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CAM > SEC Filings for CAM > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for CAMERON INTERNATIONAL CORP

Form 10-Q for CAMERON INTERNATIONAL CORP


2-Nov-2012

Quarterly Report


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, customer spending and order levels, revenues and earnings of the Company, as well as expectations regarding equipment deliveries, margins, profitability, the ability to control and reduce raw material, overhead and operating costs, cash generated from operations, legal fees, costs associated with, or any liability for, a number of lawsuits filed against the Company in connection with the Deepwater Horizon matter, capital expenditures and the use of existing cash balances and future anticipated cash flows 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 any forward-looking statements. Any such 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 projects it has been awarded; the possibility of cancellations of orders in backlog; the Company's ability to convert backlog into revenues on a timely and profitable basis; 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 directly affected customers' spending levels and their related purchases of the Company's products and services. As a result, changes in oil and gas price expectations may impact the demand for the Company's products and services and the Company's financial results due to changes in cost structure, staffing and spending levels the Company makes in response thereto. 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, among other things, 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 disclosure of such changes unless required under applicable disclosure rules and regulations.


THIRD QUARTER 2012 COMPARED TO THIRD QUARTER 2011

Market Conditions

Information related to a measure of drilling activity and certain commodity spot
and futures prices during each quarter and the number of deepwater floaters and
semis under contract at the end of each period follows:

                                              Three Months Ended
                                                 September 30,              Increase (Decrease)
                                              2012           2011          Amount             %
Drilling activity (average number of
working rigs during period)(1):
United States                                   1,906          1,945            (39 )          (2.0 )%
Canada                                            326            443           (117 )         (26.4 )%
Rest of world                                   1,260          1,169             91             7.8 %
Global average rig count                        3,492          3,557            (65 )          (1.8 )%
Commodity prices (average of daily U.S.
dollar prices per unit during
period)(2):
West Texas Intermediate Cushing, OK
crude spot price per barrel in U.S.
dollars                                    $    92.16      $   89.51     $     2.65             3.0 %
Henry Hub natural gas spot price per
MMBtu in U.S. dollars                      $     2.88      $    4.12     $    (1.24 )         (30.1 )%
Twelve-month futures strip price (U.S.
dollar amount at period end)(2):
West Texas Intermediate Cushing, OK
crude oil contract (per barrel)            $    93.54      $   80.26     $    13.28            16.5 %
Henry Hub Natural Gas contract (per
MMBtu)                                     $     3.74      $    4.11     $    (0.37 )          (9.0 )%
Number of deepwater floaters and semis
under contract in competitive major
markets at period-end(3):
U.S. Gulf of Mexico                                38             27             11            40.7 %
Northwestern Europe                                43             37              6            16.2 %
West Africa                                        32             33             (1 )          (3.0 )%
Southeast Asia and Australia                       26             26              -               - %

(1) Based on average monthly rig count data from Baker Hughes
(2) Source: Bloomberg
(3) Source: ODS-Petrodata Ltd.

The average number of worldwide operating rigs decreased slightly in the third quarter of 2012 as compared to the third quarter of 2011, primarily due to lower activity levels in Canada.

Crude oil prices (West Texas Intermediate, Cushing, OK) increased for much of the third quarter of 2012, before closing the period at approximately $92.19 per barrel. On average, crude oil prices for the third quarter of 2012 as compared to the third quarter of 2011 were up modestly. The twelve-month futures price for crude oil at September 30, 2012 was relatively flat compared to spot prices near the end of the quarter.

