EXHIBIT 13.1
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF COOPER CAMERON CORPORATION
The following discussion of Cooper Cameron Corporation’s (the Company) historical results of operations and financial condition should be read in conjunction with the Company’s consolidated financial statements and notes thereto included elsewhere in this Annual Report. All per share amounts included in this discussion are based on diluted shares outstanding.
Overview
The Company’s operations are organized into three business segments—Cameron, Cooper Cameron Valves (CCV) and Cooper Compression. Based upon the amount of equipment installed worldwide and available industry data, Cameron is one of the world’s leading providers of systems and equipment used to control pressures and direct flows of oil and gas wells. Cameron’s products are employed in a wide variety of operating environments including basic onshore fields, highly complex onshore and offshore environments, deepwater subsea applications and ultra-high temperature geothermal operations. Cameron’s products include surface and subsea production systems, blowout preventers, drilling and production control systems, gate valves, actuators, chokes, wellheads, drilling risers and aftermarket parts and services. Cameron’s customers include oil and gas majors, independent producers, engineering and construction companies, drilling contractors, rental companies and geothermal energy producers. Based upon the amount of equipment installed worldwide and available industry data, CCV is a leading provider of valves and related systems primarily used to control pressure and direct the flow of oil and gas as they are moved from individual wellheads through flow lines, gathering lines and transmission systems to refineries, petrochemical plants and industrial centers for processing. CCV’s products include ball valves, gate valves, butterfly valves, Orbit valves, rotary process valves, block and bleed valves, plug valves, globe valves, check valves, actuators, chokes and aftermarket parts and service. CCV’s customers include oil and gas majors, independent producers, engineering and construction companies, pipeline operators, drilling contractors and major chemical, petrochemical and refining companies. Based upon the amount of equipment installed worldwide and available industry data, Cooper Compression is a leading provider of compression equipment and related aftermarket parts and services. The Company’s compression equipment is used throughout the energy industry by gas transmission companies, compression leasing companies, oil and gas producers, independent power producers and a variety of other industries around the world.
In addition to the historical data contained herein, this Annual Report, including the information set forth in the Company’s Management’s Discussion and Analysis and elsewhere in this report, includes forward-looking statements regarding the future revenues and earnings of the Company, as well as expectations regarding North American rig activity, customer spending levels, pricing levels and capital expenditures made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company’s actual results may differ materially from those described in forward-looking statements. These statements are based on current expectations of the Company’s performance and are subject to a variety of factors, some of which are not under the control of the Company, which can affect the Company’s results of operations, liquidity or financial condition. Such factors may include overall demand for, and pricing of, the Company’s products; the size and timing of orders; the Company’s ability to successfully execute large subsea projects it has been awarded; changes in the price of and demand for oil and gas in both domestic and international markets; political and social issues affecting the countries in which the Company does business; fluctuations in currency and financial markets worldwide; and variations in global economic activity. In particular, current and projected oil and gas prices have historically affected customers’ spending levels and their related purchases of the Company’s products and services; however, recently there has been less linkage between commodity prices and spending. Additionally, the Company may change its cost structure, staffing or spending levels due to changes in oil and gas price expectations and the Company’s judgment of how such changes might impact customers’ spending, which may impact the Company’s financial results. 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 indication of such changes unless required under applicable disclosure rules and regulations.
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to warranty obligations, bad debts, inventories, intangible assets, income taxes, pensions and other postretirement benefits, other employee benefit plans, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
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Critical Accounting Policies
The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of its consolidated financial statements. These policies and the other sections of the Company’s Management’s Discussion and Analysis of Results of Operations and Financial Condition have been reviewed with the Company’s Audit Committee of the Board of Directors.
The Company generally recognizes revenue once the following four criteria are met: (i) a written contract or purchase order exists, (ii) delivery of the equipment has occurred and the customer has inspected, tested and accepted the equipment (if required by the contract) or services have been rendered, (iii) the price of the equipment or service is fixed and determinable and (iv) collectibility is reasonably assured.
The Company maintains allowances for doubtful accounts for estimated losses that may result from the inability of its customers to make required payments. Such allowances are based upon several factors including, but not limited to, historical experience and the current and projected financial condition of each specific customer. Were the financial condition of a customer to deteriorate, resulting in an impairment of its ability to make payments, additional allowances may be required.
The Company’s aggregate inventories are carried at cost or, if lower, net realizable value. Inventories located in the United States and Canada are carried on the last-in, first-out (LIFO) method. Inventories located outside of the United States and Canada are carried on the first-in, first-out (FIFO) method. The Company writes down its inventory for estimated obsolescence or excess quantities on hand equal to the difference between the cost of the inventory and its estimated realizable value. If future conditions cause a reduction in the Company’s estimate of realizable value, additional provisions may be required.
The Company provides for the estimated cost of product warranties at the time of sale, or, in some cases, when specific warranty problems are encountered. Should actual product failure rates or repair costs differ from the Company’s current estimates, revisions to the estimated warranty liability would be required. See Note 7 to the Notes to Consolidated Financial Statements for additional details surrounding the Company’s warranty accruals.
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized, considering future taxable income and ongoing prudent and feasible tax planning strategies. As of December 31, 2002, the Company had a net operating loss carryforward for U.S. tax purposes of approximately $249 million, which does not begin to expire until 2020. Currently, the Company believes it is more likely than not that it will generate sufficient future taxable income to fully utilize this net operating loss carryforward. Accordingly, the Company has not recorded a valuation allowance against this net operating loss carryforward. In the event the North American natural gas market deteriorates over an extended period of time, the Company may determine that it would not be able to fully realize this deferred tax asset in the future. Should this occur, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
Through December 31, 2001, the Company reviewed the carrying value of intangible assets, including goodwill, at least annually or whenever there were indications that the intangible might be impaired. In assessing the recoverability of these intangible assets and goodwill, the Company made assumptions regarding estimated future cash flows and other factors to determine the estimated fair value of the respective assets. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142) which requires that the Company estimate the fair value of each of its businesses annually and compare such amounts to their respective book values to determine if an impairment of intangibles is required.
The Company accounts for its defined benefit pension plans in accordance with Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions (FAS 87), which requires that amounts recognized in the financial statements be determined on an actuarial basis. See Note 8 of the Notes to Consolidated Financial Statements for the amounts of pension expense (income) included in the Company’s Results of Operations and the Company’s contributions to the pension plans for the years ended December 31, 2002, 2001 and 2000 as well as the unrecognized net (gain) loss at December 31, 2002 and 2001.
The assumptions used in calculating the amounts recognized in the Company’s financial statements include discount rates, interest costs, expected return on plan assets, retirement and mortality rates, inflation rates, salary growth and other factors. The Company bases the discount rate assumptions on investment yields available at year-end on corporate bonds rated AA. The Company’s inflation assumption is based on an evaluation of external market indicators. The expected rate of return on plan assets reflects asset allocations, investment strategy and the views of various investment professionals. Retirement and mortality rates are based primarily on actual plan experience. In accordance with FAS 87, actual results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While the Company believes the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense.
A significant reason for the increase in pension expense over the last three years results from the difference between the actual and assumed rates of return on plan assets. During 2000, 2001 and 2002, the Company assumed that the expected long-term rate of return on plan assets for these plans would be between 8.5% and 9.25%. Prior to
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2001, the Company’s actual cumulative long-term rate of return on the pension assets of these plans was in excess of these amounts; however, these plans’ assets have recently earned substantially less than the assumed rates of return. As a result, pension expense for 2002 increased approximately $15.5 million from 2001’s level. For 2003, the Company has lowered the assumed rates of return to between 8.0% and 8.9%, depending on the plan. As a result of this and other factors, the Company believes there will be an additional increase in pension expense of approximately $5.0-$6.0 million for 2003.
The following table illustrates the sensitivity to a change in certain assumptions used in (i) the calculation of pension expense for the year ended December 31, 2003 and (ii) the calculation of the PBO at December 31, 2002 for the Company’s pension plans:
Change in Assumption | Impact on 2003 Pre-tax Pension Expense | Impact on December 31, 2002 PBO | ||||
25 basis point decrease in discount rate | $ | 0.6 million | $ | 8.2 million | ||
25 basis point increase in discount rate | $ | (0.6) million | $ | (8.2) million | ||
25 basis point decrease in expected return on assets | $ | 0.7 million | — | |||
25 basis point increase in expected return on assets | $ | (0.7) million | — | |||
Financial Summary
The following table sets forth the consolidated percentage relationship to revenues of certain income statement items for the periods presented:
Year Ended December 31, | |||||||||
| 2002 | 2001 | 2000 | |||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||
Costs and expenses: | |||||||||
Cost of sales (exclusive of depreciation and amortization) 1 | 71.7 | 69.2 | 71.2 | ||||||
Selling and administrative expenses 1 | 17.8 | 16.1 | 19.1 | ||||||
Depreciation and amortization | 5.1 | 5.3 | 5.4 | ||||||
Interest income | (0.6 | ) | (0.6 | ) | (0.2 | ) | |||
Interest expense | 0.5 | 0.9 | 1.3 | ||||||
Total costs and expenses | 94.5 | 90.9 | 96.8 | ||||||
Income before income taxes | 5.5 | 9.1 | 3.2 | ||||||
Income tax provision | (1.6 | ) | (2.8 | ) | (1.2 | ) | |||
Net income | 3.9 | % | 6.3 | % | 2.0 | % | |||
| 1 | Includes plant closing, business realignment and other related costs. See Note 2 to the Notes to Consolidated Financial Statements. |
Results of Operations
2002 Compared to 2001
The Company had net income of $60.5 million, or $1.10 per share, for the twelve months ended December 31, 2002 compared with $98.3 million, or $1.75 per share in 2001. The results for 2002 and 2001 included pre-tax charges of $33.3 million and $20.2 million, respectively, for special items which consisted primarily of costs related to (i) facility closings and disposals, (ii) exiting a product line, and (iii) other cost rationalization programs. See Note 2 of the Notes to Consolidated Financial Statements for a discussion of these charges.
Revenues
Revenues for 2002 totaled $1.538 billion, a decrease of 1.6% from 2001 revenues of $1.563 billion. Increased subsea deliveries in Cameron were more than offset by weak market conditions in domestic natural gas and compression and transmission markets, which negatively impacted sales in Cameron’s North American surface and aftermarket business and the CCV and Cooper Compression divisions.
Cameron’s revenues for 2002 totaled $918.7 million, an increase of 2.4% from 2001 revenues of $897.6 million. Revenue in the subsea and international surface markets increased 13.7%, which more than offset declines in North American surface and aftermarket revenues of 13.0%. The increase in subsea revenues was attributable to the large increase in subsea orders received during 2001, primarily related to projects located offshore West Africa. North
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American surface and aftermarket revenues declined primarily as a result of the continued weakness in the rig count in this region.
CCV’s revenues for 2002 totaled $273.5 million, a decrease of 6.4% from 2001 revenues of $292.3 million. Increased revenues in the Cameron Ball Valve product line of 16.5% were more than offset by declines in the distributor, Orbit and aftermarket product lines which decreased 17.0%. The increase in the Cameron Ball Valve product line was attributable to the significant pipeline backlog that existed at December 31, 2001. The decline in the distributor product line resulted from weakness in the North American gas market. The decline in the Orbit product line was due to both weakness in the specialty valve market and intense competitive pressures in this market during 2002. Finally, the decline in the aftermarket product line resulted from softness in the pipeline, refining and petrochemical markets during the latter part of 2002.
Cooper Compression’s revenues for 2002 totaled $345.9 million, a decrease of 7.3% from 2001 revenues of $373.1 million. Increased aftermarket revenues of 7.9% in the gas compression market were more than offset by a 45.3% decline in new unit sales in this market. The air compression portion of Cooper Compression’s business was relatively flat in 2002 as compared to 2001. The increase in aftermarket revenues in the gas compression market was attributable primarily to the acquisitions Cooper Compression made in 2001. The decrease in new unit sales in the gas compression market resulted from a lack of demand in this market attributable to, among other things, the financial difficulties that Cooper Compression’s customers experienced throughout the year and a lack of significant development projects that would require Cooper Compression’s equipment.
Cost and Expenses
Gross margin (exclusive of depreciation and amortization) for 2002 was $435.6 million, a decrease of 9.6% from 2001 gross margin of $481.8 million. Gross margin as a percentage of revenue for 2002 was 28.3% as compared to 30.8% for 2001. The gross margin percentage for 2002 was negatively impacted by an $11.2 million unusual inventory write-down in the Cooper Compression division which decreased the gross margin percentage by 0.7%.
Cameron’s gross margin percentage for 2002 was 28.0% as compared to 31.6% for 2001. The decrease in the gross margin percentage resulted from pricing pressures in the North American surface and aftermarket businesses and the increased subsea shipments during 2002, which typically carry a lower margin percentage as compared to the Company’s traditional surface products.
CCV’s gross margin percentage for 2002 was 30.5% as compared to 31.1% for 2001. The decline in the gross margin percentage was attributable to relatively fixed overhead costs which did not decline proportionally with the decline in revenues (resulting in an approximately 1.1% decrease in the gross margin percentage) partially offset by a reduction in warranty expense in 2002 which increased the gross margin percentage by 0.5%. Warranty expense in 2001 was abnormally high due to a dispute on an international pipeline project.
Cooper Compression’s gross margin percentage for 2002 was 27.5% as compared to 28.9% for 2001. The decrease in the gross margin percentage resulted from an $11.2 million unusual inventory write-down related to facility closures (which decreased Cooper Compression’s margin percentage by 3.3%), partially offset by manufacturing efficiencies and a higher percentage of aftermarket revenues, which typically carry higher margins.
Selling and administrative expenses for 2002 were $273.1 million, an increase of 8.7% from 2001 selling and administrative expenses of $251.3 million. The increase in selling and administrative expenses resulted primarily from $3.5 million of increased investment associated with the Company’s expansion into the subsea markets and $11.4 million of higher postretirement benefit plan costs, associated primarily with lower returns on pension assets.
Included within selling and administrative expenses for 2002 and 2001 were $22.2 million and $20.2 million, respectively, of plant closing, business realignment and other related costs. Of the $22.2 million recorded in 2002, $14.7 million related to the Cooper Compression division and $7.5 million related to the Company’s other divisions. The costs attributable to Cooper Compression were generally related to the closure of 13 facilities in the gas compression business and was comprised primarily of: (i) $1.6 million of severance expenses, (ii) $8.2 million of facility exit costs, including lease termination payments, and (iii) $4.9 million of facility write-downs. The $7.5 million of costs related to the Company’s other divisions was comprised of: (i) $1.1 million of severance, (ii) $5.2 million of facility write-downs and losses on property disposals, and (iii) $1.2 million of costs associated with the Company’s international tax restructuring activities.
Depreciation and amortization expense for 2002 was $77.9 million, a decrease of 6.2% from 2001 depreciation and amortization expense of $83.1 million. The decrease in depreciation and amortization expense was attributable to the (i) lack of goodwill amortization for 2002 due to the implementation of FAS 142 (approximately $10.7 million) and (ii) lack of depreciation and amortization related to assets that were retired or became fully depreciated (approximately $5.2 million), partially offset by (i) an $8.5 million increase attributable to depreciation and amortization associated with capital additions, (ii) a $1.3 million increase attributable to depreciation and amortization associated with acquisitions, and (iii) a $2.0 million increase attributable to accelerated amortization associated with computer systems to be replaced by a new enterprise-wide system.
