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CAM > SEC Filings for CAM > Form 10-Q on 29-Apr-2013All Recent SEC Filings

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Form 10-Q for CAMERON INTERNATIONAL CORP


29-Apr-2013

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 punitive liability remaining from 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.


FIRST QUARTER 2013 COMPARED TO FIRST QUARTER 2012

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
                                                   March 31,                Increase (Decrease)
                                              2013           2012          Amount             %
Drilling activity (average number of
working rigs during period)(1):
United States                                   1,758          1,991           (233 )         (11.7 )%
Canada                                            535            591            (56 )          (9.5 )%
Rest of world                                   1,274          1,189             85             7.1 %
Global average rig count                        3,567          3,771           (204 )          (5.4 )%
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                                    $    94.30      $  102.99     $    (8.69 )          (8.4 )%
Henry Hub natural gas spot price per
MMBtu in U.S. dollars                      $     3.47      $    2.43     $     1.04            42.8 %
Twelve-month futures strip price (U.S.
dollar amount at period end)(2):
West Texas Intermediate Cushing, OK
crude oil contract (per barrel)            $    96.26      $  104.63     $    (8.37 )          (8.0 )%
Henry Hub Natural Gas contract (per
MMBtu)                                     $     4.20      $    2.80     $     1.40            50.0 %
Contracted drillships and semi
submersibles by location at
period-end(3):
U.S. Gulf of Mexico                                39             37              2             5.4 %
Central and South America                          83             80              3             3.8 %
Northwestern Europe                                47             44              3             6.8 %
West Africa                                        32             35             (3 )          (8.6 )%
Southeast Asia and Australia                       22             41            (19 )         (46.3 )%
Other                                              28             34             (6 )         (17.6 )%
   Total                                   $      251      $     271     $      (20 )          (7.4 )%

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

The decrease in average worldwide operating rigs during the first quarter of 2013 as compared to the first quarter of 2012 was due to declining North American activity levels largely reflecting the recent depressed price levels for natural gas. The average number of rigs drilling for gas was down nearly 42% in the United States and almost 18% in Canada in the first quarter of 2013 as compared to the first quarter of 2012. This impact was partially offset by a nearly 3% increase in the average number of North American rigs drilling for oil.

Crude oil prices (West Texas Intermediate, Cushing, OK) were fairly consistent throughout much of the first quarter of 2013 reaching a high of $97.94 per barrel at the end of January before closing the period at $97.23 per barrel. On average, crude oil prices were 8% lower during the first quarter of 2013 as compared to the first quarter of 2012. The twelve month futures price for crude oil at March 31, 2013 was relatively flat compared to spot prices near the end of the quarter.

Natural gas (Henry Hub) prices continued to trend upward during the first quarter of 2013 reaching their highest levels since September 2011, closing at $4.10 per MMBtu. On average, prices during the first quarter of 2013 were up 43% as compared to the same period in 2012. The 12-month futures strip price for natural gas at March 31, 2013 was $4.20 per MMBtu, 50% above the spot price at March 31, 2012.


The relatively low price levels for natural gas has negatively affected gas drilling activity levels in North America and recent order rates for certain of the Company's products, in particular distributed valves that serve this market. Continued low natural gas prices combined with declining oil prices and the lack of recovery in the North American rig count may have a further adverse impact on the Company's North American operations during the year.

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 observable 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 2013 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 March 31, 2013 was $1.9 billion, nearly 45% of which was allocated to the Company's 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 improvements to recent results. This business has in the past and continues to experience certain production inefficiencies. While profitability began to improve in late 2012, the Company expects further improvements over time. If the financial performance of the CPS business does not continue to improve, a future evaluation could indicate that an impairment of goodwill might be necessary. Goodwill associated with the CPS business was approximately $572.5 million at March 31, 2013 ($573.0 million at December 31, 2012).

Consolidated Results

Net income for the first quarter of 2013 totaled $148.3 million, or $0.60 per diluted share, compared to net income for the first quarter of 2012 of $134.0 million, or $0.54 per diluted share. Included in the first quarter 2013 results were charges of $0.10 per diluted share, primarily associated with:

• formation costs for the OneSubsea™ joint venture, which is described further in Note 2 of the Notes to Consolidated Condensed Financial Statements,

• the impact of the devaluation of the Venezuelan bolivar during the quarter, and

• changes in the market values of certain foreign currency derivatives which have not been designated as hedges, as well as certain other costs described in more detail below.