Natural gas (Henry Hub) prices trended slightly upward during the third quarter of 2012 from their lowest levels in the last decade, closing at $3.06 per MMBtu. On average, prices during the third quarter of 2012 were down 30.1% as compared to the same period in 2011, due largely to increased supplies available in North America as a result of new unconventional resource developments and higher activity levels. The twelve-month futures strip price for natural gas at September 30, 2012 remains depressed at $3.74 per MMBtu. In response to the current low natural gas prices, many oil and gas exploration and production companies have indicated they have curtailed development activities for "dry gas" wells. This activity has shifted to areas that produce gas with a mixture of liquid hydrocarbons ("wet gas" wells); thus, there has not been a significant drop off of overall U.S. activity levels to date. Should the twelve-month futures strip price stay at current levels for a long period of time, the portion of the North American rig count directed to gas drilling could decline further, which could further impact the Company's future orders flow. Additionally, should the price of various liquid hydrocarbons drop dramatically, rather than shifting activities from dry gas wells to wet gas wells, customers may elect to curtail overall activity levels which could also further negatively impact the Company's future orders flow in the U.S.


Critical Accounting Policies

Goodwill - The Company reviews the carrying value of goodwill in accordance with accounting rules on impairment of goodwill, which require that the Company estimate the fair value of each of its reporting units annually, or when impairment indicators exist, and compare such amounts to their respective carrying values to determine if an impairment of goodwill is required. The estimated fair value of each reporting unit is determined using discounted future expected cash flow models (level 3 unobservable inputs) consistent with the accounting guidance for fair value measurements. Certain estimates and judgments are required in the application of the discounted cash flow models, including, but not limited to, estimates of future cash flows and the selection of a discount rate. Generally, this review is conducted during the first quarter of each annual period. The results of the 2012 test indicated that there was no impairment of goodwill. Should the Company's estimate of the fair value of any of its reporting units decline significantly in future periods due to changes in customer demand, market activity levels, interest rates or other factors which would impact future earnings and cash flow or market valuation levels of the Company or any of its reporting units, an impairment of goodwill could be required.

Goodwill at September 30, 2012 was $1.9 billion, a large portion of which was allocated to the Company's Process & Compression Systems (PCS) segment, which includes the majority of the NATCO operations acquired in 2009. The Company's determination of the fair value of its Custom Process Systems (CPS) business within the PCS segment included assumptions for continued long-term profitability improvements from current levels As a result of competitive pressures during the economic downturn that began prior to the acquisition of the NATCO operations in 2009, the backlog of the CPS business has carried unusually low margins which have negatively impacted recent profitability. Additionally, the Company experienced operating inefficiencies during 2011 which continued into 2012. While management is taking steps to improve the financial results of CPS, should these efforts not result in performance improvements in the fourth quarter, the Company would have to re-evaluate its long-term profitability assumptions which could result in an impairment of goodwill for this reporting unit. Goodwill associated with the CPS business was approximately $572.7 million at September 30, 2012.

Consolidated Results

Net income for the third quarter of 2012 totaled $223.6 million, or $0.90 per diluted share, compared to net income for the third quarter of 2011 of $164.5 million, or $0.67 per diluted share. Included in the results for the third quarter of 2012 were pre-tax charges of $3.4 million, or $0.01 per share, for acquisition integration activities, costs for BOP litigation, the mark-to-market impact on certain centrally-managed currency derivatives and certain employee severance and restructuring-related activities. The results for the third quarter of 2011 included pre-tax charges of $34.2 million, or $0.11 per diluted share, primarily associated with costs for BOP litigation, the mark-to-market impact on certain centrally-managed currency derivatives and certain employee severance and restructuring-related activities.

Total revenues for the Company increased $532.4 million, or 31.6%, during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 on the strength of higher sales in each of the Company's business segments.

Drilling & Production Systems (DPS) segment revenues increased 31% in the third quarter of 2012 as compared to the third quarter of 2011 largely as a result of the impact of newly acquired businesses, as well as increased activity levels which resulted in double-digit revenue increases in each major product line.

Revenues in the Valves & Measurement (V&M) segment were up 23% in the third quarter of 2012 as compared to the same period last year as strong project activity levels benefitted each of the segment's new equipment product lines.