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Interest income for 2002 was $8.5 million as compared to $8.6 million in 2001. Interest expense for 2002 was $8.0 million, a decrease of $5.5 million from 2001 interest expense of $13.5 million. The decline in interest expense was primarily attributable to the retirement of outstanding higher-cost debt with the proceeds from the lower-cost convertible debentures which were issued in May 2001.
The effective tax rate for 2002 was 29.0% compared to 31.0% for 2001. The reduction in the effective tax rate for 2002 was primarily attributable to the discontinuance of amortizing goodwill, which has historically been a permanent tax difference.
2001 Compared to 2000
The Company had net income of $98.3 million, or $1.75 per share, for the twelve months ended December 31, 2001 compared with $27.7 million, or $0.50 per share in 2000. The results for 2001 and 2000 included pre-tax charges of $20.2 million and $77.4 million, respectively, for the cost of exiting a product line and other cost rationalization programs. See Note 2 of the Notes to Consolidated Financial Statements for a discussion of these charges.
Revenues
Revenues for 2001 totaled $1.563 billion, an increase of 12.9% from 2000 revenues of $1.384 billion. Strong market conditions in the energy industry during the first half of 2001 resulted in revenue increases in the Cameron, CCV and the gas compression portion of Cooper Compression’s business while the overall weakness in the worldwide industrial manufacturing environment during 2001 resulted in a decline in revenues for the air compression portion of Cooper Compression’s business.
Cameron’s revenues for 2001 totaled $897.6 million, an increase of 7.4% from 2000 revenues of $835.7 million. Revenue increases aggregating 21.1% in both surface and aftermarket products more than offset a 30.6% decline in drilling and a 7.9% decline in subsea products. The increase in revenue for the surface and aftermarket products was primarily due to strong drilling and development activities in the energy industry during the first half of 2001. Drilling revenues declined in 2001 as results in 2000 included deliveries of several large projects which were not replaced in 2001. Subsea revenues declined slightly in 2001 due to deliveries related to an offshore project in the Philippines in 2000 which did not reoccur in 2001.
CCV’s revenues for 2001 totaled $292.3 million, an increase of 32.4% from 2000 revenues of $220.8 million. Revenue increased 34.1% in the Cameron Ball Valve product line, 44.9% in the distribution product line and 16.6% in the Orbit product line. These increases were attributable to strong conditions in the energy industry during the first half of 2001 which drove overall demand increases for the year.
Cooper Compression’s revenues for 2001 totaled $373.1 million, an increase of 14.0% from 2000 revenues of $327.2 million. A 28.2% increase in Ajax units, Superior compressors and aftermarket parts and services more than offset a 39.5% decline in the Superior engine line (which was discontinued in early 2001). The increase in aftermarket parts and service was attributable to both Cooper Compression’s traditional business as well as two aftermarket suppliers acquired in 2001. The revenues in the air compression portion of the business declined 1.0% from 2000 due to weakness in the worldwide industrial manufacturing environment during 2001.
Cost and Expenses
Gross margin (exclusive of depreciation and amortization) for 2001 was $481.8 million, an increase of 21.0% from 2000 gross margin of $398.3 million. Gross margin as a percentage of revenue for 2001 was 30.8% as compared to 28.8% for 2000. The gross margin percentage for 2000 was negatively impacted by a $10.6 million unusual inventory write-down in the Cooper Compression division which decreased the 2000 gross margin percentage by 0.8%.
Cameron’s gross margin percentage for 2001 was 31.6% as compared to 28.9% for 2000. The increase in the gross margin percentage occurred across all product lines due to, among other things, improved pricing in the domestic surface, aftermarket and drilling businesses. The drilling business also benefited from reduced warranty costs in 2001 as compared to 2000.
CCV’s gross margin percentage for 2001 was 31.1% as compared to 32.2% for 2000. The decline in the gross margin percentage was attributable to a shift in the mix of products sold during 2001 towards lower margin product lines.
Cooper Compression’s gross margin percentage for 2001 was 28.9% as compared to 26.9% for 2000. The increase was due primarily to the absence in 2001 of an unusual inventory write-down recorded in 2000 related to the exit of Cooper Compression’s Superior engine business (which decreased the 2000 gross margin percentage by 2.8%), and an increase in the gross margin percentage associated with reciprocating gas compression equipment due primarily to the elimination of costs and lower margin product lines (i.e., the Superior engine line) as a result of the rationalization of Cooper Compression’s manufacturing activities, which occurred during 2000 and early 2001. These increases were partially offset by a significant decline in the gross margin percentage associated with integrally geared centrifugal compression equipment as a result of lower pricing on new units due to the overall weakness in the worldwide industrial manufacturing environment during 2001.
Selling and administrative expenses for 2001 were $251.3 million, a decrease of 4.9% from 2000 selling and administrative expenses of $264.2 million. The decrease in selling and administrative expenses resulted primarily from a $46.6 million decline in plant closing, business realignment and other costs partially offset by (i) $5.0 million of
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incremental infrastructure costs attributable to businesses acquired in 2001, (ii) $1.2 million of increased infrastructure investment associated with the Company’s expansion into the subsea markets, (iii) $12.0 million of increased postretirement benefit plan costs associated primarily with lower returns on pension assets and decreased amortization of actuarial gains, and (iv) higher infrastructure costs necessitated by the 12.9% increase in revenues (primarily salary and salary-related costs).
Included within selling and administrative expenses for 2001 and 2000 were $20.2 million and $66.8 million, respectively, of plant closing, business realignment and other related costs. All of the $20.2 million recorded in 2001 were related to the consolidation of the gas compression portion of Cooper Compression’s business. These costs were comprised primarily of: (i) $4.5 million related to severance and relocation expenses, (ii) $2.5 million of contract cancellation costs, (iii) $7.5 million of facility exit costs, including lease termination payments, and (iv) $4.1 million of costs incurred by the Superior engine business during the shutdown period.
Of the $66.8 million recorded in 2000, $26.4 million represented non-cash write-offs or write-downs of assets and $40.4 million reflected either cash expenditures or accruals for cash that will be spent in future periods. Of the cash total, $12.2 million related to employee severance and other employee costs including workmen’s compensation, medical, pay-to-stay agreements and similar items, $8.8 million related to personnel and equipment relocation, $5.4 million related to facility clean-up (including environmental) and rearrangement, $6.4 million related to operating costs for redundant facilities being held for sale and $7.7 million related to productivity degradation, including outsourcing during phase-out and other costs. The major projects included $22.1 million related to the discontinuance of Cooper Compression’s manufacturing of Superior engines and the resulting shutdown of its manufacturing facility in Springfield, Ohio; $14.1 million related to remaining costs associated with the discontinuance of all manufacturing and foundry operations in Grove City, Pennsylvania; $13.5 million resulting from the relocation of all manufacturing, warehousing and other operations from Mt. Vernon, Ohio (original headquarters for the gas compression business of Cooper Compression) to other locations pursuant to the 1999 sale of Cooper Compression’s rotating compressor business to Rolls-Royce plc; $6.6 million related to the write-off of the Canadian translation component in connection with the sale of this business; $4.1 million related to the relocation of Cameron’s drilling BOP stack and subsea “Christmas tree” manufacturing from Ville Platte, Louisiana to Liberty, Texas (subsea trees) and Beziers, France (BOPs); $2.8 million related to the shutdown of Cameron’s manufacturing facility in Vienna, Austria and relocation of this capacity to other European locations; and $3.6 million associated with various facility shutdown and realignment costs and other actions for each of the divisions.
Depreciation and amortization expense for 2001 was $83.1 million, an increase of 10.3% from 2000 depreciation and amortization expense of $75.3 million. The increase in depreciation and amortization expense was attributable to (i) $1.9 million of accelerated amortization of existing software systems that will be replaced by a new enterprise-wide system, (ii) $1.0 million of accelerated depreciation expense associated with facilities closed during 2002, (iii) $1.2 million of additional amortization expense associated with certain intangible assets, and (iv) $5.6 million associated with higher capital expenditures. These increases were offset by reduced depreciation associated with the write-off of long-term assets at Cooper Compression in connection with the decision to discontinue the Superior brand natural gas engine line and close its Springfield, Ohio manufacturing facility and other assets which were retired or became fully depreciated.
Interest income for 2001 was $8.6 million, an increase of $5.6 million from 2000 interest income of $3.0 million. The increase in interest income was attributable to the investment of excess cash in income-bearing securities. The excess cash was generated through the issuance of lower-cost convertible debentures, which were issued in May 2001, a portion of which proceeds were used to repay higher-cost debt. Interest expense for 2001 was $13.5 million, a decrease of $4.5 million from 2000 interest expense of $18.0 million. The decrease in interest expense was attributable to the retirement of outstanding higher-cost debt with the proceeds from the lower-cost convertible debentures that were issued in May 2001.
The effective tax rate for 2001 was 31.0% compared to 36.8% for 2000. The 2000 rate reflected a full-year rate on operational earnings, including special items, of 30.5%, and the absence of a tax deduction on $9.1 million of translation component write-offs included in pre-tax earnings that were not deductible for tax purposes.
Recent Pronouncements
Effective January 1, 2002, the Company adopted FAS 142. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment. As a result of the adoption of FAS 142, the Company discontinued amortizing goodwill effective January 1, 2002. Amortization of goodwill during 2001 was approximately $10.7 million. Pursuant to FAS 142, the Company tested its goodwill for impairment upon adoption and during the year, and no impairment was indicated.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which addresses the accounting for legal obligations arising from the retirement of all tangible long-lived assets, and is effective January 1, 2003. The Company currently has no significant obligations arising from the retirement of long-lived assets and therefore, no material impact is expected upon adoption of this standard.
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In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). FAS 144 supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, as well as certain provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. There was no material effect on the results of operations or financial condition of the Company upon adoption of this standard effective January 1, 2002.
Certain provisions of Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections (“FAS 145”), issued in April 2002, are currently effective whereas other provisions are effective as of January 1, 2003. There was no material impact on the Company’s results of operations or financial condition upon adoption of the provisions of FAS 145 that are currently effective and none is expected as the other provisions become effective.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“FAS 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies the consensus reached in Emerging Issued Task Force Issue No. 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. As discussed in Note 2 to the Consolidated Financial Statements, the Company has incurred restructuring costs in the past. FAS 146 may impact the timing of restructuring costs recognized in the future.
Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions, was issued in October 2002 but has no impact on the Company. Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, provides for certain additional disclosure requirements relating to stock based compensation plans as well as other matters. The additional disclosure requirements related to the year ended December 31, 2002 are included under the caption “Stock-Based Compensation” in Note 1 to the Notes to Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“FAS 150”), which becomes effective for the Company during the third quarter of 2003. The Company is currently evaluating this statement’s impact upon its financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation will significantly change current practice in the accounting for and disclosure of guarantees. Each guarantee issued or modified after December 31, 2002 and meeting the characteristics described in the Interpretation is to be recognized and initially measured at fair value. In addition, guarantors are required to make significant new disclosures, even if the likelihood of the guarantor making payments under the guarantee is remote. The Company does not have any material guarantees which will be subject to the fair value recognition requirements. Disclosures applicable to the Company have been included in Note 14 of the Notes to Consolidated Financial Statements.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, was issued in January 2003. The interpretation requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. The Company is currently evaluating whether this interpretation will have any impact on its consolidated financial position for periods beginning July 1, 2003.
Liquidity and Capital Resources
The Company’s combined cash and short-term investment balances increased to $299.1 million at December 31, 2002 from $213.7 million at December 31, 2001, due primarily to cash flow generated during 2002. During 2002, the Company’s operating activities generated $177.8 million of cash as compared to $124.9 million in 2001. Cash flow from operations in 2002 was comprised primarily of net income of $60.5 million, adjusted for depreciation and amortization of $77.9 million, and $40.7 million of working capital decreases. The most significant decreases in working capital were in inventory and receivables as the Company focused on reducing working capital throughout the year. Working capital associated with other assets and liabilities increased $33.3 million during 2002 due primarily to the contribution of $26.4 million to the Company’s pension plans.
During 2002, the Company’s investing activities consumed $25.3 million of cash as compared to $271.6 million in 2001. Capital expenditures in 2002 of $82.1 million decreased significantly from expenditures in 2001 of $125.0 million as the Company’s 2001 expenditures included $36.0 million for the construction of a new headquarters for the Cameron division and $20.0 million for the Company’s enterprise-wide software system, which the Company began implementing in late 2002. The Company spent an additional $24.3 million for its enterprise-wide software system during 2002, bringing the cumulative expenditures to date on this system to approximately $44.3 million. Cash spent on acquisitions totaled $67.8 million for 2002 and was comprised of the acquisition of a Canadian valve manufacturer, a wellhead business located in West Texas and certain drilling and riser-related assets from another oilfield equipment supplier. Cash spent on acquisitions totaled $51.8 million for 2001 and consisted primarily of two aftermarket parts and service
7
suppliers in the Cooper Compression division and a supplier of motion compensation solutions in the Cameron division. During 2002, the Company entered into a sale-leaseback transaction for its Cameron headquarters and sold land formerly used by the Cameron division. The Company realized net proceeds from these transactions of $39.5 million.
During 2002, the Company’s financing activities consumed $2.3 million of cash, as compared to generating $243.8 million of cash in 2001. The 2001 activity reflects the issuance of the convertible securities, as more fully described in Note 10 of the Notes to Consolidated Financial Statements, which generated gross proceeds of $450.0 million. These proceeds were used to repay amounts outstanding under the Company’s revolving credit facility and other borrowings of $179.1 million and for other purposes, including share repurchases of $25.1 million and acquisitions.
During the third quarter of 2002, the Company reached an agreement with a joint-venture partner whereby the partner had the option to purchase certain specialized fixed assets, with a net book value of $3.8 million as of December 31, 2002, and certain other assets by March 31, 2003 for a cash payment of $4.3 million and certain other consideration. The joint-venture partner did not exercise this option as of March 31, 2003. The Company is currently exploring other uses or other disposal means, which could result in a write-down of all or a portion of the net book value of these assets if the Company is not successful in identifying and implementing options which would support the carrying value of these assets.
During 2002, the Company entered into a revolving credit agreement (the “Revolving Credit Agreement”). This agreement provides the Company with up to $150.0 million of floating-rate credit advances maturing on March 5, 2003 (all of which was available for borrowing at December 31, 2002). The Revolving Credit Agreement currently provides for unsecured borrowings at the London Interbank Offered Rate (LIBOR) plus 0.50%. In addition to certain up-front costs, the agreement carries a facility fee of 0.10% per annum on the committed amount of the facility plus a usage fee of 0.10% per annum on the total amount of outstanding borrowings, provided such borrowings exceed $50.0 million. The Revolving Credit Agreement contains certain covenants, including maintaining specific interest coverage and debt-to-total capitalization ratios. During March 2003, the Company amended the Revolving Credit Agreement to extend the termination date of the facility to July 7, 2003 and lower the aggregate borrowing capacity under the facility to $100.0 million. The Company is evaluating whether to renew all or part of this facility prior to its expiration.
The Company expects to fund capital expenditures, estimated to be $65.0 to $70.0 million in 2003, as well as general liquidity needs, from its cash and short-term investment balances, internally generated funds and financing arrangements.
