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.
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 semissemi-submersibles under contract at the end of each period follows:
As a percent of revenues, cost of sales (exclusive of depreciation and amortization) increaseddecreased from 70.9%72.6% during the secondfirst quarter of 20132014 to 71.7%70.7% for the secondfirst quarter of 2014,2015, mainly as a result of higher costs in relation to revenuesbetter project margins in the DPS segmentSubsea and Drilling segments. Comments regarding margins in the Management's Discussion and Analysis of Financial Condition and Results of Operations refer to Revenues minus Cost of Sales (exclusive of depreciation and amortization) as described further below under "Segment Results".shown separately on the Company's Consolidated Condensed Statements of Comprehensive Income for each of the three-month periods ended March 31, 2015 and 2014.
Orders
Overall, total segment orders were down modestlyOrders for the first three months of 2015 reflected a significant decline when compared to the same period last year. Project timing delays contributed to a 19% decrease in engineered valve orders. Mostly offsetting this decline was a 28% improvement in distributed valve orders reflecting higherfirst quarter of 2014. Lower North America upstream activity levels and high distributor inventory levels reduced demand for valve and measurement products. Orders for services increased in North America.the first quarter of 2015 as compared to first quarter of 2014, primarily due to strong Middle East customer operating expenditures on maintenance activities and Asia Pacific customer mid-stream commissioning activities.
Backlog (at period-end)
Backlog levels for the V&M segment decreased slightly from June 30, 2013,March 31, 2014 to March 31, 2015, as recent order rates for new engineeredcustom valve and process valvesmeasurement products have not kept uppace with recent deliveries. These decreases were partially offset by strong demand for distributed valves and measurement products reflecting continued strength in the North American market.
PCS Segment –
| | Three Months Ended June 30, | | | Increase (Decrease) | |
| ($ in millions) | | 2014(1) | | | 2013(1) | | | $ | | | | % | |
| | | | | | | | | | | | | |
| Revenues | | $ | 202 | | | $ | 237 | | | $ | (35 | ) | | | (14.8 | )% |
| Income from continuing operations before income taxes | | $ | 13 | | | $ | 17 | | | $ | (4 | ) | | | (23.5 | )% |
| Income from continuing operations before income taxes as a percent of revenues | | | 6.4 | % | | | 7.2 | % | | | N/A | | | | (0.8 | )% |
| | | | | | | | | | | | | | | | |
| Orders | | $ | 229 | | | $ | 212 | | | $ | 17 | | | | 8.0 | % |
| Backlog (at period-end) | | $ | 908 | | | $ | 832 | | | $ | 76 | | | | 9.1 | % |
(1)Excluding discontinued operations
Revenues
The revenue decrease in the PCS segment was due primarily to:
an 18% decrease in custom process systems revenues largely as a result of the timing of manufacturing activity on large projects,
a 7% decrease in centrifugal compression revenues mainly due to declines in deliveries of plant air equipment and aftermarket revenues as a result of recent weak order rates, and
a 4% decline in deliveries of wellhead and midstream processing equipment due to weak demand.
Income from continuing operations before income taxes as a percent of revenuesCorporate Expenses
The decreaseCorporate expenses were $23 million for the first quarter of 2015, a decline of $14 million from $37 million in the ratiofirst quarter of income from continuing operations before income taxes as a percent of revenues2014. The decrease was due primarily to a 1.1 percentage-point increase in the ratio of depreciationlower employee compensation costs and amortization expense to revenues as a result of higher depreciation and amortization expense during the second quarter of 2014 in relation to lower revenues for the period, as mentioned above. Depreciation and amortization increased across each of the businesses mainly due to increased capital spending in recent periods.
Orders
The increase in segment orders was almost entirely attributable to a 46% increase in demand for wellhead and midstream processing equipment, mainly related to a large award for a new cryogenic gas processing system.
Backlog (at period-end)
Overall segment backlog was up 9% at June 30, 2014 as compared to June 30, 2013, as a 33% increase in backlog in the custom process systems business, largely resulting from a $250 million award received in the fourth quarter of 2013 for equipment to be provided for a gas processing facility in Malaysia, was partially offset by a 19% decline in backlog for centrifugal compression equipment, due to recent weak order rates for new plant air, air separation and engineered air units.
Corporate Segment –
The $53 million decrease in the loss from continuing operations before income taxes in the Corporate segment during the second quarter of 2014 as compared to the second quarter of 2013 (see Note 10 of the Notes to Consolidated Condensed Financial Statements) was due mainly to:
a $39 million decrease in other costs, net of credits, as described further in Note 3 of the Notes to Consolidated Condensed Financial Statements, and
a $12 million decrease in selling and administrative expenses, mainly reflecting the effects of cost control efforts put in place in 2014 which have lowered employee-related costs, including travel, and information technology and other facility costs.
SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO SIX MONTHS ENDED JUNE 30, 2013
Market Conditions
Information related to drilling activity and certain commodity spot prices during the first six months of each period follows:
| | Six Months Ended June 30, | | | Increase | |
| | 2014 | | | 2013 | | | Amount | | | % | |
Drilling activity (average number of working rigs during period)(1): | | | | | | | | | | | | |
| United States | | | 1,816 | | | | 1,760 | | | | 56 | | | | 3.2 | % |
| Canada | | | 364 | | | | 346 | | | | 18 | | | | 5.2 | % |
| Rest of world | | | 1,341 | | | | 1,290 | | | | 51 | | | | 4.0 | % |
| Global average rig count | | | 3,521 | | | | 3,396 | | | | 125 | | | | 3.7 | % |
| | | | | | | | | | | | | | | | |
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 | | $ | 100.89 | | | $ | 94.22 | | | $ | 6.67 | | | | 7.1 | % |
| Henry Hub natural gas spot price per MMBtu in U.S. dollars | | $ | 4.95 | | | $ | 3.76 | | | $ | 1.19 | | | | 31.6 | % |
(1)Based on average monthly rig count data from Baker Hughes
(2)Source: Bloomberg
The increase in average worldwide operating rigs during the first six months of 2014 as compared to the first six months of 2013 was driven by higher North American oil drilling activity and higher foreign activity primarily in the Middle East and Africa. Despite the improvement in natural gas pricing, the challenging economics associated with horizontal shale development drilling at current prices continues to constrain the overall rig market. The average number of rigs drilling for gas was flat in North America in the first half of 2014 as compared to the first half of 2013.
Crude oil prices (West Texas Intermediate, Cushing, OK) continued to trend upward throughout much of the first half of 2014 reaching a high of $107.26 per barrel in mid-June before closing the period at $105.37 per barrel. On average, crude oil prices were 7% higher during the first half of 2014 as compared to the first half of 2013.
In early February 2014, natural gas (Henry Hub) prices reached their highest levels since September 2011, before leveling off to close at $4.41 per MMBtu at June 30, 2014. On average, prices during the first half of 2014 were up 32% as compared to the same period in 2013.
Consolidated Results
Net income attributable to Cameron stockholders for the six months ended June 30, 2014 totaled $332 million, compared to $289 million for the first six months of 2013. Earnings from continuing operations per diluted share totaled $1.54 for the first six months of 2014, compared to $1.14 per diluted share for the same period in 2013. Included in the results for the six months ended June 30, 2014 were charges, net of certain gains, totaling $0.19 per diluted share, primarily associated with:
a goodwill impairment charge related to the PSE business and an impairment of certain intangible assets,
a gain from remeasurement of a prior interest in an equity method investment, and
severance, restructuring, integration and other costs, net of certain gains.