Absent these costs, diluted earnings per share would have increased nearly 30% as compared to the first quarter of 2012.

Total revenues for the Company increased $313.4 million, or 17.4%, on the strength of higher sales in each of the Company's business segments during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.

• DPS segment revenues increased 21.8% in the first quarter of 2013, accounting for over 70% of the total revenue increase, mainly as a result of double-digit sales increases in the Drilling and Surface Systems businesses.

• PCS segment revenues were up 20.7% in the first quarter of 2013 due to increased shipments of centrifugal compression equipment and higher project activity involving custom process systems.

• Revenues in the V&M segment grew 6.2% largely as a result of increased pipeline construction project activity levels.


As a percent of revenues, cost of sales (exclusive of depreciation and amortization) decreased from 71.0% during the first quarter of 2012 to 70.6% for the first quarter of 2013, mainly as a result of a mix shift involving increased DPS segment revenues and better margins in the V&M business.

Selling and administrative expenses increased $42.7 million, or 15.7%, during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.

• Selling and administrative expenses were 14.8% of revenues for the first quarter of 2013 as compared to 15.0% for the first quarter of 2012.

• Nearly 95% of the dollar increase was due to higher employee-related costs as a result of increased headcount, mainly in the DPS and V&M segments, and higher business activity volumes.

Depreciation and amortization expense totaled $70.0 million for the first quarter of 2013 as compared to $59.5 million during the first quarter of 2012, an increase of $10.5 million. The increase was due mainly to higher depreciation expense as a result of recent increased levels of capital spending and the impact of newly acquired businesses.

Net interest increased $3.1 million, from $22.7 million during the first quarter of 2012 to $25.8 million during the first quarter of 2013, mainly as a result of $500.0 million of new senior notes issued by the Company in May 2012.

Other costs totaled $30.8 million for the three months ended March 31, 2013 as compared to a net credit of $1.5 million for the three months ended March 31, 2012, an increase of $32.3 million. See Note 3 of the Notes to Consolidated Condensed Financial Statements for further information on the nature of these items.

The effective income tax rate for the first three months of 2013 was 18.9% as compared to 22.0% for the first three months of 2012. The decline in the tax rate was mainly due to recognition in the first quarter of 2013 of benefits associated with newly enacted tax legislation in the United States and Italy.

Segment Results

DPS Segment -

                                             Three Months Ended
                                                  March 31,                Increase (Decrease)
($ in millions)                              2013          2012              $                %

Revenues                                   $ 1,269.0     $ 1,042.1     $      226.9           21.8 %
Income before income taxes                 $   154.4     $   135.3     $       19.1           14.1 %
Income before income taxes as a percent
of revenues                                     12.2 %        13.0 %            N/A           (0.8 )%

Orders                                     $ 2,743.0     $ 1,689.5     $    1,053.5           62.4 %
Backlog (at period-end)                    $ 7,970.7     $ 4,477.3     $    3,493.4           78.0 %


Revenues

Newly acquired businesses accounted for approximately 31% of the total change in revenues from the first quarter of 2012. Absent this effect,

• sales of surface equipment increased nearly 31%, largely as a result of higher shipment and aftermarket activity levels, mainly in North America, the Middle East and the North Sea,

• drilling equipment revenues were up almost 9%, primarily related to higher project activity levels and increased customer demand for spares and repair services, and

• subsea equipment sales rose 6% as a result of increased demand for new equipment and higher project activity levels in the Gulf of Mexico and West Africa.

Income before income taxes as a percent of revenues

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

• a 0.5 percentage-point increase in the ratio of cost of sales to revenues resulting mainly from lower drilling margins which have been negatively impacted by certain newly acquired businesses, and

• a 0.2 percentage-point increase in the ratio of selling and administrative expense to revenues mainly as a result of higher employee-related costs due to increased headcount and higher business activity volumes.

Orders

Excluding the impact of newly acquired businesses, total segment orders increased nearly 57% in the first quarter of 2013 as compared to the same period last year. This growth was primarily attributable to:

• a 142% increase in subsea orders, mainly as a result of an award received during the first quarter of 2013 from Petrobras for subsea trees and associated equipment for use in Pre- and Post-Salt basins offshore Brazil, as well as a large booking in the same period to supply subsea production systems to a project offshore Nigeria, and

• a 65% increase in orders for surface equipment due to higher activity levels in most major regions of the world, with increased demand from customers in Iraq and Saudi Arabia accounting for the majority of the improvement.