At December 31, 2002, the Company was party to two forward purchase agreements with a third-party financial institution for the purchase of a total of 1,006,500 shares of the Company’s common stock. The key terms of these agreements are as follows:
| Forward Agreement Dated | ||||
| August 2002 | March 2002 | |||
Underlying shares | 350,500 | 656,000 | ||
Average price per share | $39.24 | $36.46 | ||
Settlement required by | August 12, 2004 | March 15, 2004 | ||
Maximum issuable shares | 2,103,000 | 3,600,000 | ||
Based on the closing market price of $49.82 per share at December 31, 2002, the Company was in a position to acquire these shares at a savings of approximately $12.5 million over current open market purchases.
The carrying cost inherent in these contracts is 3-month LIBOR plus 0.70%. The Company could be required to settle these agreements prematurely if the Company’s stock price falls below $16.50 per share and in certain other limited circumstances. In the event the Company chooses not to settle these transactions in cash, the maximum number of shares the Company could be required to deliver to settle each agreement is reflected above. In accordance with the consensus reached by the FASB’s Emerging Issues Task Force in Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, these forward purchase agreements have not been included as a liability in the Company’s December 31, 2002 Consolidated Balance Sheet, but rather are accounted for as permanent equity. As a result, the forward purchase agreements were accounted for at their initial fair value (which was zero). Subsequent changes in the fair value of these contracts are not recognized. The carrying cost inherent in the contracts is being charged to equity as incurred.
8
The following summarizes the Company’s significant cash contractual obligations and other commercial commitments for the next five years as of December 31, 2002 (dollars in thousands).
| (dollars in thousands) | Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||
Long-term debt | $ | 458,765 | $ | 639 | $ | 3,013 | $ | — | $ | 455,113 | (a) | |||||
Capital lease obligations | 9,327 | 4,301 | 4,616 | 410 | — | (b) | ||||||||||
Operating leases | 94,832 | 12,113 | 15,878 | 13,145 | 53,696 | |||||||||||
Total contractual cash obligations | $ | 562,924 | $ | 17,053 | $ | 23,507 | $ | 13,555 | $ | 508,809 | ||||||
| (a) | See Note 10 of the Notes to Consolidated Financial Statements for information on redemption rights by the Company and by holders of the Company’s debentures that would allow for redemption of the zero coupon debentures beginning in 2004 and for redemption of the interest bearing debentures beginning in 2006. |
| (b) | Payments shown include interest. |
| (dollars in thousands) | Amount of Commitment Expiration Per Period | ||||||||||||||
Other Commercial Obligations | Total Commitment | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | ||||||||||
Committed lines of credit | $ | 150,000 | $ | 150,000 | $ | — | $ | — | $ | — | |||||
Standby Letters of Credit | 78,474 | 47,398 | 30,937 | 139 | — | ||||||||||
Bank guarantees and letters of credit | 13,467 | 3,463 | 10,004 | — | — | ||||||||||
Guarantees of a portion of joint venture debt | 2,916 | 1,957 | 798 | 161 | — | ||||||||||
Total commercial commitments | $ | 244,857 | $ | 202,818 | $ | 41,739 | $ | 300 | $ | — | |||||
The Company secures certain contractual obligations under various agreements with its customers or other parties through the issuance of letters of credit or bank guarantees. The Company has various agreements with financial institutions to issue such instruments. As of December 31, 2002, the Company had $91.9 million of letters of credit and bank guarantees outstanding. Should these facilities become unavailable to the Company, the Company’s operations and liquidity could be negatively impacted. Circumstances which could result in the withdrawal of such facilities include, but are not limited to, deteriorating financial performance of the Company, deteriorating financial condition of the financial institutions providing such facilities, overall constriction in the credit markets or rating downgrades of the Company.
Factors That May Affect Financial Condition and Future Results
Downturns in the oil and gas industry have had, and may in the future have, a negative effect on the Company’s sales and profitability.
Demand for most of the Company’s products and services, and therefore its revenues, depend to a large extent upon the level of capital expenditures related to oil and gas exploration, production, development, processing and transmission. Declines, as well as anticipated declines, in oil and gas prices could negatively affect the level of these activities. Factors that contribute to the volatility of oil and gas prices include the following:
| • | the demand for oil and gas, which is impacted by economic and political conditions and weather; |
| • | the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and pricing; |
| • | the level of production from non-OPEC countries; |
| • | governmental policies regarding exploration and development of oil and gas reserves; |
| • | the political environments of oil and gas producing regions, including the Middle East and, in particular, Iraq; |
| • | the depletion rates of gas wells in North America; and |
| • | advances in exploration and development technology. |
The Company’s international operations expose it to instability and changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations and other risks inherent to international business.
The Company has manufacturing and service operations that are essential parts of its business in developing countries and economically and politically volatile areas in Africa, Latin America, the Middle East and the Asia-Pacific region. Additionally, the Company purchases a large portion of its raw materials and components from a relatively small
9
number of foreign suppliers in countries such as India, South Korea, Taiwan and China. The risks of international business that the Company is exposed to include the following:
| • | volatility in general economic, social and political conditions; |
| • | differing tax rates, tariffs, exchange controls or other similar restrictions; |
| • | changes in currency rates; |
| • | inability to repatriate income or capital; |
| • | changes in, and compliance with, domestic and foreign laws and regulations which impose a range of restrictions on operations, trade practices, trade partners and investment decisions; |
| • | reductions in the number or capacity of qualified personnel; and |
| • | seizure of equipment. |
The Company is subject to environmental, health and safety laws and regulations that expose the Company to potential liability.
The Company’s operations are subject to a variety of national and state, provisional and local laws and regulations, including laws and regulations relating to the protection of the environment. The Company is required to invest financial and managerial resources to comply with these laws and expects to continue to do so in the future. To date, the cost of complying with governmental regulation has not been material, but the fact that such laws or regulations are frequently changed makes it impossible for the Company to predict the cost or impact of such laws and regulations on the Company’s future operations. The modification of existing laws or regulations or the adoption of new laws or regulations imposing more stringent environmental restrictions could adversely affect the Company.
Excess cash can be invested in marketable securities, which may subject the Company to potential losses.
The Company has invested in publicly-traded debt and equity securities from time to time. Changes in the financial markets, including interest rates, as well as the performance of the issuing companies can affect the market value of the Company’s short-term investments.
Implementation of a new enterprise-wide software system could disrupt the Company’s business processes.
The Company is in the process of implementing a new enterprise-wide software system. During October 2002, the Company converted the U.S. and Canadian operations of Cameron and CCV onto the new system. During March 2003, the Company converted Cooper Compression onto the new system. The majority of the Company’s remaining operations are expected to be converted to the new system during 2003. Any disruption in this implementation could negatively affect the Company’s ability to develop, procure, manufacture and/or deliver products, and could disrupt the Company’s financial reporting system.
Changes in the financial condition of the Company’s customers could impact the Company’s business.
Erosion of the financial condition of customers could adversely affect the Company’s business with regard to both receivables exposure and future revenue realization. In both the Cooper Compression and CCV divisions, a significant portion of revenues for 2001 and 2002 were derived from a group of customers in the pipeline and gas compression business which are reported to be experiencing financial and/or other difficulties related to their capitalization. The Company believes that these difficulties have negatively impacted the Company’s business with these customers, particularly in the Cooper Compression division. To the extent these customers’ difficulties continue, worsen, and/or result in curtailments of their expenditures, the Company’s revenues and earnings could continue to be negatively affected.
The Company’s deepwater subsea projects expose the Company to new risks.
The Company continues to expand into the deepwater subsea systems market. These projects are significantly larger in scope and complexity (both in terms of technical and logistical requirements) than projects in the Company’s surface and shallow-water subsea markets since the deepwater subsea projects typically (i) involve long lead times, (ii) must function in greater water depths and pressures and (iii) typically require substantial engineering resources to meet the technical requirements of the project. To the extent the Company experiences difficulties in meeting the technical and/or delivery requirements of the projects, the Company’s earnings or liquidity could be negatively impacted. As of December 31, 2002, the Company had a deepwater subsea backlog of approximately $278 million.
Changes in the equity and debt markets impact pension expense and funding requirements for the Company’s defined benefit plans.
The Company accounts for its defined benefit pension plans in accordance with FAS 87, which requires that amounts recognized in the financial statements be determined on an actuarial basis. A significant element in determining the Company’s pension income or expense in accordance with FAS 87 is the expected return on plan assets. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which results in an estimated return on plan assets that is included in current year pension income or expense. The difference between
10
this expected return and the actual return on plan assets is deferred and amortized against future pension income or expense. Due to the weakness in the overall equity markets since 2000, the plan assets have earned a rate of return substantially less than the assumed long-term rate of return. As a result, expense associated with the Company’s pension plans has increased, and will continue to increase, significantly from the level recognized historically.
Additionally, FAS 87 requires the recognition of a minimum pension liability to the extent the assets of the plans are below the accumulated benefit obligation of the plans. In order to avoid recognizing this minimum pension liability, the Company contributed approximately $26.4 million to its pension plans during 2002. If the Company’s pension assets continue to perform poorly, the Company may be required to recognize a minimum pension liability in the future or fund additional amounts in the pension plans.
Environmental Remediation
The cost of environmental remediation and compliance has not been a material expense for the Company during any of the periods presented. The Company has been identified as a potentially responsible party with respect to five sites designated for cleanup under the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”) or similar state laws. The Company’s involvement at two of the sites has been settled by de minimis payments and involvement at two of the other sites is believed to be at a de minimis level. The fifth site is Osborne, Pennsylvania (a landfill into which the Cooper Compression operation in Grove City, Pennsylvania deposited waste), where remediation is complete and remaining costs relate to ongoing ground water treatment and monitoring. The Company is also engaged in site cleanup under the Voluntary Cleanup Plan of the Texas Commission on Environmental Quality at former manufacturing locations in Houston and Missouri City, Texas.
Additionally, the Company has discontinued operations at a number of other sites which had previously been in existence for many years. The Company does not believe, based upon information currently available, that there are any material environmental liabilities existing at these locations.
The Company has estimated its liability for environmental exposures and the Company’s consolidated financial statements included a liability balance of $11.1 million for these matters at December 31, 2002. Cash expenditures for the Company’s known environmental exposures are expected to the incurred over the next twenty years depending on the site. For the known exposures, the accrual reflects the Company’s best estimate of the amount it will incur under the agreed-upon or proposed work plans. The Company’s costs estimates were determined based upon the monitoring or remediation plans set forth in these work plans and have not been reduced by possible recoveries from third parties. These costs estimates are reviewed on an annual basis or more frequently if circumstances occur which indicated a review is warranted. The Company’s estimates include equipment and operating costs for remediation and long-term monitoring of the sites. The Company does not believe it is reasonably possible that the losses for the known exposures could exceed the current accruals by material amounts but there can be no assurances to this effect.
Market Risk Information
A large portion of the Company’s operations consist of manufacturing and sales activities in foreign jurisdictions, principally in Europe, Canada, West Africa, the Middle East, Latin America and the Pacific Rim. As a result, the Company’s financial performance may be affected by changes in foreign currency exchange rates or weak economic conditions in these markets. Overall, the Company generally is a net receiver of Pounds Sterling and Canadian dollars and, therefore, benefits from a weaker U.S. dollar with respect to these currencies. Typically, the Company is a net payer of euros and Norwegian krone as well as other currencies such as the Singapore dollar and the Brazilian real. A weaker U.S. dollar with respect to these currencies may have an adverse effect on the Company. For each of the last three years, the Company’s gain or loss from foreign currency-denominated transactions has not been material.
In order to mitigate the effect of exchange rate changes, the Company will often attempt to structure sales contracts to provide for collections from customers in the currency in which the Company incurs its manufacturing costs. In certain limited instances, the Company has historically entered into forward foreign currency exchange contracts to hedge specific, large, non-U.S. dollar anticipated receipts or large anticipated receipts in currencies for which the Company does not traditionally have fully offsetting local currency expenditures. As of December 31, 2002, there were no outstanding forward foreign currency exchange contracts.
11
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Cooper Cameron Corporation
We have audited the accompanying consolidated balance sheets of Cooper Cameron Corporation as of December 31, 2002 and 2001 and the related statements of consolidated results of operations, consolidated changes in stockholders’ equity and consolidated cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cooper Cameron Corporation at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP |
| Ernst & Young LLP |
Houston, Texas
January 27, 2003
12
CONSOLIDATED RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
Revenues | $ | 1,538,100 | $ | 1,562,899 | $ | 1,383,733 | ||||||
Costs and expenses: | ||||||||||||
Cost of sales (exclusive of depreciation and amortization) 1 | 1,102,504 | 1,081,078 | 985,404 | |||||||||
Selling and administrative expenses 1 | 273,105 | 251,303 | 264,173 | |||||||||
Depreciation and amortization | 77,907 | 83,095 | 75,321 | |||||||||
Interest income | (8,542 | ) | (8,640 | ) | (2,976 | ) | ||||||
Interest expense | 7,981 | 13,481 | 18,038 | |||||||||
Total costs and expenses | 1,452,955 | 1,420,317 | 1,339,960 | |||||||||
Income before income taxes | 85,145 | 142,582 | 43,773 | |||||||||
Income tax provision | (24,676 | ) | (44,237 | ) | (16,113 | ) | ||||||
Net income | $ | 60,469 | $ | 98,345 | $ | 27,660 | ||||||
Earnings per share: | ||||||||||||
Basic | $ | 1.12 | $ | 1.82 | $ | 0.52 | ||||||
Diluted | $ | 1.10 | $ | 1.75 | $ | 0.50 | ||||||
| 1 | Includes plant closing, business realignment and other related costs. See Note 2 to the Notes to Consolidated Financial Statements. |
The Notes to Consolidated Financial Statements are an integral part of these statements.