The results for the first six months of 2013 included after-tax charges of $0.31 per share, primarily related to formation costs for OneSubsea, including additional income tax expense incurred in connection with the formation, as well as currency devaluation, severance, restructuring and other costs.
Absent these costs in both periods, diluted earnings from continuing operations per share would have increased nearly 19% as compared to the first half of 2013.
Total revenues for the Company increased $802 million, or 18.8%, during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. Nearly 34% of the increase was attributable to businesses acquired during the last twelve months with the remaining increase reflecting higher revenues in each major product line in the DPS segment. Revenues in the V&M segment were down 3% compared to the same period last year while PCS segment revenues, excluding discontinued operations, were down 14%.
As a percent of revenues, cost of sales (exclusive of depreciation and amortization) were 72.1% for the first six months of 2014 as compared to 70.7% for the first six months of 2013. The increase was mainly the result of higher costs in relation to revenues in the DPS and PCS segments as described further below under "Segment Results".
Selling and administrative expenses increased $57 million, or 9.2%, during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. This increase was primarily due to higher business activity levels in the DPS segment, along with the impact of additional costs from newly acquired businesses. Selling and administrative expenses were 13.3% of revenues for the first six months of 2014, down from 14.5% for the same period in 2013, reflecting the impact of cost control efforts initiated in 2014.on other governance activities.
Depreciation and amortization expense totaled $177 million for the six months ended June 30, 2014 as compared to $135 million for the six months ended June 30, 2013, an increase of $42 million. The increase was due mainly to higher depreciation expense as a result of recent increased levels of capital spending and the impact of additional depreciation and acquired intangible amortization expense associated mainly with businesses acquired from Schlumberger in connection with the formation of OneSubsea.
Net interest increased $11 million, from $51 million during the first half of 2013 to $62 million during the first half of 2014, mainly resulting from additional interest associated with $750 million of new senior notes issued by the Company in December 2013.
Other costs, net of credits, totaled $44 million for the six months ended June 30, 2014 as compared to $66 million for the six months ended June 30, 2013, a decrease of $22 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 six months of 2014 was 25.1% as compared to 25.6% for the first six months of 2013. The components of the effective tax rates for both periods were as follows (dollars in millions):
| | Six Months Ended June 30, | |
| | 2014 | | | 2013 | |
| | Tax Provision | | | Tax Rate | | | Tax Provision | | | Tax Rate | |
| | | | | | | | | | | | |
| Forecasted tax expense by jurisdiction | | $ | 109 | | | | 24.0 | % | | $ | 91 | | | | 23.8 | % |
| Adjustments to income tax provision: | | | | | | | | | | | | | | | | |
| Recognition of certain historical tax benefits as prior uncertainty regarding those benefits has been resolved | | | – | | | | – | | | | (1 | ) | | | (0.1 | ) |
| Tax effect of goodwill impairment | | | 10 | | | | 2.1 | | | | – | | | | – | |
| Finalization of prior year returns | | | (4 | ) | | | (0.9 | ) | | | 9 | | | | 2.4 | |
| Tax effects of changes in legislation | | | – | | | | – | | | | (7 | ) | | | (1.9 | ) |
| Changes in valuation allowances | | | – | | | | – | | | | 5 | | | | 1.4 | |
| Accrual adjustments and other | | | (1 | ) | | | (0.1 | ) | | | – | | | | – | |
| Tax provision | | $ | 114 | | | | 25.1 | % | | $ | 97 | | | | 25.6 | % |
Segment Results
DPS Segment –
| | Six Months Ended June 30, | | | Increase (Decrease) | |
| ($ in millions) | | 2014 | | | 2013 | | | $ | | | | % | |
| | | | | | | | | | | | | |
| Revenues | | $ | 3,608 | | | $ | 2,707 | | | $ | 901 | | | | 33.3 | % |
| Income from continuing operations before income taxes | | $ | 418 | | | $ | 350 | | | $ | 68 | | | | 19.4 | % |
Income from continuing operations before income taxes as a percent of revenues | | | 11.6 | % | | | 12.9 | % | | | N/A | | | | (1.3 | )% |
| | | | | | | | | | | | | | | | |
| Orders | | $ | 3,449 | | | $ | 4,246 | | | $ | (797 | ) | | | (18.8 | )% |
Revenues
The increase in revenues was due to:
an increase of 47% in subsea equipment revenues, over two-thirds of which was due to businesses acquired during the last twelve months, along with higher revenues associated with a large project offshore West Africa, higher project activity levels in the Europe/Africa region and increased aftermarket sales,
an increase of 37% in drilling equipment revenues, primarily related to increased shipments associated with higher beginning-of-the-year backlog levels and production efficiency improvements, and
growth of 16% in surface equipment revenues, largely as a result of increased activity levels in unconventional resource regions of North America, as well as increased deliveries to customers operating in the North Sea and the impact of businesses acquired during the last twelve months.
Income from continuing operations before income taxes as a percent of revenues
The decrease in the ratio of income from continuing operations before income taxes as a percent of revenues was due primarily to a 1.2 percentage-point increase in the ratio of cost of sales to revenues resulting mainly from:
a mix shift to a higher proportion of subsea project revenues, which inherently carry lower margins than non-project related businesses, during the first six months of 2014 as compared to the same period in 2013, and
lower margins in the drilling equipment product line due to higher project costs, as well as higher warranty costs.
Orders
The decrease in orders was primarily due to:
a 62% decrease in subsea orders, mainly as a result of an award received during the first six months 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, with no similar-sized large awards received in the first six months of 2014, and
a 5% decrease in orders for surface equipment due mainly to a slowdown in 2014 in the pace of orders from customers operating in Saudi Arabia and Iraq as compared to the record level of orders received in 2013. This decline was largely offset by continued strength in activity levels in the unconventional resource regions in North America.
Offsetting these decreases were nearly $200 million of orders added from businesses acquired during the last twelve months and a 9% increase in orders for drilling equipment reflecting several large rig project awards received early in 2014.
V&M Segment –
| | Six Months Ended June 30, | | | Decrease | |
| ($ in millions) | | 2014 | | | 2013 | | | $ | | | | % | |
| | | | | | | | | | | | | |
| Revenues | | $ | 1,028 | | | $ | 1,056 | | | $ | (28 | ) | | | (2.7 | )% |
| Income from continuing operations before income taxes | | $ | 201 | | | $ | 222 | | | $ | (21 | ) | | | (9.5 | )% |
Income from continuing operations before income taxes as a percent of revenues | | | 19.6 | % | | | 21.0 | % | | | N/A | | | | (1.4 | )% |
| | | | | | | | | | | | | | | | |
| Orders | | $ | 1,053 | | | $ | 1,062 | | | $ | (9 | ) | | | (0.8 | )% |
Revenues
Overall segment sales were down modestly for the six months ended June 30, 2014 when compared to the same period last year. Project slippage and recent order weakness for pipeline valves and the timing of valve deliveries due to various customer changes contributed to sales declines of 15% and 9% for engineered valves and process valves, respectively. Partially offsetting these declines were increases of 8% and 19% for sales of distributed valves and measurement products, respectively, as a result of current strength in the North American market.