Partially offsetting these increases was an 18% drop in orders for drilling equipment reflecting the high level of new major project awards received in the first quarter of 2012, which did not reoccur at the same levels during the first quarter of 2013.

Backlog (at period-end)

Higher drilling and subsea equipment backlog levels accounted for approximately 90% of the total increase in DPS segment backlog from March 31, 2012 to March 31, 2013. Drilling equipment backlog more than doubled during the period mainly as a result of major new rig construction project awards and higher aftermarket activity levels throughout much of 2012. The strong level of subsea bookings during the first quarter of 2013, as described above, largely contributed to a 56% increase in subsea equipment backlog at March 31, 2013 as compared to the same period in the prior year.


V&M Segment -

                                             Three Months Ended
                                                  March 31,                Increase (Decrease)
($ in millions)                              2013          2012              $                %

Revenues                                   $   521.5     $   491.2     $       30.3            6.2 %
Income before income taxes                 $   113.4     $    92.6     $       20.8           22.5 %
Income before income taxes as a percent
of revenues                                     21.7 %        18.9 %            N/A            2.8 %

Orders                                     $   538.5     $   528.0     $       10.5            2.0 %
Backlog (at period-end)                    $ 1,083.5     $ 1,192.0     $     (108.5 )         (9.1 )%

Revenues

Over 50% of the increase in segment sales was attributable to an increase in engineered valves due to higher project volumes and timing of shipments when compared to the same period in 2012.

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 attributable to:

• a 4.6 percentage-point decrease in the ratio of cost of sales to revenues resulting from a favorable mix change related to project shipments and an increase in engineered valve product line margins, partially offset by:

• a 1.9 percentage-point increase in the ratio of selling and administrative costs to revenue due to higher employee-related costs.

Orders

Overall, total segment orders increased modestly when compared to the same period last year. Most of the change was attributable to a 9% increase in distributed valve orders as distributors began to replenish low levels of inventory from year end.

Backlog (at period-end)

Backlog levels for the V&M segment decreased 9% from March 31, 2012 with
distributed valves accounting for nearly three-fourths of the decrease as a
result of the record high backlog levels in the same period of the prior year.

PCS Segment -

                                              Three Months Ended
                                                  March 31,                Increase (Decrease)
($ in millions)                               2013          2012             $                %

Revenues                                   $    327.2     $   271.0     $      56.2           20.7 %
Income before income taxes                 $     22.0     $    10.6     $      11.4          107.5 %
Income before income taxes as a percent
of revenues                                       6.7 %         3.9 %           N/A            2.8 %

Orders                                     $    352.0     $   352.0     $         -              - %
Backlog (at period-end)                    $    982.8     $ 1,097.2     $    (114.4 )        (10.4 )%


Revenues

The increase in revenues was due primarily to:

• a 61% increase in sales of centrifugal compression equipment, mainly reflecting large multi-unit shipments of engineered process gas equipment to customers in Russia and the United States, as well as higher demand for air separation equipment, and

• a 40% increase in custom process systems revenues due to higher project activity levels.

These increases were partially offset by a 20% decline in sales of reciprocating compression equipment during the first quarter of 2013 due to a slowdown in international markets.

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:

• a 3.7 percentage-point decrease in the ratio of selling and administrative costs to revenues resulting mainly from lower employee-related costs year-over-year in relation to a nearly 21% increase in revenues for the same period, and

• a 0.7 percentage-point decrease in the ratio of depreciation and amortization expense to revenues as a result of lower depreciation and amortization expense from recent curtailed levels of capital spending in relation to higher revenues, as mentioned above.

These improvements in the ratio of income before income taxes as a percent of revenues were partially offset by a 1.6 percentage-point increase in the ratio of cost of sales to revenues due mainly to lower reciprocating compression equipment margins as a result of product mix and higher costs, the impact of which was not fully offset by better margins on international shipments of engineered centrifugal compression equipment.