13
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except shares and per share data)
| December 31, | ||||||||
| 2002 | 2001 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 273,800 | $ | 111,640 | ||||
Short-term investments | 25,290 | 102,071 | ||||||
Receivables, net | 304,821 | 306,205 | ||||||
Inventories, net | 387,218 | 423,819 | ||||||
Other | 26,732 | 21,251 | ||||||
Total current assets | 1,017,861 | 964,986 | ||||||
Plant and equipment, at cost less accumulated depreciation | 475,914 | 490,264 | ||||||
Goodwill, less accumulated amortization | 301,882 | 259,829 | ||||||
Other assets | 202,013 | 159,973 | ||||||
Total assets | $ | 1,997,670 | $ | 1,875,052 | ||||
Liabilities and stockholders’ equity | ||||||||
Short-term debt | $ | 4,870 | $ | 10,487 | ||||
Accounts payable and accrued liabilities | 354,377 | 349,236 | ||||||
Accrued income taxes | 15,563 | 18,048 | ||||||
Total current liabilities | 374,810 | 377,771 | ||||||
Long-term debt | 462,942 | 459,142 | ||||||
Postretirement benefits other than pensions | 45,161 | 47,759 | ||||||
Deferred income taxes | 45,641 | 41,665 | ||||||
Other long-term liabilities | 27,813 | 25,434 | ||||||
Total liabilities | 956,367 | 951,771 | ||||||
Stockholders’ equity: | ||||||||
Common stock, par value $.01 per share, 150,000,000 shares authorized, 54,566,054 shares issued | 546 | 546 | ||||||
Preferred stock, par value $.01 per share, 10,000,000 shares authorized, no shares issued or outstanding | — | — | ||||||
Capital in excess of par value | 949,188 | 951,441 | ||||||
Retained earnings | 108,147 | 47,678 | ||||||
Accumulated other elements of comprehensive income | (14,789 | ) | (53,050 | ) | ||||
Less: Treasury stock at cost, 54,954 shares at December 31, 2002 (571,320 shares at December 31, 2001) | (1,789 | ) | (23,334 | ) | ||||
Total stockholders’ equity | 1,041,303 | 923,281 | ||||||
Total liabilities and stockholders’ equity | $ | 1,997,670 | $ | 1,875,052 | ||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
14
CONSOLIDATED CASH FLOWS
(dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 60,469 | $ | 98,345 | $ | 27,660 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 67,053 | 63,073 | 59,797 | |||||||||
Amortization | 10,854 | 20,022 | 15,524 | |||||||||
Deferred income taxes and other | (1,283 | ) | 27,446 | 739 | ||||||||
Changes in assets and liabilities, net of translation and effects of acquisitions, dispositions and non-cash items: | ||||||||||||
Receivables | 15,632 | (36,511 | ) | (11,562 | ) | |||||||
Inventories | 67,960 | (40,277 | ) | 17,009 | ||||||||
Accounts payable and accrued liabilities | (9,579 | ) | 23,342 | (50,394 | ) | |||||||
Other assets and liabilities, net | (33,281 | ) | (30,518 | ) | (38,587 | ) | ||||||
Net cash provided by operating activities | 177,825 | 124,922 | 20,186 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures | (82,148 | ) | (125,004 | ) | (66,599 | ) | ||||||
(Acquisitions) dispositions, net | (67,750 | ) | (51,778 | ) | 8,171 | |||||||
Purchases of short-term investments | (45,862 | ) | (101,088 | ) | — | |||||||
Sales of short-term investments | 124,395 | 1,156 | — | |||||||||
Proceeds from sale of Cameron division headquarters building and other property | 39,460 | — | — | |||||||||
Other | 6,588 | 5,106 | 15,703 | |||||||||
Net cash used for investing activities | (25,317 | ) | (271,608 | ) | (42,725 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Loan repayments, net | (7,448 | ) | (179,080 | ) | (17,830 | ) | ||||||
Debentures issued | — | 450,000 | — | |||||||||
Debenture issuance costs | — | (8,364 | ) | — | ||||||||
Purchase of treasury stock | — | (25,082 | ) | — | ||||||||
Activity under stock option plans and other | 5,156 | 6,316 | 55,446 | |||||||||
Net cash provided by (used for) financing activities | (2,292 | ) | 243,790 | 37,616 | ||||||||
Effect of translation on cash | 11,944 | (2,030 | ) | (6,726 | ) | |||||||
Increase in cash and cash equivalents | 162,160 | 95,074 | 8,351 | |||||||||
Cash and cash equivalents, beginning of year | 111,640 | 16,566 | 8,215 | |||||||||
Cash and cash equivalents, end of year | $ | 273,800 | $ | 111,640 | $ | 16,566 | ||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
15
CONSOLIDATED CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in thousands)
| Common stock | Capital in excess of par value | Retained earnings (deficit) | Accumulated elements of | Treasury stock | Total | ||||||||||||||||||
Balance—December 31, 1999 | $ | 540 | $ | 899,978 | $ | (78,327 | ) | $ | (12,039 | ) | $ | (96,074 | ) | $ | 714,078 | ||||||||
Net income | 27,660 | 27,660 | |||||||||||||||||||||
Foreign currency translation | (25,313 | ) | (25,313 | ) | |||||||||||||||||||
Change in fair value of short-term investments | 247 | 247 | |||||||||||||||||||||
Comprehensive income | 2,594 | ||||||||||||||||||||||
Common stock issued under stock option and other employee benefit plans | (30,091 | ) | 96,074 | 65,983 | |||||||||||||||||||
Tax benefit of employee stock benefit plan transactions | 59,624 | 59,624 | |||||||||||||||||||||
Balance—December 31, 2000 | 540 | 929,511 | (50,667 | ) | (37,105 | ) | — | 842,279 | |||||||||||||||
Net income | 98,345 | 98,345 | |||||||||||||||||||||
Foreign currency translation | (15,681 | ) | (15,681 | ) | |||||||||||||||||||
Minimum pension liability, net of $35 in taxes | 57 | 57 | |||||||||||||||||||||
Change in fair value of short-term investments | (321 | ) | (321 | ) | |||||||||||||||||||
Comprehensive income | 82,400 | ||||||||||||||||||||||
Purchase of treasury stock | (25,082 | ) | (25,082 | ) | |||||||||||||||||||
Common stock issued under stock option and other employee benefit plans | 6 | 14,828 | 1,748 | 16,582 | |||||||||||||||||||
Tax benefit of employee stock benefit plan transactions | 7,129 | 7,129 | |||||||||||||||||||||
Costs related to forward stock purchase agreement | (27 | ) | (27 | ) | |||||||||||||||||||
Balance—December 31, 2001 | 546 | 951,441 | 47,678 | (53,050 | ) | (23,334 | ) | 923,281 | |||||||||||||||
Net income | 60,469 | 60,469 | |||||||||||||||||||||
Foreign currency translation | 38,005 | 38,005 | |||||||||||||||||||||
Minimum pension liability, net of $56 in taxes | 91 | 91 | |||||||||||||||||||||
Change in fair value of short-term investments, net of $56 in taxes | 165 | 165 | |||||||||||||||||||||
Comprehensive income | 98,730 | ||||||||||||||||||||||
Common stock issued under stock option and other employee benefit plans | (4,729 | ) | 21,545 | 16,816 | |||||||||||||||||||
Tax benefit of employee stock benefit plan transactions | 2,944 | 2,944 | |||||||||||||||||||||
Costs related to forward stock purchase agreements and other | (468 | ) | (468 | ) | |||||||||||||||||||
Balance—December 31, 2002 | $ | 546 | $ | 949,188 | $ | 108,147 | $ | (14,789 | ) | $ | (1,789 | ) | $ | 1,041,303 | |||||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Major Accounting Policies
Company operations— Cooper Cameron Corporation (the Company or Cooper Cameron) is engaged primarily in the manufacture of oil and gas pressure control equipment, including valves, wellheads, controls, chokes, blowout preventers and assembled systems for oil and gas drilling, production and transmission used in onshore, offshore and subsea applications. Cooper Cameron also manufactures air and gas compressors and turbochargers.
Principles of Consolidation — The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. Investments from 20% to 50% in affiliated companies are accounted for using the equity method. The Company’s operations are organized into three separate business segments. The segments are Cameron, Cooper Cameron Valves (CCV) and Cooper Compression. Additional information regarding each segment may be found in Note 13 of the Notes to Consolidated Financial Statements.
Estimates in Financial Statements — The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Revenue Recognition — The Company generally recognizes revenue once the following four criteria are met: (i) a written contract or purchase order exists, (ii) delivery of the equipment has occurred and the customer has inspected, tested and accepted the equipment (if required by the contract) or services have been rendered, (iii) the price of the equipment or service is fixed and determinable and (iv) collectibility is reasonably assured.
Short-term Investments — Investments in available for sale marketable debt and equity securities are carried at market value, based on quoted market prices. Differences between cost and market value are reflected as a component of accumulated other elements of comprehensive income until such time as those differences are realized. The basis for computing realized gains or losses is the specific identification method. The realized gains on short-term investments included in the Consolidated Results of Operations were $2.5 million, $0.3 million and $0 for the years ended December 31, 2002, 2001 and 2000, respectively. If the Company determines that a loss is other than temporary, such loss will be charged to earnings.
Receivables — The Company maintains allowances for doubtful accounts for estimated losses that may result from the inability of its customers to make required payments. Such allowances are based upon several factors including, but not limited to, historical experience and the current and projected financial condition of the specific customer.
Inventories — Aggregate inventories are carried at cost or, if lower, net realizable value. On the basis of current costs, 64% of inventories in 2002 and 68% in 2001 are carried on the last-in, first-out (LIFO) method. The remaining inventories, which are located outside the United States and Canada, are carried on the first-in, first-out (FIFO) method. The Company writes down its inventory for estimated obsolescence or excess quantities on hand equal to the difference between the cost of the inventory and its estimated realizable value.
Plant and Equipment — Depreciation is provided over the estimated useful lives of the related assets, or in the case of assets under capital leases, over the related lease term, if less, using primarily the straight-line method. The range of estimated useful lives are: buildings – 10 to 40 years; machinery and equipment – 3 to 18 years; and capitalized software, tooling, dies, patterns and all other – 3 to 10 years.
Goodwill — Prior to 2002, goodwill arising from purchase acquisitions was being amortized over 40 years from respective acquisition dates, with minor exceptions. The Company considered this amortization period to be appropriate due to the long-lived nature of the businesses acquired and the lack of rapid technological change or obsolescence associated with these operations. Through December 31, 2001, the carrying value of the Company’s goodwill was reviewed at the division level at least annually or whenever there were indications that the goodwill might be impaired. With the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142), effective January 1, 2002, the Company no longer amortizes goodwill and reviews goodwill at least annually for impairment at the reporting unit level. The Company’s reporting units for FAS 142 purposes are Cameron, CCV, Cooper Energy Services and Cooper Turbocompressor. Cooper Energy Services and Cooper Turbocompressor are combined for segment reporting purposes in the Cooper Compression segment (see Note 13 for further discussion of the Company’s business segments).
The initial evaluation upon adoption, as well as the 2002 annual evaluation, indicated that no impairment of goodwill was required.
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Income Taxes — The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Income tax expense includes U.S. and foreign income taxes, including U.S. federal taxes on undistributed earnings of foreign subsidiaries to the extent such earnings are planned to be remitted. Taxes are not provided on the translation component of comprehensive income since the effect of translation is not considered to modify the amount of the earnings that are planned to be remitted. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
Environmental Remediation and Compliance — Environmental remediation and postremediation monitoring costs are accrued when such obligations become probable and reasonably estimable. Such future expenditures are not discounted to their present value.
Product Warranty — Estimated warranty expense is accrued either at the time of sale or, in some cases, when specific warranty problems are encountered. Adjustments to the accruals are made periodically to reflect actual experience.
Stock-Based Compensation — At December 31, 2002, the Company had two stock-based employee compensation plans and one stock-based compensation plan for its outside directors. These plans are described in further detail in Note 9 of the Notes to Consolidated Financial Statements. The Company measures compensation expense for its stock-based compensation plans using the intrinsic value method. The following table illustrates the effect on net income and earnings per share if the Company had used the alternative fair value method to recognize stock-based employee compensation expense.
| Year Ended December 31, | ||||||||||||
| (dollars in thousands, except per share data) | 2002 | 2001 | 2000 | |||||||||
Net income, as reported | $ | 60,469 | $ | 98,345 | $ | 27,660 | ||||||
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax | (22,753 | ) | (31,270 | ) | (32,594 | ) | ||||||
Pro forma net income (loss) | $ | 37,716 | $ | 67,075 | $ | (4,934 | ) | |||||
Earnings (loss) per share: | ||||||||||||
Basic – as reported | $ | 1.12 | $ | 1.82 | $ | 0.52 | ||||||
Basic – pro forma | $ | 0.70 | $ | 1.24 | $ | (0.09 | ) | |||||
Diluted – as reported | $ | 1.10 | $ | 1.75 | $ | 0.50 | ||||||
Diluted – pro forma | $ | 0.68 | $ | 1.21 | $ | (0.09 | ) | |||||
Derivative Financial Instruments — Effective January 1, 2001, the Company recognizes all derivative financial instruments as assets and liabilities and measures them at fair value. For derivative financial instruments that are designated and qualify as a cash flow hedge, the effective portions of changes in fair value of the derivative are recorded in other comprehensive income, net of tax, and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized currently in earnings. Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized currently in earnings. The Company had no outstanding derivatives at December 31, 2002 or 2001.
Cash Equivalents — For purposes of the Consolidated Cash Flows statement, the Company considers all investments purchased with original maturities of three months or less to be cash equivalents.
Foreign Currency – For most subsidiaries and branches outside the U.S., the local currency is the functional currency. In accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation”, the financial statements of these subsidiaries and branches are translated into U.S. dollars as follows: assets and liabilities at year-end exchange rates; income, expenses and cash flows at average exchange rates; and shareholders’ equity at historical exchange rates. For those subsidiaries for which the local currency is the functional currency, the resulting translation adjustment is recorded as a component of accumulated other comprehensive income in the accompanying Consolidated Balance Sheets.
For certain other subsidiaries and branches, operations are conducted primarily in U.S. dollars, which is therefore the functional currency. Non-U.S. dollar monetary assets and liabilities, and the related revenue, expense, gain and loss accounts, of these foreign subsidiaries and branches are remeasured at year-end exchange rates. Non-U.S. dollar non-monetary assets and liabilities, and the related revenue, expense, gain and loss accounts, are remeasured at historical rates.
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Foreign currency gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in income. The effects of foreign currency transactions were gains (losses) of $(1,147,000), $1,767,000 and $655,000 in the years 2002, 2001 and 2000, respectively.
Reclassifications — Certain prior year amounts have been reclassified to conform to the current year presentation.
New Accounting Pronouncements — In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which addresses the accounting for legal obligations arising from the retirement of all tangible long-lived assets, and is effective January 1, 2003. The Company currently has no significant obligations arising from the retirement of long-lived assets and therefore, no material impact is expected upon adoption of this standard.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). FAS 144 supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, as well as certain provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. There was no material effect on the results of operations or financial condition of the Company upon adoption of this standard effective January 1, 2002.
Certain provisions of Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections (“FAS 145”), issued in April 2002, are currently effective whereas other provisions are effective as of January 1, 2003. There was no material impact on the Company’s results of operations or financial condition upon adoption of the provisions of FAS 145 that are currently effective and none is expected as the other provisions become effective.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“FAS 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies the consensus reached in Emerging Issued Task Force Issue No. 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. As discussed in Note 2 to the Consolidated Financial Statements, the Company has incurred restructuring costs in the past. FAS 146 may impact the timing of restructuring costs recognition in the future.
Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions, was issued in October 2002 but has no impact on the Company. Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, provides for certain additional disclosure requirements relating to stock based compensation plans as well as other matters. The additional disclosure requirements related to the year ended December 31, 2002 are included above under the caption “Stock-Based Compensation”.
In May 2003, the FASB Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“FAS 150”), which becomes effective for the Company during the third quarter of 2003. The Company is currently evaluating this statement’s impact upon its financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation will significantly change current practice in the accounting for and disclosure of guarantees. Each guarantee issued or modified after December 31, 2002 and meeting the characteristics described in the Interpretation is to be recognized and initially measured at fair value. In addition, guarantors are required to make significant new disclosures, even if the likelihood of the guarantor making payments under the guarantee is remote. The Company does not have any material guarantees which will be subject to the fair value recognition requirements. Disclosures applicable to the Company have been included in Note 14 of the Notes to Consolidated Financial Statements.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, was issued in January 2003. The interpretation requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. The Company is currently evaluating whether this interpretation will have any impact on its consolidated financial position for periods beginning July 1, 2003.