Income before income taxes as a percent of revenues
The decrease in the ratio of income from continuing operations before income taxes as a percent of revenues was primarily attributable to a 0.5 percentage-point increase in the ratio of selling and administrative costs to revenues, due mainly to higher employee-related costs in relation to the decline in revenues, and a 0.8 percentage-point increase in the ratio of depreciation and amortization expense to revenues due to higher depreciation from higher recent capital spending levels mainly in the engineered valve product line and the impact of businesses acquired during the last twelve months.
Orders
Overall, total segment orders were relatively flat when compared to the same period last year. Project slippage contributed to declines of approximately 10% and 20% in both engineered and process valve orders, respectively. This was mostly offset by a 17% increase in orders for distributed valves resulting from higher North American activity levels.
PCS Segment –
| | Six Months Ended June 30, | | | Decrease | |
| ($ in millions) | | 2014 | | | 2013 | | | $ | | | | % | |
| | | | | | | | | | | | | |
| Revenues | | $ | 436 | | | $ | 507 | | | $ | (71 | ) | | | (14.0 | )% |
| Income from continuing operations before income taxes | | $ | 28 | | | $ | 37 | | | $ | (9 | ) | | | (24.3 | )% |
Income from continuing operations before income taxes as a percent of revenues | | | 6.4 | % | | | 7.3 | % | | | N/A | | | | (0.9 | )% |
| | | | | | | | | | | | | | | | |
| Orders | | $ | 416 | | | $ | 480 | | | $ | (64 | ) | | | (13.3 | )% |
Revenues
The decrease in revenues was due primarily to:
a 13% decline in custom process systems revenues largely as a result of the timing of manufacturing activity on large projects,
a 19% decline in wellhead and midstream processing equipment sales mainly to customers in North America, and
a 16% decrease in sales of centrifugal air separation and engineered air equipment due to recent weak order rates.
Income from continuing operations before income taxes as a percent of revenues
The decrease in the ratio of income before income taxes as a percent of revenues was primarily due to:
a 0.6 percentage-point increase in the ratio of cost of sales to revenues primarily due to lower product margins in the wellhead and midstream processing equipment product line, and
higher depreciation and amortization expense in relation to a decline in revenues, primarily due to increased capital spending in recent periods, the impact of which has been partially offset by an improvement in the ratio of selling and administrative costs to revenues due to the effect of cost control efforts implemented during 2014.
Orders
Overall, segment orders decreased across most major product lines. The decreases were primarily the result of:
a 15% decline in orders for custom process systems largely related to slippage of project timelines,
a 15% decline in centrifugal compression equipment orders driven mainly by a 45% decrease in demand for plant air machines, primarily from international customers, and
a 7% decline in demand for wellhead and midstream processing equipment, mainly from customers in North America.
Corporate Segment –
The $38 million decrease in the loss before income taxes in the Corporate segment during the six-month period ended June 30, 2014 as compared to the six-month period ended June 30, 2013 (see Note 10 of the Notes to Consolidated Condensed Financial Statements) was due primarily to:
a $22 million decrease in other costs, net of credits, as described further in Note 3 of the Notes to Consolidated Condensed Financial Statements, and
a $15 million decrease in selling and administrative expenses, mainly reflecting the effects of cost control efforts put in place in 2014 which have lowered employee-related costs, including travel, and certain facility costs.
Liquidity and Capital Resources
Consolidated Condensed Statements of Cash Flows
During the first sixthree months of 2014,2015, net cash provided byused for operations totaled $39$193 million, an increase of $32$19 million from the $7$174 million of cash provided byused for operations during the first sixthree months of 2013.2014.
Cash totaling $588$429 million was used to increase working capital during the first sixthree months of 2015 compared to $448 million used during the first three months of 2014, compared to $404 million during the first six monthsa decrease of 2013, an increase of $184$19 million. During the first sixthree months of 2014, increased collections due to the high level of year end receivables added $111 million in cash. Offsetting this was $2282015, $147 million of cash was generated from the net collection of receivables while $105 million was used to build inventory levels, primarily in the DPS segment, in order to meet the demands from the high backlog and activity levels in that business segment.levels. The timing of payments to third parties and annual employee incentive payouts made in the first halfquarter of 2014 also2015 contributed to a use of cash totaling $471 million for the period.
Cash provided by investing activities was $346 million forduring the first sixthree months of 2015 was $437 million, compared to $99 million used for investing activities during the first three months of 2014. In June 2014, the Company received $547 million of cash, net of transaction costs,Net proceeds from the sale of the ReciprocatingCentrifugal Compression business added $831 million in cash during the first quarter of 2015. During this same period, net cash of $311 was used to General Electric.increase the Company's short-term investment balances. Additionally, capital spending declined from $105 million during the first sixthree months of 2014 totaled $178 million. Capital needs in the Surface Systems and OneSubsea divisions of the DPS segment, along with continued development of the Company's enhanced business information systems, accountedto $89 million for the majorityfirst three months of the 2014 capital spending.2015, reflecting current market conditions.
Net cash used for financing activities totaled $677$396 million for the first sixthree months of 2015 compared to $564 million used during the first three months of 2014. Approximately $1.2 billion$182 million of cash was used to acquire nearly 204 million shares of treasury stock and $201 million of cash was used to repurchase outstanding commercial paper during the first halfquarter of 2014. In2015. During the first quarter of 2014, the BoardCompany acquired over 15 million shares of Directors authorized the Company to initiatetreasury shares at a commercial paper program with authority to issue up to $500cost of approximately $902 million in short-term debt. Under this program, the Companyand issued commercial paper totaling $263$325.0 million in principal amount for use in funding the treasury stock purchases referred to above and for other corporate needs. The average term of the outstanding commercial paper as of June 30, 2014 was approximately 62 days.amount. The Company currently anticipates being able to continue to issueissuing new commercial paper from time to fund or extend outstanding commercial paper as it comes duetime in the future for payment. During June 2014, the Company repaid $250 million of floating rate notes upon maturity and issued a total of $500 million of new senior notes split equally between 3- and 10-year maturities.general corporate needs.
Future liquidity requirements
At June 30, 2014,March 31, 2015, the Company had $1.6$1.7 billion of cash, cash equivalents and short-term investments. Approximately $493$525 million of the Company's cash, cash equivalents and short-term investments at June 30, 2014March 31, 2015 were in the OneSubsea venture. Dividends of available cash from OneSubsea to the venture partners 40% of which would go to Schlumberger, require approval of the OneSubsea Board of Directors prior to payment. On July 11, 2014, a dividend of €75 million was paid to the venture partners with Cameron's non-U.S. partnership receiving €45 million and Schlumberger receiving €30 million. Of the remaining cash, cash equivalents and short-term investments, not held by OneSubsea, $657nearly $446 million was located in the United States. Of this amount, approximately $253 million, which included a make-whole premium plus accrued interest, was used to redeem early the Company's $250 million principal amount of 1.6% Senior Notes on July 21, 2014.
Total debt at June 30, 2014March 31, 2015 was nearly $3.4$2.8 billion, most of which was in the United States. Excluding capital leases, approximately $1.0 billionnearly $517 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 July 2018 and December 2043.