PCS segment revenues increased nearly 47% compared to the third quarter of 2011 mainly as a result of strong demand for processing equipment in unconventional resource regions of North America, higher manufacturing activity levels associated with custom engineered processing equipment and higher international shipments of reciprocating and centrifugal compression equipment.

As a percent of revenues, cost of sales (exclusive of depreciation and amortization) increased from 67.4% during the third quarter of 2011 to 70.7% for the third quarter of 2012. Lower margins in the DPS segment, mainly related to the Company's subsea project business, and a mix shift in the V&M segment, accounted for the majority of the increase in the ratio.

Selling and administrative expenses increased $41.6 million, or approximately 17.1%, during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.

Selling and administrative expenses were 12.8% of revenues for the third quarter of 2012 as compared to 14.4% for the third quarter of 2011.

Nearly 90% of the dollar increase was due to higher employee and facility-related costs mainly as a result of increased business volumes, the impact of newly acquired businesses and international and aftermarket expansion efforts.

Depreciation and amortization expense totaled $66.8 million for the third quarter of 2012 as compared to $53.1 million during the third quarter of 2011, an increase of $13.7 million, due mainly to higher depreciation expense as a result of recent increased levels of capital spending for new equipment, facilities and the Company's enhanced business information systems, as well as the impact of recently acquired businesses.

Net interest costs for the three months ended September 30, 2012 totaled $25.1 million, an increase of $4.5 million from the same period in 2011. Approximately $3.4 million of the increase was attributable to the issuance of $500.0 million principal amount of senior unsecured notes in May 2012.

Other costs consisted of:

                                                                   Three Months Ended
                                                                      September 30,
($ in millions)                                                   2012             2011

Acquisition integration costs                                  $      5.3       $        -
BOP litigation costs                                                  1.4             13.2
Mark-to-market impact on currency derivatives not designated
as accounting hedges                                                 (7.6 )            6.4
Severance, restructuring and other costs                              4.3             14.6
                                                               $      3.4       $     34.2

The Company's effective tax rate for the third quarter of 2012 was 17.1% compared to 16.9% for the third quarter of 2011. Tax rates for both periods reflect certain tax benefits recognized from tax planning strategies put in place in prior periods, resolution of certain contingencies and, favorable adjustments related to finalization of prior-year tax returns.

During the third quarter of 2012, the Company made an election to participate in a tax reduction initiative in accordance with applicable foreign country tax law, which reduced the forecasted tax rate for the calendar year 2012 by approximately 4.5 percentage points.


Segment Results

DPS Segment -

                                             Three Months Ended
                                                September 30,              Increase (Decrease)
($ in millions)                              2012          2011              $                %

Revenues                                   $ 1,279.7     $   977.2     $      302.5           31.0 %
Income before income taxes                 $   198.8     $   196.6     $        2.2            1.1 %
Income before income taxes as a percent
of revenues                                     15.5 %        20.1 %            N/A           (4.6 )%

Orders                                     $ 1,475.6     $ 1,149.1     $      326.5           28.4 %
Backlog (at period-end)                    $ 5,423.9     $ 3,755.9     $    1,668.0           44.4 %

Revenues

A large portion of the increase in revenues was attributable to the impact of newly acquired businesses, which accounted for almost 57% of the total change from the third quarter of 2011. In addition:

surface revenues increased 19% largely as a result of higher rental equipment deployments in unconventional resource regions of North America and higher activity levels in most major regions of the world;

drilling equipment sales were up nearly 16% largely related to higher international project activity and increased demand for spares and rig upgrades, and

subsea equipment sales increased 12% mainly due to increased activity levels on major projects offshore China and in the North Sea.

Income before income taxes as a percent of revenues

The ratio of income before income taxes as a percent of revenues declined by 4.6 percentage points from the third quarter of 2011 to the third quarter of 2012, primarily as a result of lower margins on major subsea projects offshore West Africa.