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Note 2: Plant Closing, Business Realignment and Other Related Costs
Plant closing, business realignment and other related costs by segment for the last three years were as follows:
| Year Ended December 31, | |||||||||
| (dollars in thousands) | 2002 | 2001 | 2000 | ||||||
Amounts included in costs of sales: | |||||||||
Cooper Compression | $ | 11,214 | $ | — | $ | 10,607 | |||
Amounts included in selling and administrative expenses: | |||||||||
Cameron | 6,275 | — | 8,121 | ||||||
CCV | — | — | 1,448 | ||||||
Cooper Compression | 14,637 | 20,159 | 57,223 | ||||||
Corporate | 1,193 | — | — | ||||||
| 22,105 | 20,159 | 66,792 | |||||||
Total charges/costs | $ | 33,319 | $ | 20,159 | $ | 77,399 | |||
During 2002, the Company recorded $33,319,000 of charges/costs related to various actions taken in the fourth quarter. Of this amount, Cooper Compression recorded $25,851,000 of costs related generally to the closure of 13 facilities in the gas compression business. This amount was comprised of: (i) $1,632,000 million related to severance and relocation expenses, (ii) $8,177,000 of facility exit costs, including lease termination payments, and (iii) $16,042,000 of facility and inventory write-downs. The $7,468,000 of costs related to the Company’s other divisions consisted of: (i) $1,082,000 related to severance, (ii) $5,193,000 of facility write-downs and losses on property disposals, and (iii) $1,193,000 related to the Company’s international tax restructuring activities.
During 2001, Cooper Compression recorded $20,159,000 of charges/costs incurred in connection with the consolidation of the manufacturing operations, closing obsolete facilities and discontinuing the manufacture of new Superior engines in its gas compression business. The charges/costs during 2001 consisted primarily of: (i) $4,516,000 of employee severance and various relocation costs, (ii) $2,544,000 of contract cancellation costs, and (iii) $11,579,000 of plant shutdown costs. Included in the plant shutdown costs were $4,088,000 of costs incurred by the Superior engine business during the shutdown period.
During 2000, the Company recorded $77,399,000 of plant closing, business realignment and other related costs. Of this amount, $36,966,000 represented non-cash write-offs or write-downs of assets and $40,433,000 reflected either cash expenditures or accruals for cash that will be spent in future periods. Of the cash total, $12,168,000 related to employee severance and other employee costs including workmen’s compensation, medical, pay-to-stay agreements and similar items, $8,841,000 related to personnel and equipment relocation, $5,378,000 related to facility clean-up (including environmental) and rearrangement, $6,356,000 related to operating costs for redundant facilities being held for sale and $7,690,000 related to productivity degradation, including outsourcing during phase-out and other costs. The major projects included $32,659,000 related to the discontinuance of Cooper Compression’s manufacturing of Superior engines and the resulting shutdown of its manufacturing facility in Springfield, Ohio; $14,126,000 related to remaining costs associated with the discontinuance of all manufacturing and foundry operations in Grove City, Pennsylvania; $13,503,000 resulting from the relocation of all manufacturing, warehousing and other operations from Mt. Vernon, Ohio (original headquarters for the gas compression business of Cooper Compression) to other locations pursuant to the 1999 sale of Cooper Compression’s rotating compressor business to Rolls-Royce plc; $6,634,000 related to the write-off of the Canadian translation component in connection with the sale of this business; $4,058,000 related to the relocation of Cameron’s drilling BOP stack and subsea “Christmas tree” manufacturing from Ville Platte, Louisiana to Liberty, Texas (subsea trees) and Beziers, France (BOPs); $2,826,000 related to the shutdown of Cameron’s manufacturing facility in Vienna, Austria and relocation of this capacity to other European locations; and $3,593,000 associated with various facility shutdown and realignment costs and other actions for each of the divisions.
The number of employees terminated as a result of the above actions were approximately 210, 190 and 350 in 2002, 2001 and 2000, respectively.
A summary of the impact of various balance sheet accounts associated with the aforementioned costs incurred during the year ended December 31, 2002 follows:
| Balance at Beginning of Year | Additions | Proceeds From Sales of Assets | Cash Disbursements | Asset Write-downs, Reclassifications & Other | Balance at End of Year | |||||||||||||||
Liabilities: | ||||||||||||||||||||
Severance | $ | 1,601 | $ | 2,714 | $ | — | $ | (2,190 | ) | $ | — | $ | 2,125 | |||||||
Facility closure | 4,586 | 8,177 | — | (6,341 | ) | 1,772 | 8,194 | |||||||||||||
Retained liabilities from sale of Rotating business | 4,929 | — | — | (1,616 | ) | — | 3,313 | |||||||||||||
International tax restructuring | — | 1,193 | — | (693 | ) | — | 500 | |||||||||||||
Environmental | — | — | — | — | 5,000 | 5,000 | ||||||||||||||
Accounts receivable | — | 269 | — | — | (269 | ) | — | |||||||||||||
Inventory | — | 11,214 | — | — | (11,214 | ) | — | |||||||||||||
Property, plant & equipment | — | 7,639 | 8,469 | — | (16,108 | ) | — | |||||||||||||
Other noncurrent assets | — | 2,113 | — | — | (2,113 | ) | — | |||||||||||||
Total | $ | 11,116 | $ | 33,319 | $ | 8,469 | $ | (10,840 | ) | $ | (22,932 | ) | $ | 19,132 | ||||||
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Note 3: Acquisitions
During 2002, the Company’s acquisitions consisted of a Canadian valve manufacturer, a wellhead business located in West Texas and certain drilling and riser-related assets from another oilfield equipment supplier. Cash and debt consideration for these acquisitions totaled $70,250,000 and resulted in preliminary goodwill of approximately $31,176,000, the majority of which resides in the CCV segment. As the Canadian valve manufacturer was acquired in late December, the purchase price allocation included in the December 31, 2002 financial statements was based on preliminary information available at the time and is subject to future revision. The Company expects to finalize its purchase price allocation with respect to inventory, plant closing reserves and intangibles by the end of the second quarter of 2003. None of these items are expected to be material to the Company.
During 2001, the Company’s acquisitions consisted primarily of two aftermarket parts and service suppliers in the Cooper Compression division and a supplier of motion compensation solutions in the Cameron division. Cash and debt consideration for these acquisitions totaled $55,350,000 and resulted in goodwill of approximately $27,168,000.
The acquisitions in 2000 were not significant. All acquisitions have been accounted for under the purchase method of accounting and their results of operations since the date of acquisition have been included in the Company’s consolidated results of operations.
Note 4: Receivables
Receivables consisted of the following:
| December 31, | ||||||||
| (dollars in thousands) | 2002 | 2001 | ||||||
Trade receivables | $ | 297,571 | $ | 300,565 | ||||
Other receivables | 9,420 | 9,633 | ||||||
Allowance for doubtful accounts | (2,170 | ) | (3,993 | ) | ||||
| $ | 304,821 | $ | 306,205 | |||||
Note 5: Inventories
Inventories consisted of the following:
| December 31, | ||||||||
| (dollars in thousands) | 2002 | 2001 | ||||||
Raw materials | $ | 37,078 | $ | 42,684 | ||||
Work-in-process | 99,417 | 93,637 | ||||||
Finished goods, including parts and subassemblies | 329,151 | 362,725 | ||||||
Other | 1,818 | 1,982 | ||||||
| 467,464 | 501,028 | |||||||
Excess of current standard costs over LIFO costs | (44,891 | ) | (52,477 | ) | ||||
Allowance for obsolete and excess inventory | (35,355 | ) | (24,732 | ) | ||||
| $ | 387,218 | $ | 423,819 | |||||
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Note 6: Plant and Equipment, Goodwill and Other Assets
Plant and equipment consisted of the following:
| December 31, | ||||||||
| (dollars in thousands) | 2002 | 2001 | ||||||
Land and land improvements | $ | 38,140 | $ | 39,950 | ||||
Buildings | 185,267 | 215,267 | ||||||
Machinery and equipment | 493,876 | 438,429 | ||||||
Tooling, dies, patterns, etc. | 48,119 | 58,565 | ||||||
Assets under capital leases | 21,940 | 23,551 | ||||||
Capitalized software | 110,538 | 82,670 | ||||||
All other | 105,307 | 108,931 | ||||||
Construction in progress | 27,799 | 26,917 | ||||||
| 1,030,986 | 994,280 | |||||||
Accumulated depreciation | (555,072 | ) | (504,016 | ) | ||||
| $ | 475,914 | $ | 490,264 | |||||
During the fourth quarter of 2002, the Company entered into a sale-leaseback transaction involving the Cameron division headquarters building. The sale of the building resulted in net proceeds to the Company of approximately $31,000,000. The building is being leased back from the purchaser over a 22-year period (with options for renewals totaling an additional 15 years) at an initial rate of approximately $2,400,000 per year. This transaction was accounted for as a sale and subsequent operating lease, resulting in the removal of the building from the Company’s records and a deferral of the related $0.6 million gain, which will be amortized over the life of the lease.
Goodwill consisted of the following:
| December 31, 2002 | December 31, 2001 | |||||||||||||||||||
| (dollars in thousands) | Gross | Accumulated Amortization | Net Book Value | Gross | Accumulated Amortization | Net Book Value | ||||||||||||||
Cameron | $ | 257,657 | $ | (121,036 | ) | $ | 136,621 | $ | 237,154 | $ | (115,053 | ) | $ | 122,101 | ||||||
CCV | 142,453 | (39,414 | ) | 103,039 | 115,359 | (38,081 | ) | 77,278 | ||||||||||||
Cooper Compression | 103,186 | (40,964 | ) | 62,222 | 102,161 | (41,711 | ) | 60,450 | ||||||||||||
| $ | 503,296 | $ | (201,414 | ) | $ | 301,882 | $ | 454,674 | $ | (194,845 | ) | $ | 259,829 | |||||||
For additional information relating to additions to goodwill arising from purchase business combinations, see Note 3 of the Notes to Consolidated Financial Statements. Other changes to goodwill balances are largely related to changes in foreign currency exchange rates applied to goodwill denominated in currencies other than the U.S. dollar.
Other assets consisted of the following:
| December 31, | ||||||||
| (dollars in thousands) | 2002 | 2001 | ||||||
Long-term prepaid benefit costs of defined benefit pension plans | $ | 107,151 | $ | 80,267 | ||||
Deferred income taxes | 67,517 | 61,998 | ||||||
Intangible assets related to pension plans | 175 | 243 | ||||||
Other amortizable intangibles: | ||||||||
Gross | 11,004 | 9,483 | ||||||
Accumulated amortization | (7,619 | ) | (5,807 | ) | ||||
Other | 23,785 | 13,789 | ||||||
| $ | 202,013 | $ | 159,973 | |||||
In June 2001, the FASB issued FAS 142. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, but are reviewed at least annually for impairment. Following are the pro forma amounts that would have been reported had FAS 142 been effective as of January 1, 2000:
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| Year Ended December 31, | |||||||||
| (dollars in thousands) | 2002 | 2001 | 2000 | ||||||
Reported net income | $ | 60,469 | $ | 98,345 | $ | 27,660 | |||
Add back goodwill amortization | — | 10,719 | 10,088 | ||||||
Pro forma net income | $ | 60,469 | $ | 109,064 | $ | 37,748 | |||
Basic earnings per share: | |||||||||
Reported earnings per share | $ | 1.12 | $ | 1.82 | $ | 0.52 | |||
Add back goodwill amortization | — | 0.19 | 0.19 | ||||||
Pro forma earnings per share | $ | 1.12 | $ | 2.01 | $ | 0.71 | |||
Diluted earnings per share: | |||||||||
Reported earnings per share | $ | 1.10 | $ | 1.75 | $ | 0.50 | |||
Add back goodwill amortization | — | 0.18 | 0.19 | ||||||
Pro forma earnings per share | $ | 1.10 | $ | 1.93 | $ | 0.69 | |||
Amortization associated with the Company’s other amortizable intangibles (primarily patents, trademarks and other) has not been an item of material expense for the Company during the three years ended December 31, 2002 and is not expected to be material during any specific year over the next five-year period.