Excluding discontinued operations, the Company's backlog decreased slightly$752 million or nearly 8% from December 31, 2013, mainly due to2014. Orders during the cancellationfirst quarter of a large drilling project award in2015 were down nearly 31% from the first quarter of 2014 totaling nearly $243 million, but was still at a near record high at June 30, 2014. Orders during the first six months of 2014 were down nearly 15% from the same period in 2013 due mainly to certain large subsea project awards receiveddecreased activity levels as a result of the significant decline in the first six months of 2013 that did not repeat during the half of 2014. The timing of such large project awards are inconsistent period over period.commodity prices which began in mid-2014. 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 2014first quarter 2015 and 20132014 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 captions "Marketcaption "Recent Market Conditions" above. A more detailed discussion of second quarter and year-to-date orders and June 30 backlog levels by segment may be found under "Segment"First Quarter 2015 Compared to First Quarter 2014 - Segment Results" for each period above. TheAs a result of these and other factors, the Company currently anticipates growthdeclines in consolidated orders, backlog and revenues during the second halfremainder of 2014 in relation2015 as compared to the same periodperiods in 2013. The Company also expects full year capital spending on new equipment and facilities to be between $450 million to $500 million for 2014, as compared to $520 million during 2013. The high backlog levels and expected growth however, may increase working capital needs in certain businesses in order in order to meet the increased customer demand.2014.
The Company believes, based on its current financial condition, existing backlog levels, which continue to be at significant levels, and current expectations for future market conditions, that it will be able to meet its short- and longer-term liquidity needs with existing cash, cash equivalents and short-term investments on hand, expected cash flow from future operating activities, and amounts available for borrowing under its $835 million five-year multi-currency Revolving Credit Facility, which maturesexpires on June 6, 2016, and its new three-year $750 million Revolving Credit Facility, described further in Note 8 of the Notes to Consolidated Condensed Financial Statements. Up to $200 million of this new facility may be used for letters of credit. The Company also has a bi-lateral $40 million facility with a third-party bank, expiring on February 2, 2015.April 11, 2017. At June 30, 2014,March 31, 2015, no amounts had been borrowed under the $835.0$835 million facility. Thefacility and the Company had issued letters of credit totaling $77$45 million under the new $750 million Revolving Credit Facility and $29 million under the $40 million bi-lateral facility, leaving $673a remaining amount of $705 million and $11 million, respectively, available for future use.
In addition,The Company also believes its existing financial condition and debt ratings, absent significant unanticipated negative developments, allow it the Company announced in January 2014 that it was exploring strategic alternatives for its Centrifugal Compression business.ability to be able to refinance debt maturing within the next three to five years with future long-term debt issuances.
The Company has an authorized stock repurchase program whereby the Company may purchase shares directly or indirectly by way of open market transactions or structured programs, including the use of derivatives, for the Company's own account or through commercial banks or financial institutions. The program, initiated in October 2011, has had a series of authorizations by the Board of Directors totaling $3.2 billion since inception. At June 30, 2014,March 31, 2015, the Company had remaining authority for future treasury stock purchases totaling approximately $456$298 million.
Factors That May Affect Financial Condition and Future Results
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 revenue, depends to a large extent upon the level of capital expenditures related to oil and gas exploration, development, production, processing and transmission. Declines, as well as anticipated declines, in oil and gas prices could negatively affect the level of these activities, or could result in the cancellation, modification or rescheduling of existing orders. For example, oil prices began declining during the third quarter of 2014, dropping nearly 56% for West Texas Intermediate crude from mid-year 2014 levels to under $48 per barrel as of March 31, 2015. Similarly, natural gas prices declined from an average of $5.16 per MMBtu during the first three months of 2014 to $2.62 per MMBtu at March 31, 2015. These declines have already begun to, and are expected to continue to, significantly affect exploration and production activity levels and, therefore, demand for the Company's products and services at least through the remainder of 2015. During the first quarter of 2015 there have been numerous deepwater projects deferred and deepwater rigs idled. In addition to a decline in future orders and revenues, the Company expects to incur additional costs as it seeks to adjust its commercial, manufacturing and support operations levels to meet expected future customer demand. See also the discussion in "Market Conditions" above for the first quarter of 2015 as compared to the first quarter of 2014.
Cancellation, downsizing or delays of orders in backlog are possible.
As described above, commodity prices have declined significantly since mid-2014 which has resulted in various oil and gas exploration and production companies announcing spending cuts or deferrals in their 2015 capital spending plans, as well as headcount reductions. At current price levels, certain projects, particularly those in deepwater environments and unconventional resource regions, may become uneconomical for the risk involved. Certain customers that are more highly leveraged may also experience concerns regarding future projected cash flows based on current price levels. These factors described above could result in existing orders in backlog being cancelled, downsized or future shipment dates may be delayed, all of which could further negatively impact the Company's future profitability.
At March 31, 2015, the Company's backlog was approximately $8.8 billion, down nearly 8% from December 31, 2014. An example of a cancellation of an existing order is the reversal of $243 million of backlog during the first quarter of 2014 as the result of a customer cancellation of a large drilling project award issued in 2012. Another example of a potential delay or downsizing of a previous award is the announcement by Chevron in late 2013 of the deferral of its Rosebank project, which was awarded in 2013 and currently accounts for $488 million of the Company's ending backlog at March 31, 2015, in order to work with its partners to improve the project's economics. Although the original contract remains in place, OneSubsea is currently working with Chevron on a revised scope for the project based on a new field layout design.
The inability of the Company to deliver its backlog or future orders on time could affect the Company's future sales and profitability and its relationships with its customers.
At June 30, 2014, the Company's backlog was approximately $11 billion, excluding discontinued operations. The ability to meet customer delivery schedules for thison the Company's existing backlog, as well as future orders, 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 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 future order rates and the timing of delivery of product currently in backlog. Failure to deliver equipment in accordance with expectations could negatively impact the market price performance
Portions of the Company's common stockbacklog for our Subsea and other publicly-traded financial instruments.Drilling segments are subject to heightened execution risk.
Expansion of the Company's offerings in the drilling market creates additional risks not previously present.
The Company's acquisitions of LeTourneau Technologies Drilling Systems, Inc. and the TTS Energy Division of TTS Group ASA (TTS) expanded the Company's portfolio of products and services available to customersCameron is involved in oil and gas drilling activities. These acquisitions brought large drilling rig construction projects not previously offered and a record backlog. As a result of both, the complexity of execution within this business has increased from that of the past. Also, the Company has recently struggled to increase production capacity to deliver its record backlog.
Large drilling rig projects are accounted for using accounting rules for production-type and construction-type contracts. In accordanceprovide customers with this guidance, the Company estimates the expected margin on these projects and recognizes this margin as units are completed. These projects (i) require significantly more engineering and project management expertise than are needed for projects involving the supply of drillingdeepwater stacks and associated equipment to customers, (ii) are larger in financial scopejackup complete drilling packages and, (iii) require longer lead times than many other projects involving the Company's Drilling Systems business. Additionally, unplanned difficulties in engineering and managing the construction of such major projects could result in cost overruns and financial penalties which could negatively impact the Company's margins and cash flow. Similar to subsea systems projects described below, a reduction in expected margins on these projects from such unplanned events would result in a cumulative adjustment to reduce margins previously recognized in the period a change in estimate is determined.
Execution of subsea systems projects exposes the Company to risks not present in its other businesses.