Orders

Excluding the impact of newly acquired businesses, total segment orders increased 6% in the third quarter of 2012 as compared to the same period last year. This increase was primarily attributable to:

a 33% increase in orders for surface equipment, mainly due to increased demand for rental equipment in unconventional resource regions of North America and higher international activity levels, and

a 15% increase in orders for drilling equipment, mainly due to new major project awards.

These increases were largely offset by a 28% decline in subsea equipment orders reflecting certain multi-tree awards that were received in the third quarter of 2011 for installation offshore China and Brazil that did not reoccur in the third quarter of 2012.

Backlog (at period-end)

Nearly 86% of the increased level of backlog at September 30, 2012 as compared to September 30, 2011 was due to higher backlog in the drilling equipment product line due mainly to the impact of newly acquired businesses, as well as strong demand in previous periods for new equipment and aftermarket parts and services.


V&M Segment -

                                             Three Months Ended
                                                September 30,              Increase/(Decrease)
($ in millions)                              2012          2011             $                 %

Revenues                                   $   536.0     $   434.4     $     101.6            23.4 %
Income before income taxes                 $   105.6     $    81.5     $      24.1            29.6 %
Income before income taxes as a percent
of revenues                                     19.7 %        18.8 %           N/A             0.9 %

Orders                                     $   485.8     $   508.6     $     (22.8 )          (4.5 )%
Backlog (at period-end)                    $ 1,083.3     $ 1,090.4     $      (7.1 )          (0.7 )%

Revenues

Sales increased at double-digit levels across all major product lines during the third quarter of 2012 as compared to the same period in 2011, with engineered and process valves accounting for more than three-fourths of the improvement in total segment sales.

Engineered valve sales increased 32% as a result of higher worldwide pipeline construction project activity levels.

Process valve and measurement product sales increased 47% and 18%, respectively, as a result of higher North American activity levels.

Distributed valve sales increased 14% as a result of the strong beginning-of-period backlog which impacted shipments during the third quarter of 2012.

Income before income taxes as a percent of revenues

The slight increase in the ratio of income before income taxes as a percent of revenues was due primarily to:

a 2.0 percentage-point decrease in the ratio of selling and administrative expenses to revenues as a result of revenues increasing at a greater rate than selling and administrative expenses during the third quarter of 2012 as compared to the third quarter of 2011, and

a 0.3 percentage-point decrease in the ratio of depreciation and amortization to revenues mainly resulting from the impact of increasing revenues in relation to relatively flat depreciation and amortization during the third quarter of 2012 as compared to the third quarter of 2011.

These decreases were offset by an increase of 1.3 percentage points in the ratio of cost of sales to revenue resulting from changes in the mix of higher versus lower-margin products delivered in the third quarter of 2012 as compared to the third quarter of 2011.

Orders

Orders decreased slightly for the overall segment as compared to the third quarter of 2011, primarily due to a 16% decrease in distributed valve orders mainly as a result of weaker demand from Canadian customers coupled with the weakness in the dry gas rig count.


PCS Segment -

                                              Three Months Ended
                                                 September 30,               Increase (Decrease)
($ in millions)                               2012           2011             $                 %

Revenues                                   $     402.6     $   274.3     $     128.3            46.8 %
Income before income taxes                 $      41.7     $    24.0     $      17.7            73.8 %
Income before income taxes as a percent
of revenues                                       10.4 %         8.7 %           N/A             1.7 %

Orders                                     $     338.7     $   345.4     $      (6.7 )          (1.9 )%
Backlog (at period-end)                    $   1,090.0     $   941.2     $     148.8            15.8 %

Revenues

Increased segment revenues resulted from:

a 56% increase in sales of processing equipment reflecting higher equipment deliveries for use in unconventional resource regions of North America and higher international project activity levels associated with new custom engineered equipment;

a 51% increase in sales of reciprocating compression equipment due mainly to increased international shipments of new Superior compressors; and

a 24% increase in centrifugal compression equipment deliveries, mainly relating to higher demand for new equipment designed mainly for gas processing applications.