Note 7: Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
| December 31, | ||||||
| (dollars in thousands) | 2002 | 2001 | ||||
Trade accounts and accruals | $ | 206,002 | $ | 207,020 | ||
Salaries, wages and related fringe benefits | 59,059 | 58,340 | ||||
Payroll and other taxes | 20,170 | 16,978 | ||||
Product warranty | 5,912 | 8,932 | ||||
Deferred income taxes | 32,904 | 32,024 | ||||
Accruals related to special items | 11,705 | 4,322 | ||||
Other | 18,625 | 21,620 | ||||
| $ | 354,377 | $ | 349,236 | |||
Activity during the year associated with the Company’s warranty accruals was as follows (dollars in thousands):
Balance December 31, 2001 | Warranty Provisions | Charges Against | Translation and Other | Balance December 31, 2002 | ||||
$8,932 | 5,826 | (9,162) | 316 | $5,912 | ||||
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Note 8: Employee Benefit Plans
Total net benefit (income) expense associated with the Company’s defined benefit pension and postretirement benefit plans consisted of the following:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| (dollars in thousands) | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||||||||||||||
Service cost | $ | 6,359 | $ | 5,971 | $ | 7,569 | $ | 13 | $ | 48 | $ | 67 | ||||||||||||
Interest cost | 20,021 | 18,721 | 17,825 | 2,936 | 3,090 | 3,123 | ||||||||||||||||||
Expected return on plan assets | (25,572 | ) | (29,543 | ) | (31,921 | ) | — | — | — | |||||||||||||||
Amortization of prior service cost | (346 | ) | (351 | ) | (188 | ) | (137 | ) | (136 | ) | (200 | ) | ||||||||||||
Amortization of (gains) losses and other | 4,322 | (5,466 | ) | (9,442 | ) | (500 | ) | (200 | ) | (10,100 | ) | |||||||||||||
Net periodic benefit (income) expense | 4,784 | (10,668 | ) | (16,157 | ) | 2,312 | 2,802 | (7,110 | ) | |||||||||||||||
Curtailment (gain) loss | — | (577 | ) | 53 | — | — | (300 | ) | ||||||||||||||||
Settlement gain | — | — | (1,484 | ) | — | — | — | |||||||||||||||||
Termination benefit expense | — | 839 | 304 | — | — | — | ||||||||||||||||||
Total net benefit (income) expense | $ | 4,784 | $ | (10,406 | ) | $ | (17,284 | ) | $ | 2,312 | $ | 2,802 | $ | (7,410 | ) | |||||||||
The change in the benefit obligations associated with the Company’s defined benefit pension and postretirement benefit plans consisted of the following:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| (dollars in thousands) | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Benefit obligation at beginning of year | $ | 299,997 | $ | 273,657 | $ | 41,680 | $ | 41,911 | ||||||||
Service cost | 6,359 | 5,971 | 13 | 48 | ||||||||||||
Interest cost | 20,021 | 18,721 | 2,936 | 3,090 | ||||||||||||
Plan participants’ contributions | 751 | 721 | — | — | ||||||||||||
Amendments | 31 | — | — | — | ||||||||||||
Actuarial (gains) losses | (14,970 | ) | 24,640 | 7,754 | 247 | |||||||||||
Exchange rate changes | 14,018 | (3,069 | ) | — | — | |||||||||||
Curtailment results | — | (1,591 | ) | — | — | |||||||||||
Termination benefit results | — | 839 | — | — | ||||||||||||
Benefits paid directly or from plan assets | (19,898 | ) | (19,892 | ) | (4,911 | ) | (3,616 | ) | ||||||||
Benefit obligation at end of year | $ | 306,309 | $ | 299,997 | $ | 47,472 | $ | 41,680 | ||||||||
The change in the plan assets associated with the Company’s defined benefit pension and postretirement benefit plans consisted of the following:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| (dollars in thousands) | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Fair value of plan assets at beginning of year | $ | 295,074 | $ | 355,819 | $ | — | $ | — | ||||||||
Actual return on plan assets | (32,687 | ) | (29,546 | ) | — | — | ||||||||||
Actuarial gains (losses) | 2,969 | (8,602 | ) | — | — | |||||||||||
Company contributions | 27,124 | 340 | 4,911 | 3,616 | ||||||||||||
Plan participants’ contributions | 751 | 721 | — | — | ||||||||||||
Exchange rate changes | 12,617 | (4,027 | ) | — | — | |||||||||||
Benefits paid from plan assets | (19,698 | ) | (19,631 | ) | (4,911 | ) | (3,616 | ) | ||||||||
Fair value of plan assets at end of year, primarily debt and equity securities | $ | 286,150 | $ | 295,074 | $ | — | $ | — | ||||||||
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The net assets (liabilities) associated with the Company’s defined benefit pension and postretirement benefit plans recognized on the balance sheet consisted of the following:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| (dollars in thousands) | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Plan assets in excess of (less than) benefit obligations at end of year | $ | (20,159 | ) | $ | (4,923 | ) | $ | (47,472 | ) | $ | (41,680 | ) | ||||
Unrecognized net (gain) loss | 124,734 | 83,350 | 2,477 | (5,776 | ) | |||||||||||
Unrecognized prior service cost | (2,380 | ) | (2,764 | ) | (166 | ) | (303 | ) | ||||||||
Unrecognized net transition obligation | 50 | 98 | — | — | ||||||||||||
Prepaid (accrued) pension cost | 102,245 | 75,761 | (45,161 | ) | (47,759 | ) | ||||||||||
Underfunded plan adjustments recognized: | ||||||||||||||||
Accrued minimum liability | (563 | ) | (932 | ) | — | — | ||||||||||
Intangible asset | 175 | 243 | — | — | ||||||||||||
Accumulated other comprehensive income, net of tax | 240 | 331 | — | — | ||||||||||||
Net assets (liabilities) recognized on balance sheet at end of year | $ | 102,097 | $ | 75,403 | $ | (45,161 | ) | $ | (47,759 | ) | ||||||
The weighted-average end of year assumptions associated with the Company’s defined benefit pension and postretirement benefit plans were as follows:
| Pension Benefits | Postretirement Benefits | |||||||
| 2002 | 2001 | 2002 | 2001 | |||||
Domestic plans: | ||||||||
Discount rate | 7.0% | 7.25% | 6.75% | 7.25% | ||||
Expected return on plan assets | 9.25% | 9.25% | ||||||
Rate of compensation increase | 4.5% | 4.5% | ||||||
Health care cost trend rate | 12.0% | 7.0% | ||||||
International plans: | ||||||||
Discount rate | 6.0% | 6.0-6.25% | ||||||
Expected return on plan assets | 6.0-8.0% | 6.0-8.5% | ||||||
Rate of compensation increase | 2.75-4.0% | 3.5-4.5% | ||||||
The rate of compensation increase for the domestic plans is based on an age-grade scale ranging from 7.5% to 3.0% with a weighted-average rate of approximately 4.5%.
The health care cost trend rate is assumed to decrease gradually from 12.0% to 5.0% by 2010 and remain at that level thereafter. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
| (dollars in thousands) | One-percentage- point Increase | One-percentage- point Decrease | |||||
Effect on total of service and interest cost components in 2002 | $ | 192 | $ | (170 | ) | ||
Effect on postretirement benefit obligation as of December 31, 2002 | $ | 3,237 | $ | (2,849 | ) | ||
Amounts applicable to the Company’s pension plans with projected and accumulated benefit obligations in excess of plan assets were as follows:
Projected Benefit Obligation in Excess of | Accumulated Benefit Obligation in Excess of Plan Assets | |||||||||||||||
| (dollars in thousands) | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Fair value of applicable plan assets | $ | 286,150 | $ | 122,568 | $ | 3,512 | $ | 2,786 | ||||||||
Projected benefit obligation of applicable plans | $ | (306,309 | ) | $ | (132,679 | ) | ||||||||||
Accumulated benefit obligation of applicable plans | $ | (8,903 | ) | $ | (7,738 | ) | ||||||||||
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The Company sponsors the Cooper Cameron Corporation Retirement Plan (Retirement Plan) covering all salaried U.S. employees and certain domestic hourly employees, as well as separate defined benefit pension plans for employees of its U.K. and German subsidiaries, and several unfunded defined benefit arrangements for various other employee groups.
In addition, the Company’s domestic employees who are not covered by a bargaining unit are also eligible to participate in the Cooper Cameron Corporation Retirement Savings Plan. Under this plan, employees’ savings deferrals are partially matched with shares of the Company’s Common stock. In addition, the Company makes cash contributions for hourly employees who are not covered under collective bargaining agreements. The Company’s expense under this plan for the years ended December 31, 2002, 2001 and 2000 amounted to $8,192,000, $7,581,000 and $7,349,000, respectively. In addition, the Company provides various savings plans for employees under collective bargaining agreements and certain international employees, which provide for, among other things, Company matching contributions in cash based on specified formulas. Expense with respect to these various defined contribution plans for the years ended December 31, 2002, 2001, and 2000 amounted to $10,723,000, $8,642,000 and $7,783,000, respectively.
Certain of the Company’s employees participate in various domestic employee welfare benefit plans, including medical, dental and prescriptions. Certain employees will receive retiree medical, prescription and life insurance benefits.
All of the welfare benefit plans, including those providing postretirement benefits, are unfunded.
Note 9: Stock Options and Employee Stock Purchase Plan
The following table summarizes stock option activity for each of the three years ended December 31:
| Number of Shares | |||||||||
| Long-term and Broad Based Incentive Plans | Non-employee Director Plan | Weighted Average Exercise Prices | |||||||
Stock options outstanding at December 31, 1999 | 7,584,181 | 380,280 | $ | 34.38 | |||||
Options granted | 2,472,205 | 72,548 | $ | 58.24 | |||||
Options cancelled | (206,242 | ) | — | $ | 31.74 | ||||
Options exercised | (4,382,012 | ) | (128,054 | ) | $ | 31.80 | |||
Stock options outstanding at December 31, 2000 | 5,468,132 | 324,774 | $ | 46.96 | |||||
Options granted | 2,110,390 | 67,740 | $ | 36.57 | |||||
Options cancelled | (166,262 | ) | (10,290 | ) | $ | 48.13 | |||
Options exercised | (555,385 | ) | (45,000 | ) | $ | 32.01 | |||
Stock options outstanding at December 31, 2001 | 6,856,875 | 337,224 | $ | 45.03 | |||||
Options granted | 1,627,602 | 42,000 | $ | 47.20 | |||||
Options cancelled | (223,565 | ) | (10,808 | ) | $ | 51.74 | |||
Options exercised | (356,828 | ) | (54,946 | ) | $ | 32.34 | |||
Stock options outstanding at December 31, 2002 | 7,904,084 | 313,470 | $ | 45.92 | |||||
Information relating to selected ranges of exercise prices for outstanding and exercisable options at December 31, 2002 was as follows:
| Options Outstanding | Options Exercisable | |||||||||
Range of Exercise Prices | Number Outstanding as of 12/31/2002 | Weighted Average Years Remaining on Contractual Life | Weighted Average Exercise Price | Number Exercisable as of 12/31/2002 | Weighted Average Exercise Price | |||||
$24.19—$24.19 | 435,672 | 5.78 | $24.19 | 435,672 | $24.19 | |||||
$29.25—$33.00 | 1,774,447 | 8.03 | $32.94 | 471,234 | $32.79 | |||||
$34.34—$46.91 | 3,027,737 | 8.08 | $43.70 | 1,438,771 | $40.38 | |||||
$47.06—$60.25 | 1,964,299 | 6.37 | $54.19 | 1,375,535 | $54.66 | |||||
$60.69—$79.94 | 1,015,399 | 3.54 | $68.53 | 979,737 | $68.57 | |||||
$24.19—$79.94 | 8,217,554 | 6.98 | $45.92 | 4,700,949 | $48.17 | |||||
Options are granted to key employees under the Long-term and Broad Based Incentive Plans and generally become exercisable on the first anniversary date following the date of grant in one-third increments each year. Certain
26
key executives also elected in 2001 and 2000 to receive options in lieu of salary for the service years ending December 31, 2002 and 2001, respectively. The options granted under the Options in Lieu of Salary Program generally become exercisable at the end of the related salary period and expire five years after the beginning of the salary period. The Options in Lieu of Salary Program has been discontinued effective January 1, 2003.
Under the Company’s Non-employee Director Stock Option Plan, non-employee directors receive a grant of 6,000 stock options annually and, for new directors, upon first joining the Board. The options generally expire five years after the date of grant and become exercisable one year following the date of grant. In addition, directors have been permitted to take either a portion of or their full annual retainer in cash ($30,000) or receive, in lieu of cash, additional stock options. Prior to 2003, all directors elected to receive their retainer in stock options. These retainer option shares, totaling 25,740 for the service years 2002 and 2001, were granted in each of the preceding years. The retainer options become exercisable one year following the beginning of the retainer period and expire five years following the beginning of the retainer period. The exercise price for all option grants is equal to the fair market value of the Company’s stock at the date of grant. Like the Options in Lieu of Salary Program, this program has been discontinued effective January 1, 2003.
As of December 31, 2002, shares reserved for future grants under the Long-term Incentive, Broad Based Incentive, and Non-employee Director Stock Option Plans were 1,241,748, 153,794 and 306,496, respectively.
Had the Company followed the alternative fair value method of accounting for stock-based compensation, the weighted-average fair value per share of options granted during 2002, 2001 and 2000 would have been $17.09, $15.42 and $24.29, respectively. The weighted-average fair value per share of stock purchases under the Employee Stock Purchase Plan during 2002, 2001 and 2000 would have been $14.52, $18.82 and $18.98, respectively. The fair values were estimated using the Black-Scholes model with the following weighted-average assumptions:
| Year Ended December 31, | |||||||||
| 2002 | 2001 | 2000 | |||||||
Expected life (in years) | 3.3 | 3.3 | 3.4 | ||||||
Risk-free interest rate | 2.4 | % | 4.5 | % | 5.8 | % | |||
Volatility | 47.6 | % | 53.3 | % | 48.8 | % | |||
Dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | |||
Further information on the impact on net income and earnings per share of using the alternative fair value method to recognize stock-based employee compensation expense may be found in Note 1 of the Notes to Consolidated Financial Statements.
Employee Stock Purchase Plan
Under the Cooper Cameron Employee Stock Purchase Plan, the Company is authorized to sell up to 2,000,000 shares of Common stock to its full-time employees in the United States, U.K., Ireland, Norway, Singapore and Canada, nearly all of whom are eligible to participate. Under the terms of the Plan, employees may elect each year to have up to 10% of their annual compensation withheld to purchase the Company’s Common stock. The purchase price of the stock is 85% of the lower of the beginning-of-plan year or end-of-plan year market price of the Company’s Common stock. Under the 2002/2003 plan, more than 1,600 employees elected to purchase approximately 179,000 shares of the Company’s Common stock at $35.85 per share, or 85% of the market price of the Company’s Common stock on July 31, 2003, if lower. A total of 132,394 shares were purchased at $36.64 per share on July 31, 2002 under the 2001/2002 plan.
Note 10: Long-term Debt
The Company’s debt obligations were as follows:
| December 31, | ||||||||
| (dollars in thousands) | 2002 | 2001 | ||||||
Convertible debentures, net of $65,643 of unamortized original issue discount ($68,801 at December 31, 2001) | $ | 455,113 | $ | 451,955 | ||||
Floating-rate revolving credit advances | — | 5,151 | ||||||
Other debt | 3,652 | 3,124 | ||||||
Obligations under capital leases | 9,047 | 9,399 | ||||||
| 467,812 | 469,629 | |||||||
Current maturities | (4,870 | ) | (10,487 | ) | ||||
Long-term portion | $ | 462,942 | $ | 459,142 | ||||
On May 16, 2001, the Company issued two series of convertible debentures with aggregate gross proceeds to the Company of $450,000,000. The first series consisted of twenty-year zero-coupon convertible debentures (the “Zero-
27
Coupon Convertible Debentures”) with an aggregate principal amount at maturity of approximately $320,756,000. The debentures were priced at $779.41 per debenture, which represents a yield-to-maturity of approximately 1.25%. The Company has the right to redeem the Zero-Coupon Convertible Debentures anytime after three years at the issue price plus the accrued original issue discount, and the debenture holders have the right to require the Company to repurchase the debentures on the third, eighth and thirteenth anniversaries of the issue. The Zero-Coupon Convertible Debentures are convertible into the Company’s common stock at a rate of 8.1961 shares per debenture, representing an initial conversion price of $95.095 per share.
The second series consisted of twenty-year convertible debentures in an aggregate amount of $200,000,000, with an interest rate of 1.75%, payable semi-annually on May 15 and November 15 (the “1.75% Convertible Debentures”). The Company has the right to redeem the 1.75% Convertible Debentures anytime after five years at the principal amount plus accrued and unpaid interest, and the debenture holders have the right to require the Company to repurchase the debentures on the fifth, tenth and fifteenth anniversaries of the issue. The 1.75% Convertible Debentures are convertible into the Company’s common stock at a rate of 10.5158 shares per debenture, or $95.095 per share.
The net proceeds from the debentures were used to repay amounts outstanding under the Company’s then existing revolving credit agreement and other borrowings and other purposes, including share repurchases and acquisitions.
As of December 31, 2002, the Company was party to a 364-day credit agreement (the “Credit Agreement”) with various banks which provided for an aggregate borrowing capacity of $150,000,000 of floating-rate credit advances, expiring March 5, 2003. The Credit Agreement provides for unsecured borrowings at the London Interbank Offered Rate (LIBOR) plus 0.50%. In addition to certain up-front costs, the agreement carries a facility fee of 0.10% per annum on the committed amount of the facility plus a usage fee of 0.10% per annum on the total amount of outstanding borrowings, provided such borrowings exceed $50,000,000. The agreement also contains certain covenants, including maintaining specific interest coverage and debt-to-total capitalization ratios. The Company is in compliance with all loan covenants. The entire amount of the facility was available for borrowing at December 31, 2002. During March 2003, the Company amended this facility to extend the termination of the facility to July 7, 2003 and to lower the aggregate borrowing capacity under the facility to $100.0 million.
In addition to the above, the Company also has other unsecured and uncommitted credit facilities available both domestically and to its foreign subsidiaries. Certain of these facilities also include annual facility fees.
Other debt, which mainly consists of acquisition related notes, has a weighted-average interest rate of 3.87% at December 31, 2002 (3.24% at December 31, 2001).