Cameron, through OneSubsea,our Subsea segment, is a significant participant in the subsea systems projects market. This market is different from mostSome of the Company's otherprojects for these markets since subsea systems projects are larger incarry heightened execution risk because of their scope and complexity, in terms of both technical and logistical requirements. SubseaSuch projects typically (i) may often involve long lead times, (ii) are larger in financial scope, (iii) 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, may require the development of new technology. TheAs a subset of its total backlog at March 31, 2015, the Company's OneSubsea business hasDrilling segment had projects fitting this risk profile that amounted to approximately $1.4 billion. As a subset of its total backlog ofat March 31, 2015, the Company's Subsea segment had projects fitting this risk profile that amounted to approximately $4 billion for subsea systems projects at June 30, 2014.$1.9 billion. To the extent the Company experiences unplanned difficulties in meeting the technical and/or delivery requirements of the projects, or has difficulty fully integrating the businesses contributed by Schlumberger to OneSubsea into its operations, the Company's earnings or liquidity could be negatively impacted. As the integration of the Schlumberger and Cameron businesses continues, issues may arise as we continue to refine the technologies and scale up the combined operations to meet customer demand. The Company accounts for its drilling and subsea projects, as it does its separation and drilling projects, using accounting rules for construction-type and production typeproduction-type contracts. 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 obtained, and the availability and costs of labor, materials and subcomponents. These factors can impact the accuracy of the Company's estimates and materially impact the Company's future period earnings. If the Company experiences cost overruns, the expected margin could decline. Were this to occur, in accordance with the accounting guidance, the Company would record a cumulative adjustment to reduce the margin previously recorded on the related project in the period a change in estimate is determined. SubseaDeepwater stack and jackup complete drilling packages and subsea systems projects accounted for approximately 14.9%14% and 12%, respectively, of total revenues in the first six months of 2014.quarter 2015 revenues.
As a designer, manufacturer, installer and servicer of oil and gas pressure control equipment, the Company may be subject to liability for personal injury, property damage and environmental contamination should such equipment fail to perform to specifications.
Cameron provides products and systems to customers involved in oil and gas exploration, development and production, as well as in certain other industrial markets. Some of the Company's equipment is designed to operate in high-temperature and/or high-pressure environments on land, on offshore platforms and on the seabed, and some equipment is designed for use in hydraulic fracturing operations. Cameron also provides aftermarket parts and repair services at numerous facilities located around the world, oras well as at customer sites for this and othertype of equipment. Because of applications to which the Company's products and services are put, particularly those involving the high temperature and/or pressure environments, a failure of such equipment, or a failure of our customer to maintain or operate the equipment properly, could cause damage to the equipment, damage to the property of customers and others, personal injury and environmental contamination, onshore or offshore, leading to claims against Cameron.
Certain of the Company's risk mitigation strategies may not be fully effective.
The Company relies on customer indemnifications and third-party insurance as part of its risk mitigation strategy. There is, however, an increasing reluctance of customers to provide what had been typical oilfield indemnifications for pollution, consequential losses, property damage, and personal injury and death, and a reluctance, even refusal, of counterparties to honor their contractual indemnity obligations when given. In addition, insurance companies may refuse to honor their policies.
An example of both is the Company's experience in the Deepwater Horizon matter. The Company's customer denied that it owed any indemnification under its contract with us, and when called on to participate in the Company's settlement with BP Exploration and Production Inc., one of the seven insurers refused to provide coverage. The Company subsequently sued its insurer and won a judgment for the full policy amount plus interest and costs, but the insurer continues to litigate the matter and has appealed the judgment.
The implementation of an upgraded business information system may disrupt the Company's operations or its system of internal controls.controls.
The Company has a project underway to upgrade its SAP business information systems worldwide. The first stage of this multi-year effort was completed at the beginning of the third quarter of 2011 with the deployment of the upgraded system for certain businesses withinto the Company's PCS segment. Certainprocess systems and compression businesses. Since then, other businesses began operating on the upgraded system during 2012.and business functions have been migrated in stages. As of December 2013,March 31, 2015, nearly all businesses within the V&M segment, were utilizing the upgraded system and, effective July 1, 2014; the Surface Systems division ofsegment, the DPS segment beganCompany's worldwide engineering and human resource functions, as well as other corporate office activities are now operating on the upgraded system. The Drilling Systemssegment is scheduled to be migrated in the third quarter of 2015 and the OneSubsea divisions of the DPSbusiness in 2016. The Drilling segment and the corporate office functions are expected to be migrated to the upgraded system during the remainder of 2014 and beyond, with completion anticipated in 2016. The DPS and V&M segmentsOneSubsea business are major contributors to the Company's consolidated revenues and income before income taxes.
As this system continues to be deployed throughout the Company, delays or difficulties may be encountered in effectively and efficiently processing transactions and conducting business operations, including project management, until such time as personnel are familiar with all appropriate aspects and capabilities of the upgraded systems.
The Company's operations and information systems are subject to cybersecurity risks.
Cameron continues to increase its dependence on digital technologies to conduct its operations. Many of the Company's files are digitized and more employees are working in almost paperless environments. Additionally, the hardware, network and software environments to operate SAP, the Company's main enterprise-wide operating system, have been outsourced to third parties. Other key software products used by the Company to conduct its operations either reside on servers in remote locations or are operated by the software vendors or other third parties for the Company's use as "Cloud-based" or "Web-based" applications. The Company has also outsourced certain information technology development, maintenance and support functions. As a result, the Company is exposed to potentially severe cyber incidents at both its internal locations and outside vendor locations that could result in a theft of intellectual property and/or disruption of its operations for an extended period of time resulting in the loss of critical data and in higher costs to correct and remedy the effects of such incidents, although no such material incidents have occurred to date.date to the Company's knowledge.
Fluctuations in 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 blowout preventers. These production facilities are located in the United Kingdom, Brazil, Romania, Italy, Norway and other European and Asian countries. To the extent the Company sells these products in U.S. dollars, the Company's profitability is eroded when the U.S. dollar weakens against the British pound, the euro, the Brazilian real and certain Asian currencies, including the Singapore dollar. Alternatively, profitability is enhanced when the U.S. dollar strengthens against these same currencies. For further information on the use of derivatives to mitigate certain currency exposures, see Item 3, "Quantitative and Qualitative Disclosures about Market Risk" below and Note 14 of the Notes to Consolidated Condensed Financial Statements.
The Company's operations expose it to risks of non-compliance with numerous countries' import and export laws and regulations, and with various nations' trade regulations including U.S. sanctions.
The Company's operations expose it to trade and import and export regulations in multiple jurisdictions. In addition to using "Centers of Excellence" for manufacturing products to be delivered around the world, the Company imports raw materials, semi-finished goods and finished products into many countries for use in country or for manufacturing and/or finishing for re-export and import into another country for use or further integration into equipment or systems. Most movement of raw materials, semi-finished or finished products by the Company involves exports and imports. As a result, compliance with multiple trade sanctions and embargoes and import and export laws and regulations poseposes a constant challenge and risk to the Company. The Company has received a number of inquiries from U.S. governmental agencies, including the U.S. Securities and Exchange Commission and the Office of Foreign Assets Control, regarding compliance with U.S. trade sanction and export control laws, the most recent of which was received in December 2012 and replied to by the Company in January 2013. The Company has undergone and will likely continue to undergo governmental audits to determine compliance with export and customs laws and regulations.
The United States and the European Union (EU) also recently imposed sanctions on various sectors of the Russian economy and on transactions with certain Russian nationals and entities. These sanctions may severely limit the amount of future business the Company does with customers involved in activities in Russia. As of March 31, 2015, approximately 1% of the Company's backlog from continuing operations related to future deliveries to customers doing business in Russia. Customer sales by the Company's continuing operations into Russia during the first quarter of 2015 totaled less than 1% of the Company's sales during the year. In addition, the sanctions of the U.S. and the EU are inconsistent and neither is, as yet, well defined, both of which factors increase the risk of an unintended violation.