Income before income taxes as a percent of revenues

The increase in the ratio of income before income taxes as a percent of revenues was due primarily to lower costs in relation to revenues as follows:

revenues increased at more than twice the rate of the increase in selling and administrative expenses resulting in a 2.8 percentage-point decrease in the ratio of selling and administrative expense to revenues and,

depreciation and amortization expense declined modestly from the prior year due to lower capital spending levels in recent periods which, in relation to increased revenues, resulted in a 1.4 percentage-point decrease in the ratio of depreciation and amortization to revenues.

These lower costs in relation to revenues were partially offset by a decline in gross margins of 2.5 percentage-points due mainly to a mix shift away from higher-margin centrifugal compression equipment sales during the third quarter of 2012 as compared to the third quarter of 2011.

Orders

Reciprocating compression equipment orders declined 34% and orders for centrifugal compression equipment were off 28% largely as a result of weaker worldwide demand in the third quarter of 2012 as compared to the third quarter of 2011. This decline was largely offset by a 45% increase in orders for processing equipment mainly (i) for use in unconventional resource regions in North America and (ii) as a result of two large international awards for custom-engineered processing equipment in the third quarter of 2012.

Backlog (at period-end)

Higher processing equipment backlog at September 30, 2012 accounted for nearly 78% of the total increase in segment backlog from September 30, 2011. Centrifugal compression equipment backlog also increased 14% year-over-year, mainly on the strength of higher demand in previous periods for new engineered air equipment. These increases were partially offset by a 14% decline in reciprocating compression equipment backlog, as recent demand for new Superior compressors and aftermarket parts and services has not kept pace with current delivery levels.


Corporate Segment -

The $27.8 million decrease in the loss before income taxes in the Corporate segment during the third quarter of 2012 as compared to the third quarter of 2011 (see Note 10 of the Notes to Consolidated Condensed Financial Statements), was due primarily to a $30.8 million decrease in other costs, partially offset by higher interest expense, both of which are described above under "Consolidated Results".

NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2011

Market Conditions

 Information related to a measure of drilling activity and certain commodity
spot and futures prices follows:

                                              Nine Months Ended
                                                September 30,              Increase (Decrease)
                                              2012          2011          Amount             %
Drilling activity (average number of
working rigs during period)(1):
United States                                   1,956         1,830            126             6.9 %
Canada                                            363           406            (43 )         (10.6 )%
Rest of world                                   1,226         1,160             66             5.7 %
Global average rig count                        3,545         3,396            149             4.4 %
Commodity prices (average of daily U.S.
dollar prices per unit during
period)(2):
West Texas Intermediate Cushing, OK
crude spot price per barrel in U.S.
dollars                                    $    96.12     $   95.39     $     0.73             0.8 %
Henry Hub natural gas spot price per
MMBtu in U.S. dollars                      $     2.54     $    4.22     $    (1.68 )         (39.8 )%
Twelve-month futures strip price (U.S.
dollar amount at period end)(2):
West Texas Intermediate Cushing, OK
crude oil contract (per barrel)            $    93.54     $   80.26     $    13.28            16.5 %
Henry Hub Natural Gas contract (per
MMBtu)                                     $     3.74     $    4.11     $    (0.37 )          (9.0 )%

(1) Based on average monthly rig count data from Baker Hughes
(2) Source: Bloomberg

The year-to-date average number of worldwide operating rigs increased slightly from the same period in the prior year but has shown a steady decline since the beginning of 2012. This decrease is largely driven by activity levels in Canada. Increased U.S. activity levels accounted for almost two-thirds of the average global rig count increase during the first nine months of 2012 as compared to the first nine months of 2011.

Crude oil prices (West Texas Intermediate, Cushing, OK) during the first nine months of 2012 remained above $90 per barrel for most of the period before . . .

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