During January 2001, the Company entered into interest rate swaps which effectively converted $155,000,000 of outstanding floating rate debt to fixed rate debt at a weighted-average interest rate of 5.24%. These swaps were terminated during the second quarter of 2001 resulting in a pre-tax loss of $1,238,000.
Future maturities of the Company’s debt (excluding the Zero-Coupon Convertible Debentures which can be put to the Company during 2004 and capital lease obligations) are $639,000 in 2003 and $3,013,000 in 2004.
For the years 2002, 2001 and 2000, total interest expense was $7,981,000, $13,481,000 and $18,038,000, respectively. Interest paid by the Company in 2002, 2001 and in 2000 is not materially different from the amounts expensed (except for capitalized interest of $371,000 and $1,847,000 and amortization of the original issue discount and related issue costs on the convertible debentures of $3,576,000 and $2,216,000 for 2002 and 2001, respectively).
The Company leases certain facilities, office space, vehicles and office, data processing and other equipment under capital and operating leases. Future minimum lease payments with respect to capital leases and operating leases with terms in excess of one year were as follows:
| (dollars in thousands) | Capital Lease | Operating Lease | |||||
Year ended December 31: | |||||||
2003 | $ | 4,301 | $ | 12,113 | |||
2004 | 2,837 | 8,300 | |||||
2005 | 1,779 | 7,578 | |||||
2006 | 399 | 7,161 | |||||
2007 | 11 | 5,984 | |||||
Thereafter | — | 53,696 | |||||
Future minimum lease payments | 9,327 | 94,832 | |||||
Less: amount representing interest | (280 | ) | — | ||||
Lease obligations at December 31, 2002 | $ | 9,047 | $ | 94,832 | |||
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Note 11: Income Taxes
The components of income (loss) before provision for income taxes were as follows:
| Year Ended December 31, | |||||||||||
| (dollars in thousands) | 2002 | 2001 | 2000 | ||||||||
Income (loss) before income taxes: | |||||||||||
U.S. operations | $ | (1,958 | ) | $ | 62,785 | $ | (26,137 | ) | |||
Foreign operations | 87,103 | 79,797 | 69,910 | ||||||||
Income before income taxes | $ | 85,145 | $ | 142,582 | $ | 43,773 | |||||
The provisions for income taxes charged to operations were as follows:
| Year Ended December 31, | |||||||||||
| (dollars in thousands) | 2002 | 2001 | 2000 | ||||||||
Current: | |||||||||||
U.S. federal | $ | 2,559 | $ | 6,696 | $ | 54,242 | |||||
U.S. state and local and franchise | 1,835 | 2,432 | 9,432 | ||||||||
Foreign | 21,962 | 14,509 | 16,375 | ||||||||
| 26,356 | 23,637 | 80,049 | |||||||||
Deferred: | |||||||||||
U.S. federal | (4,768 | ) | 8,541 | (61,318 | ) | ||||||
U.S. state and local | (717 | ) | 1,285 | (9,221 | ) | ||||||
Foreign | 3,805 | 10,774 | 6,603 | ||||||||
| (1,680 | ) | 20,600 | (63,936 | ) | |||||||
Income tax provision | $ | 24,676 | $ | 44,237 | $ | 16,113 | |||||
Items giving rise to deferred income taxes were as follows:
| Year Ended December 31, | |||||||||||
| (dollars in thousands) | 2002 | 2001 | 2000 | ||||||||
Reserves and accruals | $ | 3,463 | $ | 3,887 | $ | 12,895 | |||||
Inventory | (4,805 | ) | 2,590 | 5,842 | |||||||
Pension and postretirement benefit income not currently taxable | — | 2,828 | 9,234 | ||||||||
U.S. tax deductions less than (in excess of) amounts currently deductible | (3,358 | ) | 5,571 | (85,635 | ) | ||||||
Other | 3,020 | 5,724 | (6,272 | ) | |||||||
Deferred income taxes | $ | (1,680 | ) | $ | 20,600 | $ | (63,936 | ) | |||
29
The reasons for the differences between the provision for income taxes and income taxes using the U.S. federal income tax rate were as follows:
| Year Ended December 31, | ||||||||||||
| (dollars in thousands) | 2002 | 2001 | 2000 | |||||||||
U.S. federal statutory rate | 35.00 | % | 35.00 | % | 35.00 | % | ||||||
Nondeductible goodwill | 0.47 | 2.07 | 7.32 | |||||||||
State and local income taxes | 0.20 | 1.63 | (0.03 | ) | ||||||||
Tax exempt income | (3.08 | ) | (3.70 | ) | (1.60 | ) | ||||||
Foreign statutory rate differential | (6.36 | ) | (3.22 | ) | (11.61 | ) | ||||||
Change in valuation of prior year tax assets | — | — | (4.34 | ) | ||||||||
Foreign losses (receiving) not receiving a tax benefit | 0.81 | (1.89 | ) | (1.08 | ) | |||||||
Translation write-offs not deductible for tax | — | — | 7.27 | |||||||||
Nondeductible expenses | 1.03 | 0.61 | 2.40 | |||||||||
All other | 0.91 | 0.53 | 3.48 | |||||||||
Total | 28.98 | % | 31.03 | % | 36.81 | % | ||||||
Total income taxes paid | $ | 25,821 | $ | 15,111 | $ | 14,724 | ||||||
Components of deferred tax assets (liabilities) were as follows:
| December 31, | ||||||||
| (dollars in thousands) | 2002 | 2001 | ||||||
Deferred tax liabilities: | ||||||||
Plant and equipment | $ | (28,901 | ) | $ | (32,473 | ) | ||
Inventory | (48,236 | ) | (53,041 | ) | ||||
Pensions | (37,485 | ) | (28,192 | ) | ||||
Other | (38,544 | ) | (30,928 | ) | ||||
Total deferred tax liabilities | (153,166 | ) | (144,634 | ) | ||||
Deferred tax assets: | ||||||||
Postretirement benefits other than pensions | 17,274 | 18,268 | ||||||
Reserves and accruals | 32,658 | 36,121 | ||||||
Net operating losses and related deferred tax assets | 115,386 | 101,140 | ||||||
Other | 1,366 | 1,366 | ||||||
Total deferred tax assets | 166,684 | 156,895 | ||||||
Valuation allowance | (18,121 | ) | (17,427 | ) | ||||
Net deferred tax assets (liabilities) | $ | (4,603 | ) | $ | (5,166 | ) | ||
During each of the last three years, certain of the Company’s international operations have incurred losses that have not been tax benefited, while others that had losses in a prior year generated earnings in a subsequent year that utilized the prior year unrecorded benefit of the loss. In addition, during 2000, $1,900,000 of deferred tax assets that had been reserved in prior years were realized and the related reserves were reversed. The effect of these items on the Company’s overall effective tax rate are included in the rate reconciliation captions: “Change in valuation of prior year tax assets” and “Foreign losses (receiving) not receiving a tax benefit”. As a result of all of the foregoing, the valuation allowances established in prior years were increased in 2002 and 2001, respectively, by $694,000 and $1,226,000 and reduced in 2000 by $2,494,000, with a corresponding increase or reduction in the Company’s income tax expense. In addition, a tax benefit of $3,800,000 was recorded in 2001 relating to certain other foreign losses.
At December 31, 2002, the Company had a deferred tax asset of $104,610,000 related to net operating loss carryforwards which, if not utilized, will generally expire in 2020. The Company had a valuation allowance of $9,353,000 as of December 31, 2002 against the net operating loss and credit carryforwards as well as a valuation allowance of $8,768,000 against certain other deferred tax assets. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event the Company were to determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
30
Note 12: Stockholders’ Equity
Common Stock
Under its Amended and Restated Certificate of Incorporation, the Company is authorized to issue up to 150,000,000 shares of Common stock, par value $.01 per share. Additionally, in November 1998, the Company’s board of directors approved the repurchase of up to 10,000,000 shares of Common stock for use in the Company’s various employee stock ownership, option and benefit plans.
Changes in the number of shares of the Company’s outstanding stock for the last three years were as follows:
| Common Stock | Treasury Stock | Shares Outstanding | ||||||
Balance—December 31, 1999 | 54,001,507 | (3,433,548 | ) | 50,567,959 | ||||
Stock issued under stock option and other employee benefit plans | 10,422 | 3,433,548 | 3,443,970 | |||||
Balance—December 31, 2000 | 54,011,929 | — | 54,011,929 | |||||
Purchase of treasury stock | (611,000 | ) | (611,000 | ) | ||||
Stock issued under stock option and other employee benefit plans | 554,125 | 39,680 | 593,805 | |||||
Balance—December 31, 2001 | 54,566,054 | (571,320 | ) | 53,994,734 | ||||
Stock issued under stock option and other employee benefit plans | — | 516,366 | 516,366 | |||||
Balance—December 31, 2002 | 54,566,054 | (54,954 | ) | 54,511,100 | ||||
At December 31, 2002, 10,863,842 shares of unissued Common stock were reserved for future issuance under various employee benefit plans.
At December 31, 2002, the Company was party to two forward purchase agreements with a third party financial institution for the purchase of a total of 1,006,500 shares of the Company’s common stock. The key terms of these agreements are as follows:
| Forward Agreement Dated | ||||
| August 2002 | March 2002 | |||
Underlying shares | 350,500 | 656,000 | ||
Average price per share | $39.24 | $36.46 | ||
Settlement required by | August 12, 2004 | March 15, 2004 | ||
Maximum issuable shares | 2,103,000 | 3,600,000 | ||
Based on the closing market price of $49.82 per share at December 31, 2002, the Company was in a position to acquire these shares at a savings of approximately $12,474,000 over current open market purchases.
The carrying cost inherent in these contracts is 3-month LIBOR plus 0.70%. The Company could be required to settle these agreements prematurely if the Company’s stock price falls below $16.50 per share and in certain other limited circumstances. In the event the Company chooses not to settle these transactions in cash, the maximum number of shares the Company could be required to deliver to settle each agreement is reflected above. In accordance with the consensus reached by the FASB’s Emerging Issues Task Force in Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, these forward purchase agreements have not been included as a liability in the Company’s December 31, 2002 Consolidated Balance Sheet, but rather are accounted for as permanent equity. As a result, the forward purchase agreements were accounted for at their initial fair value (which was zero). Subsequent changes in the fair value of these contracts are not recognized. The carrying cost inherent in the contracts is being charged to equity as incurred.
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred stock, par value $.01 per share. At December 31, 2002, no preferred shares were issued or outstanding. Shares of preferred stock may be issued in one or more series of classes, each of which series or class shall have such distinctive designation or title as shall be fixed by the Board of Directors of the Company prior to issuance of any shares. Each such series or class shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special
31
rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issuance of such series or class of preferred stock as may be adopted by the Board of Directors prior to the issuance of any shares thereof. A total of 1,500,000 shares of Series A Junior Participating Preferred Stock has been reserved for issuance upon exercise of the Stockholder Rights described below.
Stockholder Rights Plan
On May 23, 1995, the Company’s Board of Directors declared a dividend distribution of one Right for each then-current and future outstanding share of Common stock. Each Right entitles the registered holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company, par value $.01 per share, for an exercise price of $300. Unless earlier redeemed by the Company at a price of $.01 each, the Rights become exercisable only in certain circumstances constituting a potential change in control of the Company, described below, and will expire on October 31, 2007.
Each share of Series A Junior Participating Preferred Stock purchased upon exercise of the Rights will be entitled to certain minimum preferential quarterly dividend payments as well as a specified minimum preferential liquidation payment in the event of a merger, consolidation or other similar transaction. Each share will also be entitled to 100 votes to be voted together with the Common stockholders and will be junior to any other series of Preferred Stock authorized or issued by the Company, unless the terms of such other series provides otherwise.
Except as otherwise provided in the Plan, in the event any person or group of persons acquire beneficial ownership of 20% or more of the outstanding shares of Common stock, each holder of a Right, other than Rights beneficially owned by the acquiring person or group (which will have become void), will have the right to receive upon exercise of a Right that number of shares of Common stock of the Company, or, in certain instances, Common stock of the acquiring person or group, having a market value equal to two times the current exercise price of the Right.
Retained Earnings
The Company’s retained earnings includes a $441,000,000 charge related to the goodwill write-down that occurred concurrent with the Company becoming a separate stand-alone entity on June 30, 1995 in connection with the split-off from its former parent, Cooper Industries, Inc. Delaware law, under which the Company is incorporated, provides that dividends may be declared by the Company’s Board of Directors from a current year’s earnings as well as from the total of capital in excess of par value plus the retained earnings, which amounted to approximately $1,057,335,000 at December 31, 2002.
Note 13: Business Segments
The Company’s operations are now organized into three separate business segments—Cameron, CCV and Cooper Compression. Prior to 2002, the Company had four separate segments. In connection with an internal restructuring completed during the second quarter of 2002, the Company combined its Cooper Energy Services and Cooper Turbocompressor divisions into one segment, known as Cooper Compression. The restructuring reflects the common management team of both divisions and the decision to share manufacturing and aftermarket facilities as well as service personnel in order to improve utilization and customer responsiveness. Prior period financial information relating to these two divisions has been combined for consistency with the current period presentation.
Based upon the amount of equipment installed worldwide and available industry data, Cameron is one of the world’s leading providers of systems and equipment used to control pressures and direct flows of oil and gas wells. Cameron’s products include surface and subsea production systems, blowout preventers, drilling and production control systems, gate valves, actuators, chokes, wellheads, drilling risers and aftermarket parts and services. Based upon the amount of equipment worldwide installed and available industry data, CCV is a leading provider of valves and related systems primarily used to control pressure and direct the flow of oil and gas as they are moved from individual wellheads through flow lines, gathering lines and transmission systems to refineries, petrochemical plants and industrial centers for processing. CCV’s products include ball valves, gate valves, butterfly valves, Orbit valves, rotary process valves, block and bleed valves, plug valves, globe valves, check valves, actuators, chokes and aftermarket parts and service. Based upon the amount of equipment installed worldwide and available industry data, Cooper Compression is a leading provider of air compression equipment and related aftermarket parts and services for the energy industry and for manufacturing companies and chemical process industries worldwide.
The Company’s primary customers are major and independent oil and gas exploration and production companies, foreign national oil and gas companies, drilling contractors, pipeline companies, refiners and other industrial and petrochemical processing companies. Cooper Compression’s customers also include manufacturers and companies in the chemical process industry.
The Company markets its equipment through a worldwide network of sales and marketing employees supported by agents and distributors in selected international locations. Due to the extremely technical nature of many of the products, the marketing effort is further supported by a staff of engineering employees.
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For the years ended December 31, 2002, 2001 and 2000, the Company incurred research and development costs, including costs incurred on projects designed to enhance or add to its existing product offerings, totaling $28,020,000, $27,388,000 and $27,276,000, respectively. Cameron accounted for 85%, 76% and 78% of each respective year’s total costs.
Summary financial data by segment follows:
| For the Year Ended December 31, 2002 | ||||||||||||||||||
| (dollars in thousands) | Cameron | CCV | Cooper Compression | Corporate & Other | Consolidated | |||||||||||||
Revenues | $ | 918,677 | $ | 273,507 | $ | 345,916 | $ | — | $ | 1,538,100 | ||||||||
Depreciation and amortization | $ | 46,040 | $ | 10,122 | $ | 19,216 | $ | 2,529 | $ | 77,907 | ||||||||
Interest income | $ | — | $ | — | $ | — | $ | (8,542 | ) | $ | (8,542 | ) | ||||||
Interest expense | $ | — | $ | — | $ | — | $ | 7,981 | $ | 7,981 | ||||||||
Income (loss) before taxes | $ | 76,261 | $ | 37,290 | $ | (8,477 | ) | $ | (19,929 | ) | $ | 85,145 | ||||||
Capital expenditures | $ | 39,253 | $ | 9,266 | $ | 9,689 | $ | 23,940 | $ | 82,148 | ||||||||
Total assets | $ | 1,067,598 | $ | 303,506 | $ | 300,665 | $ | 325,901 | $ | 1,997,670 | ||||||||
| For the Year Ended December 31, 2001 | ||||||||||||||||||
| (dollars in thousands) | Cameron | CCV | Cooper Compression | Corporate & Other | Consolidated | |||||||||||||
Revenues | $ | 897,551 | $ | 292,257 | $ | 373,091 | $ | — | $ | 1,562,899 | ||||||||
Depreciation and amortization | $ | 48,811 | $ | 14,198 | $ | 18,458 | $ | 1,628 | $ | 83,095 | ||||||||
Interest income | $ | — | $ | — | $ | — | $ | (8,640 | ) | $ | (8,640 | ) | ||||||
Interest expense | $ | — | $ | — | $ | — | $ | 13,481 | $ | 13,481 | ||||||||
Income (loss) before taxes | $ | 123,121 | $ | 38,275 | $ | 2,006 | $ | (20,820 | ) | $ | 142,582 | |||||||
Capital expenditures | $ | 71,056 | $ | 6,985 | $ | 13,011 | $ | 33,952 | $ | 125,004 | ||||||||
Total assets | $ | 1,038,322 | $ | 247,864 | $ | 346,390 | $ | 242,476 | $ | 1,875,052 | ||||||||
| For the Year Ended December 31, 2000 | ||||||||||||||||||
| (dollars in thousands) | Cameron | CCV | Cooper Compression | Corporate & Other | Consolidated | |||||||||||||
Revenues | $ | 835,744 | $ | 220,772 | $ | 327,217 | $ | — | $ | 1,383,733 | ||||||||
Depreciation and amortization | $ | 45,711 | $ | 11,379 | $ | 17,371 | $ | 860 | $ | 75,321 | ||||||||
Interest income | $ | — | $ | — | $ | — | $ | (2,976 | ) | $ | (2,976 | ) | ||||||
Interest expense | $ | — | $ | — | $ | — | $ | 18,038 | $ | 18,038 | ||||||||
Income (loss) before taxes | $ | 92,301 | $ | 23,917 | $ | (41,558 | ) | $ | (30,887 | ) | $ | 43,773 | ||||||
Capital expenditures | $ | 38,615 | $ | 5,981 | $ | 21,912 | $ | 91 | $ | 66,599 | ||||||||
Total assets | $ | 884,187 | $ | 245,653 | $ | 278,461 | $ | 85,572 | $ | 1,493,873 | ||||||||
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Geographic revenue and long-lived assets related to operations as of and for the years ended December 31 were as follows:
| (dollars in thousands) | 2002 | 2001 | 2000 | ||||||
Revenues: | |||||||||
United States | $ | 836,264 | $ | 932,490 | $ | 749,802 | |||
United Kingdom | 256,213 | 220,818 | 203,219 | ||||||
Other foreign countries | 445,623 | 409,591 | 430,712 | ||||||
Total | $ | 1,538,100 | $ | 1,562,899 | $ | 1,383,733 | |||
Long-lived assets: | |||||||||
United States | $ | 505,069 | $ | 529,803 | $ | 429,611 | |||
United Kingdom | 117,752 | 102,989 | 112,149 | ||||||
Other foreign countries | 158,535 | 121,220 | 123,060 | ||||||
Total | $ | 781,356 | $ | 754,012 | $ | 664,820 | |||
For internal management reporting, and therefore the above segment information, consolidated interest is treated as a Corporate item because short-term investments and debt, including location, type, currency, etc., are managed on a worldwide basis by the Corporate Treasury Department. In addition, the Company’s enterprise-wide software upgrade is being reflected as a Corporate asset. Amortization expense on this asset is reflected in each segment’s results.
Note 14: Off-Balance Sheet Risk and Guarantees, Concentrations of Credit Risk and Fair Value of Financial Instruments
Off-Balance Sheet Risk and Guarantees
At December 31, 2002, the Company was contingently liable with respect to approximately $78,474,000 of standby letters of credit (“letters”) issued on its behalf by financial institutions in connection with the delivery, installation and performance of the Company’s products under contracts with customers throughout the world. The Company was also liable for approximately $13,467,000 of bank guarantees and letters of credit used to secure certain financial obligations of the Company. While certain of the letters do not have a fixed expiration date, the majority expire within the next one to two years and the Company would expect to issue new or extend existing letters in the normal course of business. In addition, the Company has provided third parties with guarantees of a portion of the outstanding bank loans of its joint ventures, as well as other matters, totaling $2,916,000 at December 31, 2002.
The Company’s other off-balance sheet risks were not material.
Concentrations of Credit Risk
Apart from its normal exposure to its customers, who are predominantly in the energy industry, the Company had no significant concentrations of credit risk at December 31, 2002.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, short-term marketable debt and equity securities, trade receivables, trade payables and debt instruments. The book values of cash and cash equivalents, trade receivables and trade payables and floating-rate debt instruments are considered to be representative of their respective fair values.
The Company’s short-term investments (which consisted entirely of available-for-sale securities) comprised the following:
| December 31, | ||||||||||||
| 2002 | 2001 | |||||||||||
| (amounts in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||
Auction rate preferred stock | $ | 25,000 | $ | 25,000 | $ | — | $ | — | ||||
Bond mutual fund | — | — | 92,062 | 92,062 | ||||||||
Equity instruments | 290 | 290 | 10,009 | 10,009 | ||||||||
| $ | 25,290 | $ | 25,290 | $ | 102,071 | $ | 102,071 | |||||
The proceeds from sales of available-for-sale securities were $124,395,000, $1,156,000 and $0 for the years ended December 31, 2002, 2001 and 2000, respectively.
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The primary portion of the Company’s debt consists of fixed-rate convertible debentures. Based on quoted market prices, the book value for this debt at December 31, 2002 was $2,257,000 higher than the market value. The difference between book value and market value on the Company’s other fixed-rate debt was not material.
Note 15: Summary of Noncash Investing and Financing Activities
The effect on net assets of noncash investing and financing activities was as follows:
| Year Ended December 31, | |||||||
| (dollars in thousands) | 2002 | 2001 | |||||
Common stock issued for employee stock ownership plans | $ | 4,944 | $ | 4,185 | |||
Tax benefit of certain employee stock benefit plan transactions | 2,944 | 7,129 | |||||
Other | (3 | ) | 30 | ||||
Note 16: Earnings Per Share
The calculation of basic and diluted earnings per share for each period presented was as follows:
| Year Ended December 31, | |||||||||
| (amounts in thousands, except per share data) | 2002 | 2001 | 2000 | ||||||
Net income | $ | 60,469 | $ | 98,345 | $ | 27,660 | |||
Add back interest on debentures, net of tax | 5,024 | 3,032 | — | ||||||
Net income (assuming conversion of convertible debentures) | $ | 65,493 | $ | 101,377 | $ | 27,660 | |||
Average shares outstanding (basic) | 54,215 | 54,170 | 52,800 | ||||||
Common stock equivalents | 862 | 936 | 2,213 | ||||||
Incremental shares from assumed conversion of convertible debentures | 4,732 | 2,969 | — | ||||||
Shares utilized in diluted earnings per share calculation | 59,809 | 58,075 | 55,013 | ||||||
Earnings per share: | |||||||||
Basic | $ | 1.12 | $ | 1.82 | $ | 0.52 | |||
Diluted | $ | 1.10 | $ | 1.75 | $ | 0.50 | |||
Note 17: Accumulated Other Elements of Comprehensive Income
Accumulated other elements of comprehensive income comprised the following:
| December 31, | ||||||||
| (dollars in thousands) | 2002 | 2001 | ||||||
Accumulated foreign currency translation loss | $ | (14,640 | ) | $ | (52,645 | ) | ||
Accumulated adjustments to record minimum pension liabilities | (240 | ) | (331 | ) | ||||
Change in fair value of short-term investments | 91 | (74 | ) | |||||
| $ | (14,789 | ) | $ | (53,050 | ) | |||
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Note 18: Unaudited Quarterly Operating Results
Unaudited quarterly operating results were as follows:
| 2002 (by quarter) | |||||||||||||
| (dollars in thousands, except per share data) | 1 | 2 | 3 | 4 | |||||||||
Revenues | $ | 366,901 | $ | 402,583 | $ | 383,847 | $ | 384,769 | |||||
Gross margin1 | 106,982 | 115,907 | 112,060 | 100,647 | |||||||||
Net income (loss) | 19,489 | 22,667 | 20,683 | (2,370 | ) | ||||||||
Earnings (loss) per share: | |||||||||||||
Basic | 0.36 | 0.42 | 0.38 | (0.04 | ) | ||||||||
Diluted | 0.35 | 0.40 | 0.37 | (0.04 | ) | ||||||||
| 2001 (by quarter) | |||||||||||||
| (dollars in thousands, except per share data) | 1 | 2 | 3 | 4 | |||||||||
Revenues | $ | 334,056 | $ | 404,625 | $ | 417,218 | $ | 407,000 | |||||
Gross margin1 | 103,106 | 120,415 | 128,779 | 129,521 | |||||||||
Net income | 14,255 | 19,807 | 34,400 | 29,883 | |||||||||
Earnings per share: | |||||||||||||
Basic | 0.26 | 0.36 | 0.63 | 0.55 | |||||||||
Diluted | 0.26 | 0.35 | 0.60 | 0.53 | |||||||||
1 Gross margin equals revenues less cost of sales before depreciation and amortization.
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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF COOPER CAMERON CORPORATION
The following table sets forth selected historical financial data for the Company for each of the five years in the period ended December 31, 2002. This information should be read in conjunction with the consolidated financial statements of the Company and notes thereto included elsewhere in this Annual Report.
| Year Ended December 31, | ||||||||||||||||||||
| (dollars in thousands, except per share data) | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||||
Income Statement Data: | ||||||||||||||||||||
Revenues | $ | 1,538,100 | $ | 1,562,899 | $ | 1,383,733 | $ | 1,469,962 | $ | 1,890,691 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of sales (exclusive of depreciation and amortization) 1 | 1,102,504 | 1,081,078 | 985,404 | 1,076,276 | 1,340,722 | |||||||||||||||
Selling and administrative expenses 1 | 273,105 | 251,303 | 264,173 | 216,319 | 251,666 | |||||||||||||||
Depreciation and amortization | 77,907 | 83,095 | 75,321 | 83,716 | 72,474 | |||||||||||||||
Interest income | (8,542 | ) | (8,640 | ) | (2,976 | ) | (5,099 | ) | (2,620 | ) | ||||||||||
Interest expense | 7,981 | 13,481 | 18,038 | 27,834 | 32,721 | |||||||||||||||
Total costs and expenses | 1,452,955 | 1,420,317 | 1,339,960 | 1,399,046 | 1,694,963 | |||||||||||||||
Income before income taxes | 85,145 | 142,582 | 43,773 | 70,916 | 195,728 | |||||||||||||||
Income tax provision | (24,676 | ) | (44,237 | ) | (16,113 | ) | (27,914 | ) | (59,572 | ) | ||||||||||
Net income | $ | 60,469 | $ | 98,345 | $ | 27,660 | $ | 43,002 | $ | 136,156 | ||||||||||
Earnings per share: | ||||||||||||||||||||
Basic | $ | 1.12 | $ | 1.82 | $ | 0.52 | $ | 0.81 | $ | 2.58 | ||||||||||
Diluted | $ | 1.10 | $ | 1.75 | $ | 0.50 | $ | 0.78 | $ | 2.48 | ||||||||||
Balance Sheet Data (at the end of period): | ||||||||||||||||||||
Total assets | $ | 1,997,670 | $ | 1,875,052 | $ | 1,493,873 | $ | 1,470,719 | $ | 1,823,603 | ||||||||||
Stockholders’ equity | 1,041,303 | 923,281 | 842,279 | 714,078 | 780,285 | |||||||||||||||
Long-term debt | 462,942 | 459,142 | 188,060 | 195,860 | 364,363 | |||||||||||||||
Other long-term obligations | 118,615 | 114,858 | 117,503 | 138,955 | 149,113 | |||||||||||||||
| 1 | Includes plant closing, business realignment and other related costs aggregating $33,319,000, $20,159,000, $77,399,000, $10,585,000 and $21,956,000 for the years ending December 31, 2002, 2001, 2000, 1999 and 1998, respectively. See Note 2 of the Notes to Consolidated Financial Statements for further information relating to these costs incurred during 2002, 2001 and 2000. Information on similar costs in 1999 and 1998 may be found in the Company’s 1999 Annual Report to Stockholders. |
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STOCKHOLDER INFORMATION
Transfer Agent and Registrar
EquiServe Trust Company, N.A.
General correspondence about your shares should be addressed to:
EquiServe Trust Company, N.A.
Shareholder Services
P.O. Box 43069
Providence, RI 02940-3069
Website: www.equiserve.com
E-mail: equiserve@equiserve.com
Telephone inquiries can be made to the Telephone Response Center at (781) 575-2725, Monday through Friday, 8:30 a.m. to 7:00 p.m., Eastern Time.
Additional Stockholder Assistance
For additional assistance regarding your holdings, write to:
Corporate Secretary
Cooper Cameron Corporation
1333 West Loop South, Suite 1700
Houston, Texas 77027
Telephone: (713) 513-3322
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m., Thursday, May 8, 2003, at the Company’s corporate headquarters in Houston, Texas. A meeting notice and proxy materials are being mailed to all stockholders of record on March 24, 2003.
Stockholders of Record
The approximate number of record holders of Cooper Cameron Common stock was 1,608 as of February 18, 2003.
Common Stock Prices
Cooper Cameron Common stock is listed on the New York Stock Exchange under the symbol CAM. The trading activity during 2002 and 2001 was as follows:
| High | Low | Last | |||||||
2002 | |||||||||
First Quarter | $ | 52.98 | $ | 36.40 | $ | 51.11 | |||
Second Quarter | 59.60 | 47.99 | 48.42 | ||||||
Third Quarter | 50.86 | 35.94 | 41.76 | ||||||
Fourth Quarter | 53.31 | 38.56 | 49.82 | ||||||
| High | Low | Last | |||||||
2001 | |||||||||
First Quarter | $ | 69.28 | $ | 52.56 | $ | 54.00 | |||
Second Quarter | 73.00 | 46.55 | 55.80 | ||||||
Third Quarter | 57.74 | 28.85 | 32.80 | ||||||
Fourth Quarter | 44.75 | 31.20 | 40.36 | ||||||
The following documents are available on the Company’s website atwww.coopercameron.com:
| • | The Company’s filings with the Securities and Exchange Commission (SEC). |
| • | The charters of the Committees of the Board. |
| • | Other documents that may be required to be made so available by the SEC or the New York Stock Exchange. |
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