The Company's operations expose it to political and economic risks and instability due to changes in economic conditions, civil unrest, foreign currency fluctuations, and other risks, such as local content requirements, inherent to international businesses.
The political and economic risks of doing business on a worldwide basis include the following:
| • | volatility in general economic, social and political conditions; |
• | the effects of civil unrest and sanctions imposed by the United States and other governments on transactions with various countries, such as Iran; |
| • | the effects of civil unrest and, in some cases, military action on the Company's business operations, customers and employees, such as that recently occurring in several countries in the Middle East, in Ukraine and in Venezuela; |
| • | exchange controls or other similar measures thatwhich result in restrictions on repatriation of capital and/or income, such as those involving the currencies of, and the Company's operations in, Angola and Nigeria; and |
| • | reductions in the number or capacity of qualified personnel. |
In recent months, civil unrest and military action have increased in Iraq which may impact the ability of that country to continue to produce and export oil at current levels. Such unrest may also jeopardize the Company's in-country investments and on-going business activities supporting Iraq's oil and gas production infrastructure. At June 30, 2014,March 31, 2015, less than 1% of the Company's backlog related to future deliveries to customers doing business in Iraq. Additionally, less than 1% of the Company's property, plant and equipment waswere located in Iraq and less than 1% of the Company's receivables were for sales into Iraq to multinational operators and to Iraqi drilling and production companies.Iraq. The Company is also evaluating its options under the force majeure clauses of each of the major contracts with its customers doing business in Iraq in the event the current situation in that country continues to deteriorate.
Cameron also has manufacturing and service operations that are essential parts of its business in other developing countries and volatile areas in Africa, Latin America Russia and other countries that were part of the Former Soviet Union, the Middle East, and Central and South East Asia. Recent increases in activity levels in certain of these regions have increased the Company's risk of identifying and hiring sufficient numbers of qualified personnel to meet increased customer demand in selected locations. The Company also purchases a large portion of its raw materials and components from a relatively small number of foreign suppliers in China, India and other developing countries. The ability of these suppliers to meet the Company's demand could be adversely affected by the factors described above.
In addition, customers in countries such as Angola and Nigeria increasingly are requiring the Company to accept payments in the local currencies of these countries. These currencies do not currently trade actively in the world's foreign exchange markets.
The Company also has variouscertain manufacturing and aftermarketservices operations in Venezuela that contributed $37 million inless than 1% of the Company's consolidated revenues during the first six monthsquarter of 2014.2015. The economy in Venezuela is highly inflationaryinflationary. As a result, the Company's operations in Venezuela are accounted for as having a U.S. dollar functional currency and becoming more regulated. Thesethe Company considers its earnings in Venezuela to be permanently reinvested. Because of the continuing economic turmoil in Venezuela and further statutory changes which impact exchange rates companies are allowed to use by the Venezuelan government when converting bolivars into dollars, Cameron recognized a gain of $4 million relating to the impact on its bolivar-denominated net liabilities of a devaluation of the Venezuelan currency from the official exchange rate used in the past to a market-based rate during the first quarter of 2015. The factors described above which led to the currency devaluation, along with recent civil unrest, create political and economic uncertainty with regard to theirthe impact on the Company's continued operations in this country.
The Venezuelan government has maintained currency controls and a fixed official exchange rate since February 2003. In February 2013, the Venezuelan government devalued its currency from 4.3 bolivars to the U.S. dollar to an official rate of 6.3 bolivars to the U.S. dollar. Since then, the Company has used the official rate of 6.3 bolivars to the U.S. dollar to remeasure non-functional currency transactions in its financial statements. Due to the highly inflationary status of the Venezuelan economy,Net assets associated with the Company's operations in Venezuela are accounted for as U.S. dollar functional currency entities. In addition, the Company considers its earnings in Venezuela to be permanently reinvested. In early 2014, Venezuelan government officials indicated that this official rate will increasingly be reserved only for settlement of U.S. dollar denominated obligations related to purchases of "essential goods and services." Through the end of the second quarter of 2014, Petroleos de Venezuela (PDVSA), the Company's primary customer, has continued to pay its U.S. dollar denominated obligations to the Company at the official rate. Recent events, however, create uncertainty as to whether this will continue. First, in January 2014, the Venezuelan government significantly expanded the use of the Supplementary Foreign Currency Administration System (SICAD) auction rate and indicated this rate (SICAD 1) would be used for certain transactions and activities. In February 2014, the Venezuelan government signed into law a plan to open a new exchange control mechanism (SICAD 2) which may be available to all entities for all transactions. At June 30, 2014, the published SICAD 1 rate was 10.6 bolivars to the U.S. dollar and the published SICAD 2 rate wasMarch 31, 2015 totaled approximately 49.98 bolivars to the U.S. dollar. Recently, Rafael Ramirez, the Venezuelan Vice President for the Economy and Oil Minister announced that the three exchange rates would progressively converge, with a new system involving a single unified rate that could be in place by the end of 2014. The Company is currently evaluating the impact of these changes on its business and is monitoring the payment practices of its primary customer to determine what effect there may be on its non-functional currency assets and liabilities. A foreign exchange loss during 2014 may ultimately result from this evaluation or from changes in the payment practices of the Company's primary customer.$59 million.
Increasingly, some of the Company's customers, particularly the national oil companies, have required a certain percentage, or an increased percentage, of local content in the products they buy directly or indirectly from the Company. This requires the Company to add to or expand manufacturing capabilities in certain countries that are presently without the necessary infrastructure or human resources in place to conduct business in a manner as typically done by Cameron. This increases the risk of untimely deliveries, cost overruns and defective products.
The Company's operations expose it to risks resulting from differing and/or increasing tax rates.
Economic conditions around the world have resulted in decreased tax revenues for many governments, which have led and could continue to lead to changes in tax laws in countries where the Company does business, including further changes in the United States. Changes in tax laws could have a negative impact on the Company's future results.
The Company's operations require it to deal with a variety of cultures, as well as agents and other intermediaries, exposing it to anti-corruption compliance risks.
Doing business on a worldwide basis necessarily involves exposing the Company and its operations to risks inherent in complying with the laws and regulations of a number of different nations. These laws and regulations include various anti-bribery and anti-corruption laws.
The Company does business and has operations in a number of developing countries that have relatively underdeveloped legal and regulatory systems compared to more developed countries. Several of these countries are generally perceived as presenting a higher than normal risk of corruption, or as having a culture in which requests for improper payments are not discouraged. Maintaining and administering an effective anti-bribery compliance program under the U.S. Foreign Corrupt Practices Act (FCPA), the United Kingdom's Bribery Act of 2010, and similar statutes of other nations, in these environments presentspresent greater challenges to the Company than is the case in other, more developed countries.
Additionally, the Company's business involves the use of agents and other intermediaries, such as customs clearance brokers, in these countries as well as others. As a result, the risk to the Company of compliance violations is increased because actions taken by any of them when attempting to conduct business on our behalf could be imputed to us by law enforcement authorities.
