of the
contamination.
The
Company believes, based on its review of the facts and law, that any potential
exposure from existing agreements, the class action settlement or other actions
that have been or may be filed, will not have a material adverse effect on its
financial position or results of operations. The Company’s consolidated balance
sheet included a liability of $15.1 million for these matters as of March 31,
2009.
The
Company has been named as a defendant in a number of multi-defendant,
multi-plaintiff tort lawsuits since 1995. At March 31, 2009, the Company’s
consolidated balance sheet included a liability of approximately $3.2 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 these suits
will not have a material adverse effect on its consolidated results of
operations, financial condition or liquidity.
Regulatory
Contingencies
In
January 2007, the Company underwent a Pre-Assessment Survey as part of a Focused
Assessment Audit initiated by the Regulatory Audit Division of the U.S. Customs
and Border Protection, Department of Homeland Security. The
Pre-Assessment Survey resulted in a finding that the Company had deficiencies in
its U.S. Customs compliance process and had underpaid customs
duties. The Company has taken corrective action and has closed out
all matters regarding duties owed for import entries processed from September
29, 2001 through October 5, 2007. The Company expects that the final
assessment compliance period will encompass import activity during the second
half of 2009. The field work for the Focused Assessment Audit is
expected to commence in the second quarter of 2010.
In July
2007, the Company was one of a number of companies to receive a letter from the
Criminal Division of the U.S. Department of Justice (DOJ) requesting information
on their use of a freight forwarder and customs clearance broker. The DOJ is
inquiring into whether certain of the services provided to the Company by the
freight forwarder may have involved violations of the U.S. Foreign Corrupt
Practices Act (FCPA). The Company is conducting an internal investigation in
response, as discussed below, and is providing the requested information to the
DOJ.
The
Company engaged special counsel reporting to the Audit Committee of the Board of
Directors to conduct an investigation into its dealings with the freight
forwarder to determine if any payment made to or by the freight forwarder and
customs clearing broker on the Company’s behalf constituted a violation of the
FCPA. The investigation is also looking into activities of Company employees and
agents with respect to immigration matters and importation permitting. To date,
the special counsel has found that the Company utilized certain services in
Nigeria offered by the customs broker that appear to be similar to services that
have been under review by the DOJ. Special counsel is reviewing these and other
services and activities to determine whether they were conducted in compliance
with all applicable laws and regulations. Special counsel is also reviewing the
extent, if any, of the Company’s knowledge, and its involvement in the
performance, of these services and activities and whether the Company fulfilled
its obligations under the FCPA.
In
addition, the U.S. Securities and Exchange Commission (SEC) is conducting an
informal inquiry into the same matters currently under review by the DOJ. As
part of this inquiry the SEC has requested that the Company provide to them the
information and documents that have been requested by and are being provided to
the DOJ. The Company is cooperating fully with the SEC, as it is doing with the
DOJ, and is providing the requested materials. At this stage of the internal
investigation, the Company cannot predict the ultimate outcome of either the
internal investigation or the government inquiries. The Company has also
undertaken an enhanced compliance training effort for its personnel, including
foreign operations personnel dealing with customs clearance regulations, and
hired a Chief Compliance Officer in September 2008 to oversee and direct all
legal compliance matters for the Company.
Tax
Contingencies
The
Company has legal entities in over 35 countries, each of which has various tax
filing requirements. The Company prepares its tax filings in a manner which it
believes is consistent with such filing requirements; however, some of the tax
laws and regulations to which the Company is subject require interpretation
and/or judgment. Although the Company believes that the tax liabilities for
periods ending on or before the balance sheet date have been adequately provided
for in the financial statements, to the extent that a taxing authority believes
that the Company has not prepared its tax filings in accordance with the
authority’s interpretation of the tax laws/regulations, the Company could be
exposed to additional taxes.
The
information set forth under the caption “Factors That May Affect Financial
Condition and Future Results” on pages 22 – 26 of this quarterly report on
Form 10-Q is incorporated herein by reference.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
In
February 2006, the Company’s Board of Directors changed the number of
shares of the Company’s common stock authorized for repurchase from the
5,000,000 shares authorized in August 2004 to 10,000,000 shares in order to
reflect the 2-for-1 stock split effective December 15, 2005. This
authorization was subsequently increased to 20,000,000 in connection with the
2-for-1 stock split effective December 28, 2007 and eventually to
30,000,000 by a resolution adopted by the Board of Directors on
February 21, 2008. Additionally, on May 22, 2006, the Company’s Board
of Directors approved repurchasing shares of the Company’s common stock with the
proceeds remaining from the Company’s 2.5% Convertible Debenture offering, after
taking into account a planned repayment of $200,000,000 principal amount of the
Company’s outstanding 2.65% senior notes due 2007. This authorization is in
addition to the 30,000,000 shares described above.
Purchases
pursuant to the 30,000,000-share Board authorization may be made by way of open
market purchases, directly or indirectly, for the Company’s own account or
through commercial banks or financial institutions and by the use of derivatives
such as a sale or put on the Company’s common stock or by forward or
economically equivalent transactions. Shares of common stock purchased and
placed in treasury during the three months ended March 31, 2009 under the
Board’s two authorization programs described above are as follows:
Period
|
|
Total
number
of
shares
purchased
|
|
|
Average
price paid per share
|
|
|
Total
number of shares
purchased
as part of
all
repurchase
programs
(a)
|
|
|
Maximum
number of shares that may yet be purchased
under
all repurchase
programs
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/1/09
– 1/31/09
|
|
|
−
|
|
|
$
|
−
|
|
|
|
25,546,990
|
|
|
|
7,107,780
|
|
2/1/09
– 2/28/09
|
|
|
322,578
|
|
|
$
|
20.49
|
|
|
|
25,869,568
|
|
|
|
6,785,202
|
|
3/1/09
– 3/31/09
|
|
|
25,100
|
|
|
$
|
17.69
|
|
|
|
25,894,668
|
|
|
|
6,760,102
|
|
Total
|
|
|
347,678
|
|
|
$
|
20.29
|
|
|
|
25,894,668
|
|
|
|
6,760,102
|
|
(a)
|
All
share purchases during the three months ended March 31, 2009 were done
through open market transactions.
|
(b)
|
As
of March 31, 2009, there were no remaining shares available for purchase
under the May 22, 2006 Board
authorization.
|
Item
3. Defaults Upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security Holders
None
Item
5. Other Information
(a)
|
Information
Not Previously Reported in a Report on
Form 8-K
|
None
(b)
|
Material
Changes to the Procedures by Which Security Holders May Recommend
Board Nominees.
|
There
have been no material changes to the procedures enumerated in the Company’s
definitive proxy statement filed on Schedule 14A with the Securities and
Exchange Commission on March 25, 2009 with respect to the procedures by
which security holders may recommend nominees to the Company’s Board of
Directors.
Exhibit 31.1
–
Certification
Exhibit 31.2
–
Certification
Exhibit 32.1
–
|
Certification
of the CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
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:
May 8, 2009
|
CAMERON
INTERNATIONAL CORPORATION
|
|
(Registrant)
|
|
|
|
By:
/s/
Charles M.
Sledge
|
|
Charles M. Sledge
|
|
Senior Vice President and Chief Financial Officer
and authorized to sign on behalf of the
Registrant
|
EXHIBIT
INDEX
Exhibit
Number
|
|
Description
|
|
31.1
|
|
Certification
|
|
|
|
|
|
31.2
|
|
Certification
|
|
|
|
|
|
32.1
|
|
Certification
of the CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
33
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