Orders

A 22% increase in orders for process systems equipment, mainly resulting from higher international demand during the first quarter of 2013 as compared to the first quarter of 2012, was completely offset by:

• a 25% decline in orders for reciprocating compression equipment as a result of large project awards received in the first quarter of 2012 that did not reoccur in the first quarter of 2013, and

• a 7% decline in centrifugal compression equipment orders due to weaker demand for new engineered gas processing units.

Backlog (at period-end)

Backlog at March 31, 2013 declined from the same period last year in all major product lines, except new plant air equipment, as a result of weaker recent order rates which did not keep up with shipment and manufacturing activity levels.

Corporate Segment -

The $40.2 million increase in the loss before income taxes in the Corporate segment during the first quarter of 2013 as compared to the first quarter of 2012 (see Note 9 of the Notes to Consolidated Condensed Financial Statements) was due primarily to (i) a $32.3 million increase in other costs and (ii) a $3.1 million increase in net interest, both of which are described above under "Consolidated Results".


Liquidity and Capital Resources

Consolidated Condensed Statements of Cash Flows

During the first three months of 2013, net cash used for operations totaled $22.7 million, a decrease of $181.1 million from the $203.8 million of cash used from operations during the first three months of 2012. Most of the decrease was due to lower cash needs for working capital in the first quarter of 2013 as compared to the same period last year and the impact of a net cash payment of $82.5 million made in the first quarter of 2012 to BP Exploration and Production Inc. in connection with an indemnity settlement reached in late 2011.

Cash totaling $254.8 million was used to increase working capital during the first three months of 2013 compared to $397.8 million during the first three months of 2012, a decrease of $143.0 million. During the first three months of 2013, $215.5 million of cash was used to build inventory levels, primarily in the DPS segment, in order to meet the demands from increased bookings and activity levels. The timing of payments to third parties and employee incentive payouts made in the first quarter of 2013 resulted in a use of cash totaling $204.5 million for the period. These decreases were partially offset by $165.2 million of receivable collections as balances declined from December 31, 2012 levels reflecting seasonally higher fourth quarter sales activity as compared to the first quarter of 2013.

Cash used for investing activities increased $32.8 million, from $59.6 million during the first three months of 2012 to $92.4 million during the first three months of 2013. During the first three months of 2013, the majority of the cash use was for capital expenditures totaling $83.7 million. In the same period of 2012, the Company paid $61.5 million for an acquisition and incurred $86.7 million for capital expenditures, which was partially offset by the transfer of $78.8 million from short-term investments to cash and cash equivalents.

Net cash provided by financing activities totaled $29.9 million for the first three months of 2013, mainly due to an increase in international short-term borrowings of $18.5 million and proceeds from stock option exercises, net of tax, totaling $22.2 million. Treasury shares issued in satisfaction of stock option exercises and vesting of restricted stock units during the three months ended March 31, 2013 totaled 1,313,132 shares. The Company also purchased 613,453 treasury shares at a total cash cost of $32.1 million.

Future liquidity requirements

At March 31, 2013, the Company had $1.6 billion of cash, cash equivalents and short-term investments, approximately 52% of which were located in the United States. Total debt at March 31, 2012 was nearly $2.1 billion, most of which was in the United States. Excluding capital leases, nearly $556 million of the debt obligations have maturities within the next three-year period. The remainder of the Company's long-term debt is due in varying amounts between 2018 and 2041.

The Company's backlog is at a record level, up almost 17% from December 31, 2012, and first quarter 2013 orders were more than 5% higher than orders in the first quarter of 2012. The Company views its backlog of unfilled orders, current order rates, current rig count levels and current and future expected oil and gas prices to be, in varying degrees, leading indicators of and factors in determining its estimates of future revenues, cash flows and profitability levels. Information regarding actual first quarter 2013 and 2012 average rig count and commodity price levels and forward-looking twelve-month market-traded futures prices for crude oil and natural gas are shown in more detail under the caption "Recent Market Conditions" above. A more detailed discussion of orders and backlog by segment may be found under "First Quarter 2013 Compared to First Quarter 2012 - Segment Results" above. As a result of these and other factors, the Company currently anticipates further growth in consolidated orders, backlog and revenues during the remainder of 2013, although certain shorter cycle businesses may be negatively impacted in the near term by the recent weakening in activity levels in certain regions of North America and economic uncertainty in various other parts of the world. This growth is also expected to lead to increased needs for the use of cash for capital spending on new equipment and . . .

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