As an example, various employees and former employees of the Company's primary customer in Brazil are being investigated currently over allegations of bribery and other acts of corruption. This investigation, along with the current recessionary economic conditions in Brazil, is, at present, having a negative impact on future orders and growth prospects for the Company's operations in Brazil. Sales to customers in Brazil accounted for approximately 4% of the Company's consolidated revenues during the first quarter of 2015, as compared to nearly 7% during the first quarter of 2014.
The Company is subject to environmental, health and safety laws and regulations that expose the Company to potential liability and proposed new regulations that would restrict activities to which the Company currently provides equipment and services.
The Company's operations are subject to a variety of national and state, provincial 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.
The Company provides equipment and services to companies employing hydraulic fracturing or "fracking" and could be adversely impacted by additional regulations of this enhanced recovery technique.
Environmental concerns have been raised regarding the potential impact on underground water supplies of hydraulic fracturing which involves the pumping of water and certain chemicals under pressure into a well to break apart shale and other rock formations in order to increase the flow of oil and gas embedded in these formations. Recently,On March 20, 2015, the U.S. Interior Department's Bureau of Land Management (BLM) released a final rule regulating hydraulic fracturing activities on Federal and Indian lands. The final rule includes new well-bore integrity requirements, imposes standards for interim storage of recovered waste fluids, and requires notifications and waiting periods for key parts of the fracturing process, which could lead to delays in fracturing and/or drilling operations. The rule also mandates disclosure of the chemicals used in the process.
Additionally, on April 7, 2015, the U.S. Environmental Protection Agency (EPA) published a proposed rule that would prohibit the disposal of unconventional oil and natural gas wastewater at publicly owned treatment works.
A number of U.S. states have also proposed regulations regarding disclosure of chemicals used in fracking operations or have temporarily suspended issuance of permits for such operations. The State of New York implemented a statewide ban on hydraulic fracturing at the beginning of 2015 which limits natural gas production from a portion of the Marcellus Shale region. Additionally, the United States Environmental Protection Agency (EPA)EPA issued rules, which becomebecame effective in January 2015, that are designed to limit the release of volatile organic compounds, or pollutants, from natural gas wells that are hydraulically fractured. The EPA has published draft permitting guidance for oil and gas hydraulic fracturing activities using diesel fuels and is continuing to study whether the fracking process has any negative impact on underground water supplies. A draft of the final report on the results of the study is expected in 2014. Should these regulations, or additional regulations and bans by governments, continue to restrict or further curtail hydraulic fracturing activities, the Company's revenues and earnings could be negatively impacted.
Enacted and proposed climate protection regulations and legislation may impact the Company's operations or those of its customers.
The EPA has made a finding under the United States Clean Air Act that greenhouse gas emissions endanger public health and welfare and the EPA has enacted regulations requiring monitoring and reporting by certain facilities and companies of greenhouse gas emissions. In June 2014, the U.S. Supreme Court prohibited the EPA from being able to require limits on carbon dioxide and other heat trapping gases from sources that would otherwise not need an air pollution permit.
Also, in June 2014, the EPA, acting under President Obama's Climate Action Plan, proposed its Clean Power Plan, which would set U.S. state-by-state guidelines for power plants to meet by 2030 to cut their carbon emissions by 30% nationwide from 2005 levels. The guidelines are also intended to cut pollution, nitrogen oxides and sulfur dioxide by more than 25% during the same period. Under the Clean Power Plan, states are to develop plans to meet state-specific goals to reduce carbon pollution and submit those plans to the EPA by June 2016, with a later deadline provided under certain circumstances. While these proposed rules may hasten the switch from coal to cleaner burning fuels such as natural gas, the overall long-term economic impact of the plan is uncertain at this point.
Carbon emission reporting and reduction programs have also expanded in recent years at the state, regional and national levels with certain countries having already implemented various types of cap-and-trade programs aimed at reducing carbon emissions from companies that currently emit greenhouse gases.
To the extent the Company's customers are subject to these or other similar proposed or newly enacted laws and regulations, the Company is exposed to risks that the additional costs by customers to comply with such laws and regulations could impact their ability or desire to continue to operate at current or anticipated levels in certain jurisdictions, which could negatively impact their demand for the Company's products and services.
To the extent Cameron becomes subject to any of these or other similar proposed or newly enacted laws and regulations, the Company expects that its efforts to monitor, report and comply with such laws and regulations, and any related taxes imposed on companies by such programs, will increase the Company's cost of doing business in certain jurisdictions, including the United States, and may require expenditures on a number of its facilities and possibly on modifications of certain of its products.
The Company could also be impacted by new laws and regulations establishing cap-and-trade and those that might favor the increased use of non-fossil fuels, including nuclear, wind, solar and bio-fuels or that are designed to increase energy efficiency. If the proposed or newly executed laws have the effect of dampening demand for oil and gas production, they could lower spending by customers for the Company's products and services.
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 revenue, depends to a large extent upon the level of capital expenditures related to oil and gas exploration, development, production, processing and transmission. Declines, as well as anticipated declines, in oil and gas prices could negatively affect the level of these activities, or could result in the cancellation, modification or rescheduling of existing orders. As an example, natural gas spot prices in the United States declined during the first half of 2012 to less than $2 per MMBtu, the lowest level in the last decade. Although natural gas prices have subsequently increased, current rig count levels associated with dry gas extraction activities have not fully recovered to previous levels. This price decline negatively impacted 2012 order levels by certain of the Company's customers which affected the Company's 2012 and 2013 revenues and profitability. See also the discussion in "Market Conditions" above.
Environmental Remediation
The Company's worldwide operations are subject to domestic and international regulations with regard to air, soil and water quality as well as other environmental matters. The Company, through its environmental management systemHealth, Safety and activeEnvironmental (HSE) Management System and corporate third-party regulatory compliance audit program, believes it is in substantial compliance with these regulations.
The Company is heir to a number of older manufacturing plants that conducted operations in accordance with the standards of the time, but which have since changed. The Company has undertaken clean-up efforts at these sites and now conducts its business in accordance with today's standards. The Company's clean-up efforts have yielded limited releases of liability from regulators in some instances, and have allowed sites with no current operations to be sold. The Company conducts environmental due diligence prior to all new site acquisitions. For further information, refer to Note 13 of the Notes to Consolidated Condensed Financial Statements.
Environmental Sustainability
The Company has pursued environmental sustainability in a number of ways. Processes are monitored in an attempt to produce the least amount of waste. All of the waste disposal firms used by the Company are carefully selected in an attempt to prevent any future Superfund involvements. Actions are taken in an attempt to minimize the generation of hazardous wastes and to minimize air emissions. Recycling of process water is a common practice. Best management practices are used in an effort to prevent contamination of soil and ground water on the Company's sites.
Cameron has implemented a corporate "HSEHSE Management System" based onSystem that incorporates many of the principles of ISO 14001 and OHSAS 18001. The HSE Management System contains a set of corporate standards that are required to be implemented and verified by each business unit. Cameron has also implemented a corporate third-party regulatory compliance audit program to verify facility compliance with environmental, health and safety laws and regulations. The compliance program employs or uses independent third-party auditors to audit facilities on a regular basis specific to country, region, and local legal requirements. Audit reports are circulated to the senior management of the Company and to the appropriate business unit. The compliance program requires corrective and preventative actions be taken by a facility to remedy all findings of non-compliance which are tracked on the corporate HSE data base.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is currently exposed to market risk from changes in foreign currency exchange rates changes in the value of its equity instruments 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, China and other countries in 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, have been described under "Results of Operations" in this Management's Discussion and Analysis of Financial Condition and Results of Operations for the periods shown.
In order to mitigate the effect of exchange rate changes, the Company will often 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 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, 2015. 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 various wholly-owned international subsidiaries. Many of these contracts have been designated as and are accounted for as cash flow hedges, with changes in the fair value of those contracts recorded in accumulated other comprehensive income (loss) in the period such change occurs. Certain other contracts, many of which are centrally managed, are intended to offset other foreign currency exposures but have not been designated as hedges for accounting purposes and, therefore, any change in the fair value of those contracts are reflected in earnings in the period such change occurs. The Company expects to expand its use of such contracts in the future.
Capital Markets and Interest Rates
The Company is subject to interest rate risk on its variable-interest rate and commercial paper 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. Additionally, the fair value of the Company's fixed-rate debt changes with changes in market interest rates.
The Company manages its debt portfolio to achieve an overall desired position of fixed and floating rates and employs from time to time 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 1.15% and 1.4% 3-year Senior Notes, the 3.6%, 3.7%, 4.0%, 4.5% and 6.375% 10-year Senior Notes and the 5.125%, 5.95% and 7.0% 30-year Senior Notes are principally dependent on prevailing interest rates. The fair value of the commercial paper and other short-term debt is expected to approximate its book value.
The Company has various other long-term debt instruments, but believes that the impact of changes in interest rates in the near term will not be material to these instruments.
Derivatives Activity
Total gross volume bought (sold) by notional currency and maturity date on open derivative contracts at March 31, 2015 was as follows:
| | | Notional Amount - Buy | | | Notional Amount - Sell | |
| (amounts in millions) | | 2015 | | | 2016 | | | 2017 | | | Total | | | 2015 | | | 2016 | | | Total | |
| Foreign exchange forward contracts - | | | | | | | | | | | | | | | | | | | | | |
| Notional currency in: | | | | | | | | | | | | | | | | | | | | | |
| Euro | | | 236 | | | | 14 | | | | – | | | | 250 | | | | (51 | ) | | | – | | | | (51 | ) |
| Malaysian ringgit | | | 319 | | | | 51 | | | | – | | | | 370 | | | | (47 | ) | | | – | | | | (47 | ) |
| Norwegian krone | | | 580 | | | | 184 | | | | 4 | | | | 768 | | | | (63 | ) | | | (54 | ) | | | (117 | ) |
| Pound Sterling | | | 150 | | | | 9 | | | | – | | | | 159 | | | | (28 | ) | | | (1 | ) | | | (29 | ) |
| U.S. dollar | | | 61 | | | | – | | | | – | | | | 61 | | | | (481 | ) | | | (137 | ) | | | (618 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange option contracts - | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notional currency in: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. dollar | | | 13 | | | | – | | | | – | | | | 13 | | | | – | | | | – | | | | – | |
As described further in Note 14 of the Notes to Consolidated Condensed Financial Statements, the net fair value of the Company's outstanding derivatives was a $119 million liability to the Company at March 31, 2015 ($99 million liability at December 31, 2014).
Fair Value of Financial Instruments
The Company had approximately $1.3 billion of cash equivalents and $424 million of short-term investments at March 31, 2015. Cash equivalents represent highly liquid investments which are readily convertible to cash and have maturities of three months or less at the time of purchase. Short-term investments have original maturities of more than three months but less than one year. Certain of these investments are valued based upon quoted or estimated market prices which represent levels 1 and 2 market inputs.
The fair values of the Company's foreign exchange forward and option contracts were based on quoted exchange rates for the respective currencies applicable to similar instruments (level 2 observable market inputs).
The Company's international pension plans have assets available to fund future pension liabilities. The majority of these assets are invested in debt and equity securities or mutual funds, which were valued based on quoted market prices for an individual asset (level 1 market inputs), or mutual fund unit values, which were based on the fair values of the individual securities that the fund had invested in (level 2 observable market inputs). A certain portion of the assets were invested in insurance contracts, real estate and other investments, which were valued based on level 3 unobservable inputs.
The values of these assets are subject to change, based generally on changes in market conditions involving foreign exchange rates, interest rates and debt and equity security investment pricing.
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 Sarbanes-Oxley 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 June 30, 2014March 31, 2015 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 June 30, 2014.March 31, 2015.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been and continues to be named as a defendant in a number of multi-defendant, multi-plaintiff tort lawsuits. At June 30, 2014,March 31, 2015, the Company's Consolidated Condensed Balance Sheet included a liability of approximately $16$18 million for such cases. 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.
The information set forth under the caption "Factors That May Affect Financial Condition and Future Results" on pages 3328 – 3834 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company has an authorized stock repurchase program whereby the Company may purchase shares directly or indirectly by way of open market transactions or structured programs, including the use of derivatives, for the Company's own account or through commercial banks or financial institutions. The program, initiated in October 2011, has had a series of authorizations by the Board of Directors totaling $3.2 billion since inception. At June 30, 2014,March 31, 2015, the Company had remaining authority for future treasury stock purchases totaling approximately $456$298 million.
Shares of common stock purchased and placed in treasury during the three months ended June 30, 2014March 31, 2015 under the Board's treasury stock purchase authorization program described above were as follows:
Period | | Total number of shares purchased during the period | | | Average price paid per share | | | Cumulative number of shares purchased as part of repurchase program | | | Maximum number of shares that may yet be purchased under repurchase program(1) | |
| 4/1/14 – 4/30/14 | | | 3,788,207 | | | $ | 62.73 | | | | 46,362,733 | | | | 2,815,393 | |
| 5/1/14 – 5/31/14 | | | 452,100 | | | $ | 63.62 | | | | 46,814,833 | | | | 7,416,387 | |
| 6/1/14 – 6/30/14 | | | 276,361 | | | $ | 65.76 | | | | 47,091,194 | | | | 6,736,137 | |
| Total | | | 4,516,668 | | | $ | 63.00 | | | | 47,091,194 | | | | 6,736,137 | |
Period | | Total number of shares purchased during the period | | | Average price paid per share | | | Cumulative number of shares purchased as part of repurchase program | | | Maximum number of shares that may yet be purchased under repurchase program(1) | |
| 1/1/15 – 1/31/15 | | | 1,230,663 | | | $ | 44.55 | | | | 56,618,578 | | | | 9,415,237 | |
| 2/1/15 – 2/28/15 | | | 1,451,000 | | | $ | 46.86 | | | | 58,069,578 | | | | 7,510,988 | |
| 3/1/15 – 3/31/15 | | | 1,264,871 | | | $ | 44.28 | | | | 59,334,449 | | | | 6,595,850 | |
| Total | | | 3,946,534 | | | $ | 45.31 | | | | 59,334,449 | | | | 6,595,850 | |
(1) | Based upon month-end stock price. At June 30, 2014, the closing stock price was $67.71 per share. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
N/A
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 April 1, 2014March 27, 2015 with respect to the procedures by which security holders may recommend nominees to the Company's Board of Directors.
Exhibit 31.1 –
Certification
Exhibit 31.2 –
Certification
Exhibit 32.1 –
Certification of the CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS –
XBRL Instance Document
Exhibit 101.SCH –
XBRL Taxonomy Extension Schema Document
Exhibit 101. CAL –
XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF –
XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB –
XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE –
XBRL Taxonomy Extension Presentation Linkbase Document
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: JulyApril 24, 20142015 | 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 |
| |
| Certification |
| Certification |
| Certification of the CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |