UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-K

☑ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

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Commission File Number 1-13884

 

CAMERON INTERNATIONAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

Registrant’s telephone number, including area code (713) 513-3300

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £  No R

The aggregate market value of the Common Stock, par value $0.01 per share, held by non-affiliates of the registrant as of June 30, 2014, our most recently completed second fiscal quarter, was approximately $10,963,201,206.  For purposes of the determination of the above statement amount only, all the directors and executive officers of the registrant are presumed to be affiliates. The number of shares of Common Stock, par value $.01 per share, outstanding as of February 10, 2015 was 193,721,697.

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DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s 2015 Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 2015 are incorporated by reference into Part III.

 

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TABLE OF CONTENTS

 

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PART I

GLOSSARY OF TERMS

Actuator. A hydraulic or electric motor used to open or close valves.

Blowout Preventer or BOP. A hydraulically operated system of safety valves installed at the wellhead during drilling and completion operations for the purpose of preventing an increase of high-pressure formation fluids — oil, gas or water — in the wellbore from turning into a “blowout” of the well.

BOP stack.  A set of two or more BOPs used to ensure pressure control of a well.  A typical stack configuration has the ram BOPs on the bottom and the annular BOPs at the top.  Ram BOPs consist of two halves of a cover known as ram blocks that are forced together by hydraulic cylinders to seal the wellbore, in some cases by shearing through the drillpipe.  Annular BOPs contain a sealing element which resembles a large rubber doughnut that is mechanically squeezed inward to seal on either the drillpipe, casing or the open hole.

Casing.  Large-diameter pipe lowered into an open hole and cemented in place.

Choke. A type of valve used to control the rate and pressure of the flow of production from a well or through flowlines.

Christmas tree. An assembly of valves, pipes and fittings used to control the flow of oil and gas from a well.

Controls. A device which allows the remote triggering of an actuator to open or close a valve.

Drawworks.  The machine on the rig consisting of a large-diameter steel spool, brakes, a power source and assorted auxiliary devices. The primary function of the drawworks is to reel out and reel in the drilling line, a large diameter wire rope, in a controlled fashion.

Drilling stack. A vertical arrangement of blowout prevention equipment installed at the top of the casing at a wellhead to provide maximum pressure integrity in the event of a well control incident for drilling and completion operations.

Elastomer. A rubberized pressure control sealing element used in drilling and wellhead applications.

Manifold.  An arrangement of piping or valves designed to control, distribute and often monitor fluid flow.

Reservoir.  A subsurface body of rock having sufficient porosity and permeability to store and transmit fluids.

Riser. Pipe used to connect the wellbore of offshore wells to drilling or production equipment on the surface, and through which drilling fluids or hydrocarbons travel.

Semisubmersible.  A particular type of floating vessel that is supported primarily on large pontoon-like structures submerged below the sea surface.

Subsea tree. An assembly of valves, actuators and ancillary equipment connected to the top of the casing of a well located on the sea floor to direct and control the flow of oil and gas from the well.

Topdrive.  A device that turns the drillstring.

Valve. A device used to control the rate of flow in a line, to open or shut off a line completely, or to serve as an automatic or semi-automatic safety device.

Wellhead. The equipment installed at the surface of a wellbore to maintain control of a well and including equipment such as the casing head, tubing head and Christmas tree.

 

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ITEM 1.

BUSINESS

Cameron International Corporation (Cameron or the Company) provides flow equipment products, systems and services to worldwide oil and gas industries through four business segments – Subsea, Surface, Drilling and Valves & Measurement (V&M).  For additional business segment information for each of the three years in the period ended December 31, 2014, see Note 16 of the Notes to Consolidated Financial Statements, which Notes are included in Part II, Item 8 of this Annual Report on Form 10-K.

In 1920, Jim Abercrombie, Ed Lorehn, Harry Cameron and several other partners incorporated an oilfield repair shop in Houston, Texas under the name Cameron Iron Works (CIW).  Abercrombie subsequently invented and CIW manufactured the industry’s first blowout preventer for use in oil and gas well drilling.  CIW grew rapidly due to sales of blowout preventers and other oilfield equipment.  In the early 1940’s, CIW entered the market for defense-related equipment becoming a major supplier of anti-submarine and other naval armaments to the U.S. Navy.  CIW also became a leading supplier of forged metal products for both defense and oilfield applications replacing less durable cast metal components of the day.  CIW subsequently expanded into various other flow control, valve and pressure control equipment businesses acquiring Joy Petroleum Equipment and McEvoy-Willis wellhead equipment prior to its acquisition by Cooper Industries, Inc. in 1989.

Cameron was incorporated in its current form as a Delaware corporation on November 10, 1994, when Cooper Industries transferred all of the assets and liabilities of its Petroleum and Industrial Equipment segment into this new entity.  Following this, the Company operated as a wholly-owned subsidiary of Cooper Industries from 1994 until June 30, 1995, when it was spun-off as a separate stand-alone company and renamed Cooper Cameron Corporation.  The Company subsequently changed its name to Cameron International Corporation in May 2006.  Since becoming a stand-alone company, Cameron has made numerous acquisitions, including the 1996 acquisition of Ingram Cactus Company, the 1998 acquisition of Orbit Valve International, Inc., 2004’s acquisition of Petreco International, Inc., the purchase of substantially all of the businesses within the Flow Control segment of Dresser, Inc. in 2005, the acquisition of NATCO Group Inc. (NATCO) in 2009, the purchase of LeTourneau Technologies Drilling Systems, Inc. in 2011 and the acquisition of the TTS Energy Division from TTS Group, ASA in 2012.  In 2013, Cameron and Schlumberger Limited joined together to form OneSubsea^™, a venture established to manufacture and develop products, systems and services for the subsea oil and gas market.  Cameron is a 60% owner and manager of OneSubsea.  Cameron has also sold various operations during the time it has been a stand-alone company, including its Reciprocating Compression business in June 2014 and its Centrifugal Compression business, which closed effective January 1, 2015.  Today, Cameron is a Fortune 500 company with annual revenues of more than $10 billion and a workforce of over 28,000 employees.  Cameron also has legal entities in more than 50 countries worldwide.

The common stock of Cameron trades on the New York Stock Exchange under the symbol “CAM”.  The Company’s Internet address is www.c-a-m.com. General information about Cameron, including its Corporate Governance Principles, charters for the committees of the Company’s board of directors, Code of Conduct, and Codes of Ethics for Management Personnel, including Senior Financial Officers, and Directors, can be found in the Governance and Compliance sections of the Company’s website. The Company makes available on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the Exchange Act) as soon as reasonably practicable after the Company electronically files or furnishes them to the United States Securities and Exchange Commission (the SEC).  Information filed by the Company with the SEC is also available at www.sec.gov or may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  Information regarding operations of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Any reference to Cameron, its segments or other businesses within this Form 10-K as being a leader, leading provider, leading manufacturer, or having a leading position is based on the amount of equipment installed worldwide and available industry data.

 

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Markets and Products

Subsea Segment

The Subsea segment delivers integrated solutions, products, systems and services to the subsea oil and gas market, including integrated subsea production systems involving wellheads, subsea trees, manifolds and flowline connectors, subsea processing systems for the enhanced recovery of hydrocarbons, control systems, connectors and services designed to maximize reservoir recovery and extend the life of each field.  The Subsea segment includes the operations of OneSubsea™, a business jointly owned by Cameron (60%) and Schlumberger (40%).  Products and services are marketed products under the Cameron^®, Mars^™, McEvoy^® and Willis^® brand names through a worldwide network of sales and marketing employees, supported by agents in some international locations.  The Company’s  custom  process systems products are marketed under the Cameron^®, Consept^™, Cynara^®, Hydromation^®, KCC^™, Metrol^®, Mozley^™, NATCO^®, Petreco^®, Porta-test^®, Unicel^™, Vortoil^® and Wemco^® brand names.  Due to the technical nature of many of the products offered and the complexity of the subsea field layouts and designs, the marketing effort is further supported by a staff of engineering employees.

On January 6, 2015, the Company announced the execution of definitive agreements between OneSubsea, Helix Energy Solutions Group, Inc. and Schlumberger for a non-incorporated alliance formed to develop technologies and to deliver equipment and services designed to provide customers with more cost effective and more efficient subsea well intervention solutions, particularly for deep and ultra-deepwater basins and high well pressure environments.

Surface Segment

Cameron’s Surface segment designs and manufactures complete wellhead and Christmas tree systems for onshore and offshore topside applications – from conventional to high-pressure, high temperature systems, to specialized systems for dry completions and heavy oil.  The Surface segment, with its extensive global installed base of equipment, is the industry’s largest provider of surface completion and production equipment and has a large services footprint in each of its served markets.  A complete portfolio of API 6A valves, chokes, actuators and artificial lift technologies is marketed primarily to oil and gas operators under the Cameron^®, Camrod^™, IC^™, McEvoy^®, Precision^™, SBS^™, Tundra^™, Willis^® and WKM^® brand names.

One of the major services provided by the Surface segment is CAMSHALE™ Production Solutions, which specializes in shale gas production.  In this process, intense pressure from fracing fluid (usually a mixture of water and sand) is used to crack surrounding shale.  Once the fractures are made, the water is removed from the well bore and the sand is left behind to hold the fractures open.  Oil and natural gas then moves out of the fractures, into the well bore, and up to the surface.

New technology developments and increased market penetration, along with robust customer spending in recent years for exploration and production, particularly within unconventional resource regions of North America, has resulted in increased demand for the Company’s equipment and services.  As a result, the Surface segment achieved growth in both orders and revenues during each of the last three years covered by this Annual Report.

Drilling Segment

The Drilling segment of Cameron is one of the leading global suppliers of integrated drilling systems for onshore and offshore applications to shipyards, drilling contractors, exploration and production companies and rental tool companies. Drilling equipment designed and manufactured includes ram and annular BOPs, control systems, drilling risers, drilling valves, choke and kill manifolds, diverter systems, topdrives, drawworks, mud pumps, pipe handling equipment, other rig products and parts and services. The products are marketed by a staff of sales and marketing employees supported by an engineering group under the Cameron^®, Guiberson^™, H&H CUSTOM^™, H&H Melco^™, LeTourneau^®, Lewco^®, OEM^®, Sense^™ and Townsend^™ brand names.

The Drilling segment significantly enhanced its product offerings to its customers with the late 2011 acquisition of LeTourneau Technologies Drilling Systems, Inc. (LeTourneau) from Joy Global Inc., and the mid-2012 acquisition of TTS Energy Division from TTS Group ASA, a Norwegian company (TTS).  LeTourneau provides drilling equipment and rig designs and components for both the land and offshore rig markets.  LeTourneau’s products include elevating systems, skidding systems, cranes, topdrives, rotary tables, drawworks, mud pumps and rig control and power systems.  TTS provides high performance drilling equipment, rig packages and rig solutions for both onshore and offshore rigs internationally.

 

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Cameron’s Drilling segment continues to be a primary supplier of BOPs and related equipment to the drilling industry.  The level of major project awards for new drilling equipment is often influenced by construction cycles for new build deepwater drillships and semi-submersibles, as well as shallow water jack-up rigs.  In recent years, the level of such awards was strong during the 2006 – 2008 and 2011 – 2012 time periods but has tapered off in 2013 and 2014 as the supply of rigs is currently exceeding demand.

Tighter regulations for the industry and an increased focus on safety have caused drilling contractors and operators, both on land and in deepwater environments, to turn to original equipment manufacturers (OEMs) for service, equipment repair and related parts, in many cases to re-certify BOP stacks back to OEM specifications or for new equipment to replace an aging fleet.  This has led to increased demand for the Company’s services and for additional drilling stacks, BOP’s and related equipment for use as spares to supplement or replace existing equipment currently in use.  The Company has continued to experience strong demand for parts and services in 2014 and 2013 despite the drop off in major new project awards.

Valves & Measurement Segment

The V&M segment includes businesses that provide valves and measurement systems primarily used to control, direct and measure 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. Equipment used in these environments is generally required to meet demanding standards set by the American Petroleum Institute and the American Society of Mechanical Engineers.

Products include gate valves, ball valves, butterfly valves, Orbit^® brand rising stem ball valves, double block & bleed valves, plug valves, globe valves, check valves, actuators, chokes and parts and services, as well as measurement products such as totalizers, turbine meters, flow computers, chart recorders, ultrasonic flow meters and sampling systems.

This equipment and the related services are marketed through a worldwide network of combined sales and marketing employees, as well as distributors and agents in selected international locations. Due to the technical nature of many of the products, the marketing effort is further supported by a staff of engineering employees.  Customers include oil and gas majors, independent producers, engineering and construction companies, pipeline operators, drilling contractors and major chemical, petrochemical and refining companies.

The product lines included in this segment are as follows:

Distributed Valves –

Distributed valves are used in the exploration, production and transportation of oil and gas, with products historically sold through a network of wholesalers and oilfield supply distributors, primarily in North America and to upstream markets in Asia-Pacific and the Middle East.  In order to expand the Company’s downstream industrial valve offerings, Douglas Chero, a forged gate, globe and check valve manufacturer located in Italy, was acquired during 2013.

Although demand for distributed valves was strong during much of 2014, order rates decreased in the fourth quarter of 2014 as compared to the third quarter of 2014 reflecting the weakening in commodity prices and activity levels during the latter half of the year.

Distributed valves are marketed under the brand names AOP^™, Demco^®, Douglas Chero^™, Dynatorque^™, Maxtorque^™, Navco^®, Newco^®, Nutron^®, OIC^®, Techno^™, Texstream^™, Thornhill Craver^®, Wheatley^® and WKM^®.

Engineered Valves –

Engineered valves include a full range of highly customized ball, gate and check valves serving the oil and gas production, pipeline, subsea and liquefied natural gas (LNG) markets. Products are marketed under the brand names Cameron^®, Entech^™, Grove^®, Ledeen^™, Ring-O^®, TK^®, Tom Wheatley^® and WKM^®.  Demand for engineered valves has historically been affected by the scope and timing of large development and infrastructure projects involving long lead times.

 

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Process Valves –

Process valves are sold under the brand names of General Valve^®, Orbit^® and TBV^™ for use in critical service applications that are often subject to extreme temperature conditions, particularly in refinery, power generation (including nuclear), chemical, petrochemical, gas processing and liquid storage terminal markets, including LNG.

Measurement Systems –

The V&M segment also designs, manufactures and distributes measurement products, systems and solutions to the global oil and gas, process and power industries. Brand names for these products include Barton^®, Caldon^®, Clif Mock^™, Jiskoot^™, Linco^™ and Nuflo^™.

Services –

In addition to the above, V&M provides preventative maintenance, OEM spare parts, repair, field service, asset management and remanufactured products for valves and actuators through service centers situated in strategic locations around the world.

Market Issues

The success of hydraulic fracturing activities in recent years has led to increased supplies of oil and natural gas in North America.  This, combined with various other factors such as, (i) continued strong production levels from the Organization of Petroleum Exporting Countries (OPEC) and certain other resource-rich countries, (ii) current weakness in world demand for petroleum due to slowing economic growth in certain regions, and (iii) the strong U.S. dollar, in which a significant portion of world trade in petroleum products occurs, has contributed to a decline in commodity prices which began during the latter half of 2014, and has continued into early 2015.  While market activity was generally strong for the first nine months of 2014, activity levels began to weaken toward the end of the year as a result of the decline in commodity prices.  We believe these declines in commodity prices will reduce market activity levels in 2015, which will lower the demand for our products and services.  Although the Company has a substantial backlog of work that is scheduled to be executed during 2015, weaker demand for our products and services is expected to have an adverse impact on new orders, revenues and earnings.  Based on the Company’s long history in the energy sector, we believe such declines in commodity prices and demand are cyclical in nature.  During such cyclical downturns, we take steps to adjust our commercial, manufacturing and support operations as appropriate to ensure that the Company remains competitive and financially sound.  The Company cannot predict the timing of improvement in market conditions.

Cameron continues to be one of the leaders in the global market for the supply of petroleum production equipment. Cameron believes that it is well-positioned to serve these markets, even during downturns. Plant and service center facilities around the world in major oil and gas producing regions provide broad market coverage. Information relating to revenues generated from shipments to various geographic regions of the world is set forth on page 2 of “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Cameron International Corporation” included in Part II, Item 7 of this Annual Report on Form 10-K and incorporated herein by reference.

The market beyond North America continues to be important to Cameron, accounting for nearly 64% of Cameron’s revenues for the year ended December 31, 2014, up from 61% in 2013 and 55% in 2012.   The desire to expand oil and gas resources and transmission capacity in developed and developing countries, for both economic and political reasons, continues to be a major factor affecting market demand.  Production and service facilities in North and South America, Europe, Asia, the Middle East and West Africa provide the Company with the ability to serve the global marketplace.

As a result of tighter regulations for the industry in recent years and an increased focus on safety, the Company has experienced increased demand in its Drilling segment to service and, in many cases, re-certify existing BOP stacks back to original OEM specifications.  The Company believes this trend by operators to use OEM’s to service their equipment will continue in the near future.

Also, based upon the Company’s broad portfolio of products, Cameron has a significant presence in the offshore oil and gas drilling, production and infrastructure market.  The Company provides drilling equipment packages for drilling rigs, drilling and production risers, subsea production systems, oil and gas separation equipment, chokes, valves and other equipment to the offshore market.  Approximately 62% of the Company’s 2014 revenue was derived from the offshore market (51% in 2013).

 

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Cameron is also a significant participant, through its OneSubsea venture with Schlumberger, in serving the subsea systems projects market.  This market is significantly different from the Company’s other markets since subsea systems projects are significantly larger in scope and complexity, in terms of both technical and logistical requirements. Subsea projects (i) typically involve long lead times, (ii) typically are larger in financial scope, (iii) typically require substantial engineering resources to meet the technical requirements of the project and (iv) often involve the application of existing technology to new environments and in some cases, new technology. The Company’s OneSubsea business has a backlog of approximately $2.7 billion for subsea systems projects at December 31, 2014.  To the extent the Company experiences unplanned difficulties in meeting the technical and/or delivery requirements of the projects, the Company’s earnings or liquidity could be negatively impacted.  For additional information, see the Company’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Cameron International Corporation” included in Part II, Item 7 of this Annual Report on Form 10-K and incorporated herein by reference.

The creation of OneSubsea in 2013 allows the Company to bring together Schlumberger’s expertise in subsea processing and platform integration with Cameron’s capabilities in subsea equipment to provide customers with the ability to greatly increase their subsea reservoir recovery rates.

Also, see Part I, Item 1A for a discussion of other risk factors, some of which are market related, that could affect the Company’s financial condition and future results.

New Product Development

For the years ended December 31, 2014, 2013 and 2012, research and product development expenditures, including amounts incurred on projects designed to enhance or add to its existing product offerings, totaled approximately $128 million, $83 million and $63 million, respectively.  The Subsea segment accounted for 58%, 44% and 47% of each respective year’s total costs.

On January 6, 2015, the Company announced the execution of definitive agreements between OneSubsea, Helix Energy Solutions Group, Inc. and Schlumberger for a non-incorporated alliance formed to develop technologies and to deliver equipment and services designed to provide customers with more cost effective and more efficient subsea well intervention solutions, particularly for deep and ultra-deepwater basins and high well pressure environments.

Working with numerous universities around the world through the Company’s Sustainability Business Model, the Company was able to commercialize the EVERMAX™ lubricant in 2013.  Formulated as a grease, EVERMAX features nanotechnology additives which reduce friction by orders of magnitude over traditional lubricants.  The Company expects this product to provide significant improvements in operating efficiency and wear reduction in Cameron’s ball valve products as well as BOPs and gate valve applications.

Cameron has also provided funding for university research in both the United States and Brazil for the development of advanced materials that dampen vibration that could be caused by ocean currents in subsea environments.  Cameron's researchers have also worked with a variety of technical partners around the world in developing elastomer seals that perform better in low temperature, high pressure environments.

OneSubsea continues to focus on new technology development in areas such as Life of Field services, Processing, Controls, Optimization and High Pressure and High Temperature applications and in the integration of subsea and subsurface technologies to increase recovery and lower intervention costs.  As example, in 2014 OneSubsea delivered a subsea multiphase meter with an innovative conductivity probe that allows for the determination of water in gas or oil down to the parts-per-million (PPM) level or to detect changes in water salinity.  Additionally, three innovative subsea sampling solutions were delivered to clients in various parts of the world.  Similarly, testing was completed on a 3.8Mw high-pressure subsea multiphase boosting pump to the satisfaction of, and support from, several Oil and Gas Operators.  Finally, as discussed above, OneSubsea entered into an alliance with Schlumberger and Helix Energy Solutions that will deliver to the market efficient and cost-effective light well intervention technologies.

Additionally, Cameron continues to improve its CO2 membrane technology.  The Cynara PN-1 membrane product was released in 2012 with enhanced separation characteristics for high volume gas applications.  This resulted from a joint development effort between Cameron and Petronas and was recently selected for a large gas processing plant in Southeast Asia.

 

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Another new CO2 membrane will be released in 2015 with capabilities to handle higher natural gas pressures and lower CO2 concentrations, which initially will be marketed for on-shore gas processing applications.  This technology is an alternative to amine systems in many applications, with significant lower operating cost, modular construction and smaller footprint.

The monoethylene glycol (MEG) reclamation technology is a continued focus for product improvement and enhancement.  The latest generation of Cameron’s brine displacement solution was launched in 2013 as PureMEG®.  The latest developments include divalent salt removal systems and improved salt management processes. These enhancements are targeted to provide better reliability and OPEX.

In 2014, Cameron began offering the Bilectric©HF, which combines our established Bilectric desalting product with the performance enhancements achieved by our Dual Frequency® power units.  This hybrid of two established technologies will provide producers and refiners with options to upgrade existing installations for improved throughput, performance or chemical optimization.

The CDX Compact Deaeration technology will be launched in 2015.  This packed bed reactor solution will provide substantial space and weight savings as compared to traditional vacuum deaeration solutions utilized offshore for seawater flooding.  This is the result of a 3 year development that is in the final stage of field demonstration testing.

Over the last three years, Cameron’s Surface segment has developed a number of products to serve the hydraulic fracturing (frac) market.  The F-T90 horizontal frac tree is ultra-compact in design to reduce frac stack height.  In 2014, Cameron expanded the F-T90 fleet to include 5” 15,000-psi trees in both Canada and the U.S.   The Monoline™ Frac Fluid Delivery System (FFDS) eliminates a significant number of frac iron connections, eliminates the need for expensive safety strapping, reduces footprint and reduces wellsite clutter for added safety benefits. Cameron’s rotating casing hanger facilitates running the casing string in highly deviate wells, reducing both rig time and the risk of stuck pipe.  The tension hanger designed by Cameron allows for the tubing string to be pulled straighter on completion to allow for artificial lift solutions that are required later for almost all shale wells.  To address the needs of maturing frac wells, Cameron’s Surface Systems Engineering group has improved the CAMLIFT™ 30-120, CAMLIFT 30-144 and the CAMLIFT 40-192 systems to extend seal life by reducing the hammering effects in the system.  This has improved operators’ uptime and significantly exceeds the uptime average for artificial lift wells.  Throughout the life of the frac wells, the new CAM20-MT Interchanger Multi-Trim choke is a cost-effective solution that allows fast actuated adjustments to keep up with changing well conditions and is designed for fast and easy replacement of internals if they get damaged by sand or proppant.

During 2011, the Company’s Drilling segment delivered the industry’s first and only 13⅝” 25,000-psi BOP stack for use in a high-pressure application in the Gulf of Mexico.  Currently, the Company has on order a second 25,000-psi BOP stack and a 25,000-psi manifold which is expected to be delivered in 2015.  Previously, in another first, the Drilling segment had introduced an 18¾” 20,000-psi BOP stack in 2009, which had the characteristics of reduced height and weight found in the EVO^® BOP that was introduced in 2007 as a compact, lighter version of Cameron’s traditional subsea BOP.  Also during 2008, the Company introduced the Sea Pressure Accumulator^™ (SPA), a complement to the EVO BOP, which uses seawater pressure instead of traditional nitrogen-charged accumulator bottles to power the BOP rams.  In 2012, Cameron developed a derivative system of SPA called Sea Pressure Reduction Assembly (SPRA), which reduces hydrostatic seawater effects on the EVO BOP operating system.  This, in turn, makes more efficient use of existing accumulator capacity.  Another highlight of 2012 was the development of the stab-in connection system (STiCS).  The STiCS provides an automated means of safely and quickly connecting heavy choke and kill hoses to the riser slip joint which saves hours of rig time.

The Drilling segment also introduced a number of products to the industry in 2014 including the CognitionTM Stack Instrumentation Infrastructure package and EVO® 300 Bonnet™ technology that were introduced at the Offshore Technology Conference (OTC) and the X-COM operator’s chair that was introduced at the Offshore North Seas Conference (ONS).  The Cognition package is a network of sensors, data recorders and communications on the subsea stack that provides critical information for real-time subsea stack monitoring, conditioned-based maintenance, and emergency mitigation and recovery.  The EVO 300 Bonnet is a simpler bonnet design for the EVO BOP which has an increased closing force of 54% over the previous design.  The X-COM operator’s chair improves upon the earlier chair design and incorporates added features to improve operational efficiency.

In addition, the Mark IV HA control systems and Mark IV control POD were introduced.  The Mark IV system – featuring an industry-first three-POD design option – improves operational reliability of the drilling system through redundancy and simplified POD design.  Each control POD within the system has also been improved to include 33% more available functions to accommodate eighty-cavity stacks, a 50% reduction in internal tubing to reduce leak paths, and a 26% smaller footprint than its predecessor.

 

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Competition

Cameron competes in all areas of its operations with a number of other companies, some of which have financial and other resources comparable to or greater than those of Cameron.

Cameron has a leading position in the petroleum production equipment markets. In these markets, Cameron competes principally with Aker Solutions, Balon Corporation, Circor International, Inc., Dover Corporation, Dril-Quip, Inc., Emerson Process Management, FlowServ Corp., FMC Technologies, Inc., GE Oil & Gas Group, Master Flo (a Stream-Flo Industries Ltd. company), National Oilwell Varco Inc., PBV-USA, Inc. (a Zy-Tech Global Industries company), Petrovalve (a Flotek Industries, Inc. company), Pibiviese, Robbins & Myers Fluid Management Group, SPX Corporation’s Flow Technology Segment, Tyco International Ltd. and the Artificial Lift Systems business of Weatherford, Ltd.

The principal competitive factors in the petroleum production equipment markets are technology, quality, service and price. Cameron believes several factors give it a strong competitive position in these markets. Most significant are Cameron’s broad product offering, its worldwide presence and reputation, its service and repair capabilities, its expertise in high-pressure technology and its experience in alliance and partnership arrangements with customers and other suppliers.

Manufacturing

Cameron has manufacturing facilities worldwide that conduct a broad variety of processes, including machining, fabrication, assembly and testing, using a variety of forged and cast alloyed steels and stainless steel as the primary raw materials.  Cameron has, at various times, rationalized plants and products, closed various manufacturing facilities, moved product lines to achieve economies of scale, and upgraded other facilities.  The Company has also in recent years constructed new facilities, mainly in certain locations outside of North America, in order to meet expected future demand, particularly with regard to its drilling, surface and subsea product offerings.  This is an ongoing process as the Company seeks ways to improve delivery performance and reduce costs.  Cameron maintains advanced manufacturing, quality assurance and testing equipment geared to the specific products that it manufactures and uses process automation in its manufacturing operations.  Manufacturing facilities typically utilize computer-aided, numeric-controlled tools and manufacturing techniques that concentrate the equipment necessary to produce similar products in one area of the plant in a configuration commonly known as a manufacturing cell.  One operator in a manufacturing cell can monitor and operate several machines, as well as assemble and test products made by such machines, thereby improving operating efficiency and product quality.

 

Cameron’s test capabilities are critical to its overall processes. The Company has the capability to test most equipment at rated operating conditions, measuring all operating parameters, efficiency and emissions.

 

All of Cameron’s Asian, European and Latin American manufacturing plants are ISO certified and API licensed, and most of the U.S. plants are ISO certified. ISO is an internationally recognized verification system for quality management.

Backlog

Cameron’s backlog was approximately $9.5 billion at December 31, 2014 (approximately 60% of which is expected to be shipped during 2015), as compared to $11.1 billion at December 31, 2013, and $8.1 billion at December 31, 2012.  Backlog consists of customer orders for which a purchase order or contract has been received, satisfactory credit or financing arrangements exist and delivery is scheduled.

Patents, Trademarks and Other Intellectual Property

As part of its ongoing research, development and manufacturing activities, Cameron has a policy of seeking patents when appropriate on inventions involving new products and product improvements. Cameron owns 513 unexpired United States patents and 1,200 unexpired foreign patents. During 2014, 160 new U.S. and 282 new foreign patent applications were filed.

 

Although, in the aggregate, these patents are of considerable importance to the manufacturing of many of its products, Cameron does not consider any single patent or group of patents to be material to its business as a whole.

 

Trademarks are also of considerable importance to the marketing of Cameron’s products. Cameron considers the following trade names to be important to its business as a whole: CAMERON, WILLIS, W-K-M, NATCO and LeTourneau. Other important trademarks used by Cameron are included under “Markets and Products” above.  Cameron has registered trademarks in countries where such registration is deemed important.  Cameron has the right to use the trademark Joy on parts until November 2027.

 

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Cameron also relies on trade secret protection for its confidential and proprietary information. Cameron routinely enters into confidentiality agreements with its employees, partners and suppliers. There can be no assurance, however, that others will not independently obtain similar information or otherwise gain access to Cameron’s trade secrets.

Employees

As of December 31, 2014, Cameron had approximately 28,000 employees, of which nearly 23% were represented by labor unions.

 

Over 2,300 employees are covered by union contracts which are slated to expire during 2015, the majority of which are in Italy and Romania.

 

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Executive Officers of the Registrant

 

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ITEM1A.

RISK FACTORS

Factors That May Affect Financial Condition and Future Results

Downturns in the oil and gas industry have had, and will likely in the future have, a negative effect on the Company’s sales and profitability.

Demand for most of the Company’s products and services, and therefore its revenue, depends to a large extent upon the level of capital expenditures related to oil and gas exploration, development, production, processing and transmission. Declines, as well as anticipated declines, in oil and gas prices could negatively affect the level of these activities, or could result in the cancellation, modification or rescheduling of existing orders. For example, oil prices began declining during the third quarter of 2014, dropping nearly 50% from mid-year levels to approximately $53 per barrel as of December 31, 2014.  Prices have continued to decline into the mid-$40 range since year end.  Similarly, natural gas prices declined late in 2014 from the low-to-mid $4 range per MMBtu to just under $3 per MMBtu at December 31, 2014.  These declines have already begun to, and are expected to continue to, affect exploration and production activity levels and, therefore, demand for the Company’s products and services at least through 2015.  In addition to a decline in future orders and revenues, the Company may also incur additional costs as it seeks to adjust its commercial, manufacturing and support operations levels to meet expected future customer demand. See also the discussion in “Market Conditions” above for 2014 as compared to 2013.

Cancellation, downsizing or delays of orders in backlog are possible.

As described above, commodity prices have declined significantly since mid-2014 which has resulted in various oil and gas exploration and production companies announcing spending cuts or deferrals in their 2015 capital spending plans, as well as headcount reductions.  At current price levels, certain projects, particularly those in deepwater environments and unconventional resource regions, may become uneconomical for the risk involved.  Certain customers who are more highly leveraged may also experience concerns regarding future projected cash flows based on current price levels.  These factors described above could result in existing orders in backlog being cancelled, downsized or future shipment dates may be delayed, all of which could further negatively impact the Company’s future profitability.

At December 31, 2014, the Company’s backlog was approximately $9.5 billion, down 14% from December 31, 2013.  An example of a cancellation of an existing order is the reversal of $243 million of backlog during the first quarter of 2014 as the result of a customer cancellation of a large drilling project award issued in 2012.  Another example of a potential delay or downsizing of a previous awards is the announcement by Chevron in late 2013of the deferral of its Rosebank project, which was awarded in 2013 and currently accounts for $505 million of the Company’s ending backlog, in order to work with its partners to improve the project’s economics.  Although the original contract remains in place, OneSubsea is currently working with Chevron on a revised scope for the project based on a new field layout design.

The inability of the Company to deliver its backlog or future orders on time could affect the Company’s sales and profitability and its relationships with its customers.

The ability to meet customer delivery schedules on the Company’s existing backlog, as well as future orders, is dependent on a number of factors including, but not limited to, access to the raw materials required for production, an adequately trained and capable workforce, project engineering expertise for large subsea projects, sufficient manufacturing plant capacity and appropriate planning and scheduling of manufacturing resources.  Many of the contracts the Company enters into with its customers require long manufacturing lead times and contain penalty clauses relating to on-time delivery. A failure by the Company to deliver in accordance with customer expectations could subject the Company to financial penalties or loss of financial incentives and may result in damage to existing customer relationships.

Execution of subsea and drilling rig projects exposes the Company to risks not present in its other businesses.

Cameron is involved in development projects involving drilling rigs and, through our subsea business, is a significant participant in the subsea systems projects market.  These markets are different from most of the Company’s other markets since drilling rig and subsea systems projects are larger in scope and complexity, in terms of both technical and logistical requirements. Both types of projects typically (i) involve long lead times, (ii) are larger in financial scope, (iii) require substantial engineering resources to meet the technical requirements of the project and (iv) often involve the application of existing technology to new environments and, in some cases, may require the development of new technology. The Company’s Drilling business had a backlog of approximately $721 million for drilling rig equipment and the subsea business had a backlog of approximately $2.7 billion for subsea systems projects at December 31, 2014.  To the extent the Company experiences unplanned difficulties in meeting the technical and/or delivery requirements of the projects, the Company’s earnings or liquidity could be negatively impacted.  The Company accounts for its drilling and subsea projects, as it does its separation projects, using accounting rules for construction-type and production-type contracts.  Factors that may affect future project costs and margins include the ability to properly execute the engineering and design phases consistent with our customers’ expectations, production efficiencies obtained, and the availability and costs of labor, materials and subcomponents.  These factors can impact the accuracy of the Company’s estimates and materially impact the Company’s future period earnings.  If the Company experiences cost overruns, the expected margin could decline.  Were this to occur, in accordance with the accounting guidance, the Company would record a cumulative adjustment to reduce the margin previously recorded on the related project in the period a change in estimate is determined.   Drilling rig equipment and subsea systems projects accounted for approximately 9% and 14%, respectively, of total 2014 revenues.

 

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As a designer, manufacturer, installer and servicer of oil and gas pressure control equipment, the Company may be subject to liability, personal injury, property damage and environmental contamination should such equipment fail to perform to specifications.

Cameron provides products and systems to customers involved in oil and gas exploration, development and production, as well as in certain other industrial markets.  Some of the Company’s equipment is designed to operate in high-temperature and/or high-pressure environments on land, on offshore platforms and on the seabed, and some equipment is designed for use in hydraulic fracturing operations.  Cameron also provides parts and repair services at numerous facilities located around the world, as well as at customer sites for this and other equipment.  Because of applications to which the Company’s products and services are put, particularly those involving the high temperature and/or pressure environments, a failure of such equipment, or a failure of our customer to maintain or operate the equipment properly, could cause damage to the equipment, damage to the property of customers and others, personal injury and environmental contamination, onshore or offshore, leading to claims against Cameron.

Certain of the Company’s risk mitigation strategies may not be fully effective.

The Company relies on customer indemnifications and third-party insurance as part of its risk mitigation strategy.  There is, however, an increasing reluctance of customers to provide what had been typical oilfield indemnifications for pollution, consequential losses, property damage, and personal injury and death, and a reluctance, even refusal of counterparties to honor their contractual indemnity obligations when given.  In addition,  insurance companies may refuse to honor their policies.

An example of both is the Company’s experience in the Deepwater Horizon matter.  The Company’s customer denied that it owed any indemnification under the contract with us, and when called on to participate in the Company’s settlement with BP Exploration and Production Inc., one of the seven insurers refused to provide coverage.  The Company subsequently sued its insurer and won a judgment for the full policy amount plus interest and costs, but the insurer continues to litigate the matter and has appealed the judgment.

The implementation of an upgraded business information system may disrupt the Company’s operations or its system of internal controls.

The Company has a project underway to upgrade its SAP business information systems worldwide.  The first stage of this multi-year effort was completed at the beginning of the third quarter of 2011 with the deployment of the upgraded system to the Company’s process systems and compression businesses.  Since then, other businesses and business functions have been migrated in stages.  As of December 31, 2014, nearly all businesses within the V&M segment, the Surface segment, the Company’s worldwide engineering and human resource functions, as well as other corporate office activities are now operating in the upgraded system.  The Drilling segment is scheduled to be migrated in 2015 and the OneSubsea business in 2016.  The Drilling segment and the OneSubsea business are major contributors to the Company’s consolidated revenues and income before income taxes.

As this system continues to be deployed throughout the Company, delays or difficulties may be encountered in effectively and efficiently processing transactions and conducting business operations, including project management, until such time as personnel are familiar with all appropriate aspects and capabilities of the upgraded systems.

A deterioration in future expected profitability or cash flows could result in an impairment of the Company’s goodwill.

Total goodwill was nearly $2.5 billion at December 31, 2014.  Due to the significant drop in commodity prices during the latter half of 2014 and the reorganization of the Company’s reporting structure, the Company made an additional evaluation of goodwill for impairment during the fourth quarter of 2014 based upon macro factors that existed at that point in time.  The fair value of our Process Systems reporting unit was estimated to be 10% to 15% higher than its carrying value as part of that evaluation.  The estimated fair value for Process Systems was based on forecasted timing and success in receiving new major project awards in 2015 and beyond, the pricing and profitability of those new awards and further improvements in revenue growth and profitability rates from those achieved historically.  Should our expectations prove to be incorrect due to (i) further declines in oil and gas prices and continued instability in the worldwide energy markets, (ii)  unanticipated delays occurring in project awards, including unplanned project cancellations, or, (iii) an increase in interest rates, our prior estimates of future earnings, cash flows and fair value of the Process Systems business would be negatively impacted, which could lead to an impairment of goodwill for that reporting unit, possibly even as early as our annual evaluation during the first quarter of 2015.  Goodwill associated with the Process Systems reporting unit at December 31, 2014 was approximately $571 million.

 

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The Company’s operations and information systems are subject to cybersecurity risks.

Cameron continues to increase its dependence on digital technologies to conduct its operations. Many of the Company’s files are digitized and more employees are working in almost paperless environments.  Additionally, the hardware, network and software environments to operate SAP, the Company’s main enterprise-wide operating system, have been outsourced to third parties.  Other key software products used by the Company to conduct its operations either reside on servers in remote locations or are operated by the software vendors or other third parties for the Company’s use as “Cloud-based” or “Web-based” applications.  The Company has also outsourced certain information technology development, maintenance and support functions.  As a result, the Company is exposed to potentially severe cyber incidents at both its internal locations and outside vendor locations that could result in a theft of intellectual property and/or disruption of its operations for an extended period of time resulting in the loss of critical data and in higher costs to correct and remedy the effects of such incidents, although no such material incidents have occurred to date to the Company’s knowledge.

Fluctuations in currency markets can impact the Company’s profitability.

The Company has established multiple “Centers of Excellence” facilities for manufacturing such products as subsea trees, subsea chokes, subsea production controls and blowout preventers.  These production facilities are located in the United Kingdom, Brazil, Romania, Italy, Norway and other European and Asian countries. To the extent the Company sells these products in U.S. dollars, the Company’s profitability is eroded when the U.S. dollar weakens against the British pound, the euro, the Brazilian real and certain Asian currencies, including the Singapore dollar. Alternatively, profitability is enhanced when the U.S. dollar strengthens against these same currencies.  For further information on the use of derivatives to mitigate certain currency exposures, see Item 3, “Quantitative and Qualitative Disclosures about Market Risk” below and Note 19 of the Notes to Consolidated Condensed Financial Statements.

The Company’s operations expose it to risks of non-compliance with numerous countries’ import and export laws and regulations, and with various nations’ trade regulations including U.S. sanctions.

The Company’s operations expose it to trade and import and export regulations in multiple jurisdictions.  In addition to using “Centers of Excellence” for manufacturing products to be delivered around the world, the Company imports raw materials, semi-finished goods and finished products into many countries for use in country or for manufacturing and/or finishing for re-export and import into another country for use or further integration into equipment or systems.  Most movement of raw materials, semi-finished or finished products by the Company involves exports and imports.  As a result, compliance with multiple trade sanctions and embargoes and import and export laws and regulations poses a constant challenge and risk to the Company.  The Company has received a number of inquiries from U.S. governmental agencies, including the U.S. Securities and Exchange Commission and the Office of Foreign Assets Control, regarding compliance with U.S. trade sanction and export control laws, the most recent of which was received in December 2012 and replied to by the Company in January 2013.  The Company has undergone and will likely continue to undergo governmental audits to determine compliance with export and customs laws and regulations.

The United States and the European Union (EU) also recently imposed sanctions on various sectors of the Russian economy and on transactions with certain Russian nationals and entities.  These sanctions may severely limit the amount of future business the Company does with customers involved in activities in Russia.  As of December 31, 2014, approximately 1% of the Company’s backlog from continuing operations related to future deliveries to customers doing business in Russia.  Customer sales by the Company’s continuing operations into Russia during 2014 totaled less than 1% of the Company’s sales during the year.  In addition, the sanctions of the U.S. and the EU are inconsistent and neither is, as yet, well defined, both of which factors increase the risk of an unintended violation.

 

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The Company’s operations expose it to political and economic risks and instability due to changes in economic conditions, civil unrest, foreign currency fluctuations, and other risks, such as local content requirements, inherent to international businesses.

The political and economic risks of doing business on a worldwide basis include the following:

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volatility in general economic, social and political conditions;

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the effects of civil unrest and, in some cases, military action on the Company’s business operations, customers and employees, such as that recently occurring in several countries in the  Middle East, in Ukraine and in Venezuela;

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exchange controls or other similar measures which result in restrictions on repatriation of capital and/or income, such as those involving the currencies of, and the Company’s operations in, Angola and Nigeria; and

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reductions in the number or capacity of qualified personnel.

In recent months, civil unrest and military action have increased in Iraq which may impact the ability of that country to continue to produce and export oil at current levels.  Such unrest may also jeopardize the Company’s in-country investments and on-going business activities supporting Iraq’s oil and gas production infrastructure.  At December 31, 2014, less than 1% of the Company’s backlog related to future deliveries to customers doing business in Iraq.  Additionally, less than 1% of the Company’s property, plant and equipment were located in Iraq.  The Company is also evaluating its options under the force majeure clauses of each of the major contracts with its customers doing business in Iraq in the event the current situation in that country continues to deteriorate.

Cameron also has manufacturing and service operations that are essential parts of its business in other developing countries and volatile areas in Africa, Latin America and other countries that were part of the Former Soviet Union, the Middle East, and Central and South East Asia. Recent increases in activity levels in certain of these regions have increased the Company’s risk of identifying and hiring sufficient numbers of qualified personnel to meet increased customer demand in selected locations.  The Company also purchases a large portion of its raw materials and components from a relatively small number of foreign suppliers in China, India and other developing countries. The ability of these suppliers to meet the Company’s demand could be adversely affected by the factors described above.

In addition, customers in countries such as Angola and Nigeria increasingly are requiring the Company to accept payments in the local currencies of these countries.  These currencies do not currently trade actively in the world’s foreign exchange markets.

The Company also has certain manufacturing and services operations in Venezuela that contributed $74 million in revenues during 2014.  The economy in Venezuela is highly inflationary.   As a result, the Company’s operations in Venezuela are accounted for as having a U.S. dollar functional currency and the Company considers its earnings in Venezuela to be permanently reinvested.  The Company does not currently expect a material gain or loss or a material decline in operating cash flows to occur as a result of any change in the payment practices of its primary customer or in further devaluations of the Venezuelan currency.  These factors however, along with recent civil unrest, create political and economic uncertainty with regard to their impact on the Company’s continued operations in this country.

Increasingly, some of the Company’s customers, particularly the national oil companies, have required a certain percentage, or an increased percentage, of local content in the products they buy directly or indirectly from the Company.  This requires the Company to add to or expand manufacturing capabilities in certain countries that are presently without the necessary infrastructure or human resources in place to conduct business in a manner as typically done by Cameron.  This increases the risk of untimely deliveries, cost overruns and defective products.

The Company’s operations expose it to risks resulting from differing and/or increasing tax rates.

Economic conditions around the world have resulted in decreased tax revenues for many governments, which have led and could continue to lead to changes in tax laws in countries where the Company does business, including further changes in the United States.  Changes in tax laws could have a negative impact on the Company’s future results.

The Company’s operations require it to deal with a variety of cultures, as well as agents and other intermediaries, exposing it to anti-corruption compliance risks.

Doing business on a worldwide basis necessarily involves exposing the Company and its operations to risks inherent in complying with the laws and regulations of a number of different nations. These laws and regulations include various anti-bribery and anti-corruption laws.

 

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The Company does business and has operations in a number of developing countries that have relatively underdeveloped legal and regulatory systems compared to more developed countries. Several of these countries are generally perceived as presenting a higher than normal risk of corruption, or as having a culture in which requests for improper payments are not discouraged. Maintaining and administering an effective anti-bribery compliance program under the U.S. Foreign Corrupt Practices Act (FCPA), the United Kingdom’s Bribery Act of 2010, and similar statutes of other nations, in these environments present greater challenges to the Company than is the case in other, more developed countries.

Additionally, the Company’s business involves the use of agents and other intermediaries, such as customs clearance brokers, in these countries as well as others.  As a result, the risk to the Company of compliance violations is increased because actions taken by any of them when attempting to conduct business on our behalf could be imputed to us by law enforcement authorities.

The Company is subject to environmental, health and safety laws and regulations that expose the Company to potential liability and proposed new regulations that would restrict activities to which the Company currently provides equipment and services.

The Company’s operations are subject to a variety of national and state, provincial and local laws and regulations, including laws and regulations relating to the protection of the environment. The Company is required to invest financial and managerial resources to comply with these laws and expects to continue to do so in the future. To date, the cost of complying with governmental regulation has not been material, but the fact that such laws or regulations are frequently changed makes it impossible for the Company to predict the cost or impact of such laws and regulations on the Company’s future operations. The modification of existing laws or regulations or the adoption of new laws or regulations imposing more stringent environmental restrictions could adversely affect the Company.

The Company provides equipment and services to companies employing hydraulic fracturing or “fracking” and could be adversely impacted by additional regulations of this enhanced recovery technique.

Environmental concerns have been raised regarding the potential impact on underground water supplies of hydraulic fracturing which involves the pumping of water and certain chemicals under pressure into a well to break apart shale and other rock formations in order to increase the flow of oil and gas embedded in these formations.  Recently, a number of U.S. states have proposed regulations regarding disclosure of chemicals used in fracking operations or have temporarily suspended issuance of permits for such operations.  The State of New York recently announced a statewide ban on hydraulic fracturing beginning in 2015 which would limit natural gas production from a portion of the Marcellus Shale region.  Additionally, the United States Environmental Protection Agency (EPA) issued rules, which became effective in January 2015, that are designed to limit the release of volatile organic compounds, or pollutants, from natural gas wells that are hydraulically fractured.  The EPA has published draft permitting guidance for oil and gas hydraulic fracturing activities using diesel fuels and is continuing to study whether the fracking process has any negative impact on underground water supplies.  Should these regulations, or additional regulations and bans by governments, restrict or curtail hydraulic fracturing activities, the Company’s revenues and earnings could be negatively impacted.

Enacted and proposed climate protection regulations and legislation may impact the Company’s operations or those of its customers.

The EPA has made a finding under the United States Clean Air Act that greenhouse gas emissions endanger public health and welfare and the EPA has enacted regulations requiring monitoring and reporting by certain facilities and companies of greenhouse gas emissions.  In June 2014, the U.S. Supreme Court prohibited the EPA from being able to require limits on carbon dioxide and other heat trapping gases from sources that would otherwise not need an air pollution permit.

Also, in June 2014, the EPA, acting under President Obama’s Climate Action Plan, proposed its Clean Power Plan, which would set U.S. state-by-state guidelines for power plants to meet by 2030 to cut their carbon emissions by 30% nationwide from 2005 levels.  The guidelines are also intended to cut pollution, nitrogen oxides and sulfur dioxide by more than 25% during the same period.  Under the Clean Power Plan, states are to develop plans to meet state-specific goals to reduce carbon pollution and submit those plans to the EPA by June 2016, with a later deadline provided under certain circumstances.  While these proposed rules may hasten the switch from coal to cleaner burning fuels such as natural gas, the overall long-term economic impact of the plan is uncertain at this point.

Carbon emission reporting and reduction programs have also expanded in recent years at the state, regional and national levels with certain countries having already implemented various types of cap-and-trade programs aimed at reducing carbon emissions from companies that currently emit greenhouse gases.

 

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To the extent the Company’s customers are subject to these or other similar proposed or newly enacted laws and regulations, the Company is exposed to risks that the additional costs by customers to comply with such laws and regulations could impact their ability or desire to continue to operate at current or anticipated levels in certain jurisdictions, which could negatively impact their demand for the Company’s products and services.

To the extent Cameron becomes subject to any of these or other similar proposed or newly enacted laws and regulations, the Company expects that its efforts to monitor, report and comply with such laws and regulations, and any related taxes imposed on companies by such programs, will increase the Company’s cost of doing business in certain jurisdictions, including the United States, and may require expenditures on a number of its facilities and possibly on modifications of certain of its products.

The Company could also be impacted by new laws and regulations establishing cap-and-trade and those that might favor the increased use of non-fossil fuels, including nuclear, wind, solar and bio-fuels or that are designed to increase energy efficiency.  If the proposed or newly executed laws have the effect of dampening demand for oil and gas production, they could lower spending by customers for the Company’s products and services.

Environmental Remediation

The Company’s worldwide operations are subject to domestic and international regulations with regard to air, soil and water quality as well as other environmental matters. The Company, through its Health, Safety and Environmental (HSE) Management System and corporate third-party regulatory compliance audit program, believes it is in substantial compliance with these regulations.

The Company is heir to a number of older manufacturing plants that conducted operations in accordance with the standards of the time, but which have since changed.  The Company has undertaken clean-up efforts at these sites and now conducts its business in accordance with today’s standards.  The Company’s clean-up efforts have yielded limited releases of liability from regulators in some instances, and have allowed sites with no current operations to be sold.  The Company conducts environmental due diligence prior to all new site acquisitions.  For further information, refer to Note 20 of the Notes to Consolidated Condensed Financial Statements.

Environmental Sustainability

The Company has pursued environmental sustainability in a number of ways. Processes are monitored in an attempt to produce the least amount of waste. All of the waste disposal firms used by the Company are carefully selected in an attempt to prevent any future Superfund involvements. Actions are taken in an attempt to minimize the generation of hazardous wastes and to minimize air emissions. Recycling of process water is a common practice. Best management practices are used in an effort to prevent contamination of soil and ground water on the Company’s sites.

Cameron has implemented a corporate HSE Management System that incorporates many of the principles of ISO 14001 and OHSAS 18001.  The HSE Management System contains a set of corporate standards that are required to be implemented and verified by each business unit. Cameron has also implemented a corporate third-party regulatory compliance audit program to verify facility compliance with environmental, health and safety laws and regulations.  The compliance program employs or uses independent third-party auditors to audit facilities on a regular basis specific to country, region, and local legal requirements.  Audit reports are circulated to the senior management of the Company and to the appropriate business unit.  The compliance program requires corrective and preventative actions be taken by a facility to remedy all findings of non-compliance which are tracked on the corporate HSE data base.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

There were no unresolved comments from the SEC staff at the time of filing of this Form 10-K.

 

ITEM 2.

PROPERTIES

The Company manufactures, markets and sells its products and provides services throughout the world, operating facilities in numerous countries ranging in size from approximately 100 square feet to approximately 1,200,000 square feet.  In addition to its manufacturing facilities, the Company also owns and leases land, warehouses, distribution centers, service and storage facilities, sales and administrative offices. The Company leases its corporate headquarters office space and headquarters space for the staff of its segments in Houston, Texas.

 

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The table below shows the number of significant operating manufacturing, warehouse, distribution and service facilities and sales and administrative offices by business segment and geographic area at December 31, 2014.  The location and square footage information also includes land owned and leased.

The Company’s operations in the “Americas” are mainly located in North and South America.  The Company’s operations in the “Asia/Pacific and Middle East” region are mainly located on the Asian continent, in countries considered to be on the Pacific rim of the Asian continent or in the area of the world commonly known as the “Middle East”.  The Company’s operations in “Europe/Africa/Caspian/Russia” are mainly located in the United Kingdom, Norway, on the European continent, in Angola, Algeria, Nigeria, Russia and areas surrounding the Caspian Sea.

Cameron believes its facilities are suitable for their present and intended purposes and are adequate for the Company’s current and anticipated level of operations.

ITEM 3.

LEGAL PROCEEDINGS

The Company is subject to a number of contingencies, including litigation, tax contingencies and environmental matters.

Litigation

The Company has been and continues to be named as a defendant in a number of multi-defendant, multi-plaintiff tort lawsuits. At December 31, 2014, the Company’s Consolidated Balance Sheet included a liability of approximately $17 million for such cases. The Company believes, based on its review of the facts and law, that the potential exposure from these suits will not have a material adverse effect on its consolidated results of operations, financial condition or liquidity.

 

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Tax and Other Contingencies

The Company has legal entities in over 50 countries. As a result, the Company is subject to various tax filing requirements in these countries. The Company prepares its tax filings in a manner which it believes is consistent with such filing requirements. However, some of the tax laws and regulations to which the Company is subject require interpretation and/or judgment. Although the Company believes the tax liabilities for periods ending on or before the balance sheet date have been adequately provided for in the financial statements, to the extent a taxing authority believes the Company has not prepared its tax filings in accordance with the authority’s interpretation of the tax laws and regulations, the Company could be exposed to additional taxes.

The Company has been assessed customs duties and penalties by the government of Brazil totaling almost $50 million at December 31, 2014, including interest accrued at local country rates, following a customs audit for the years 2003-2010.  The Company filed an administrative appeal and believes a majority of this assessment will ultimately be proven to be incorrect because of numerous errors in the assessment, and because the government has not provided appropriate supporting documentation for the assessment.  As a result, the Company currently expects no material adverse impact on its results of operations or cash flows as a result of the ultimate resolution of this matter.  No amounts have been accrued for this assessment as of December 31, 2014 as no loss is currently considered probable.

Environmental Matters

The Company is currently identified as a potentially responsible party (PRP) for one site designated for cleanup under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) or similar state law. The Osborne site is a landfill into which a predecessor of the Reciprocating Compression operation in Grove City, Pennsylvania deposited waste, where remediation was completed in 2011 and remaining costs relate to ongoing ground water monitoring. The Company is also a party with de minimis exposure at other CERCLA sites.

The Company is engaged in site cleanup under the Voluntary Cleanup Plan of the Texas Commission on Environmental Quality ("TCEQ") at a former manufacturing location in Houston, Texas and had been engaged in one at a former manufacturing location in Missouri City, Texas.  With respect to the Missouri City site, the Company received a Certificate of Completion from the TCEQ on February 17, 2015.  With respect to the Houston site, in 2001, the Company discovered that contaminated underground water had migrated under an adjacent residential area. Pursuant to applicable state regulations, the Company notified the affected homeowners. Concerns over the impact on property values of the underground water contamination and its public disclosure led to a number of claims by homeowners.  The Company has settled these claims, primarily as a result of the settlement of a class action lawsuit, and is obligated to reimburse approximately 190 homeowners for any diminution in value of their property due to contamination concerns at the time of the property's sale. Test results of monitoring wells on the southeastern border of the plume indicate that the plume is moving in a new direction, likely as a result of a ground water drainage system completed as part of an interstate highway improvement project.  As a result, the Company notified 39 additional homeowners, and may provide notice to additional homeowners, whose property is adjacent to the class area that their property may be affected. The Company continues to monitor the situation to determine whether additional remedial measures would be appropriate.  The Company believes, based on its review of the facts and law, that any potential exposure from existing agreements as well as any possible new claims that may be filed with respect to this underground water contamination will not have a material adverse effect on its financial position or results of operations. The Company's Consolidated Balance Sheet included a noncurrent liability of approximately $7 million for these matters as of December 31, 2014.

Additionally, the Company has discontinued operations at a number of other sites which had been active for many years and which may have yet undiscovered contamination. The Company does not believe, based upon information currently available, that there are any material environmental liabilities existing at these locations. At December 31, 2014, the Company's Consolidated Balance Sheet included a noncurrent liability of nearly $3 million for these environmental matters.

The Iran Threat Reduction and Syria Human Rights Act of 2012

The Iran Threat Reduction and Syria Human Rights Act of 2012, passed by the United States Congress and signed into law in August 2012, requires companies to report certain prohibited activities or conduct that were knowingly engaged in by the company or any of its affiliates involving Iran or other parties named therein.  For the year ended December 31, 2014, the Company had no such activities or conduct to report.

 

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ITEM 4.

MINE SAFETY DISCLOSURES

N/A.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of Cameron International Corporation, par value $.01 per share, is traded on the New York Stock Exchange (“NYSE”) under the symbol CAM. No dividends were paid during 2014 or 2013.

The trading activity during 2014 and 2013 was as follows:

 

As of February 10, 2015, the approximate number of stockholders of record of Cameron common stock was 836.

Information concerning securities authorized for issuance under stock-based compensation plans is included in Note 10 of the Notes to Consolidated Financial Statements, which notes are included in Part II, Item 8 hereof.

The Board of Directors has given management the authority to purchase nearly $3.8 billion of the Company’s common stock.  The Company, under this authorization, may purchase shares directly or indirectly by way of open market transactions or structured programs, including the use of derivatives, for the Company’s own account or through commercial banks or financial institutions.  At December 31, 2014, the Company had remaining authority for future stock purchases totaling approximately $476 million.

Shares of common stock purchased and placed in treasury during the three months ended December 31, 2014 under the Board’s authorization program described above were as follows:

(1)

Based upon month-end stock price

 

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ITEM 6.

SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data for the Company for each of the five years in the period ended December 31, 2014. This information should be read in conjunction with the consolidated financial statements of the Company and notes thereto included elsewhere in this Annual Report.

 

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the historical results of operations and financial condition of Cameron International Corporation (the Company or Cameron) 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 attributable to Cameron stockholders included in this discussion are based on diluted shares outstanding.

Overview

Cameron provides flow equipment products, systems and services to worldwide oil and gas industries through four business segments – Subsea, Surface, Drilling and Valves & Measurement (V&M).

The Subsea segment delivers integrated solutions, products, systems and services to the subsea oil and gas market, including integrated subsea production systems involving wellheads, subsea trees, manifolds and flowline connectors, subsea processing systems for the enhanced recovery of hydrocarbons, control systems, connectors and services designed to maximize reservoir recovery and extend the life of each field.  The Subsea segment includes the operations of OneSubsea™, a business jointly owned by Cameron (60%) and Schlumberger (40%).

The Surface segment provides onshore and offshore platform wellhead systems and processing solutions, including valves, chokes, actuators, Christmas trees and services to oil and gas operators.  Rental equipment and artificial lift technologies are also provided, as well as products and services involving shale gas production.

One of the major services provided by the Surface segment is CAMSHALE™ Production Solutions, which specializes in shale gas production.  In this process, intense pressure from fracing fluid (usually a mixture of water and sand) is used to crack surrounding shale.  Once the fractures are made, the water is removed from the well bore and the sand is left behind to hold the fractures open.  Oil and natural gas then moves out of the fractures, into the well bore, and up to the surface.

The Drilling segment provides drilling equipment and services to shipyards, drilling contractors, exploration & production operators and rental tool companies.  Products fall into two broad categories: pressure control equipment and rotary drilling equipment and are designed for either onshore or offshore applications.  Such products include drilling equipment packages, blowout preventers (BOPs), BOP control systems, connectors, riser systems, valve and choke manifold systems, topdrives, mud pumps, pipe handling equipment, rig designs and rig kits.

The V&M segment businesses serve portions of the upstream, midstream and downstream markets.   These businesses provide valves and measurement systems that are primarily used to control, direct and measure the flow of oil and gas as they are moved from wellheads through flow lines, gathering lines and transmission systems to refineries, petrochemical plants and industrial centers for processing. Products include gate valves, butterfly valves, Orbit® brand rising stem ball valves, double block and bleed valves, plug valves, globe valves, check valves, actuators, chokes and parts and services as well as measurement equipment products such as totalizers, turbine meters, flow computers, chart recorders, ultrasonic flow meters and sampling systems.

Exposure to offshore markets

The Company’s broad portfolio of products results in Cameron having a significant presence in the offshore oil and gas drilling, production and infrastructure market.  Cameron provides drilling equipment packages for drilling rigs, drilling and production risers, subsea production systems, oil and gas separation equipment, chokes, valves and other equipment to the offshore market.  Approximately 62% of the Company’s 2014 revenue was derived from the offshore market (51% in 2013).

 

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Exposure to international markets

Revenues for the years ended December 31, 2014, 2013 and 2012 were generated from shipments to the following regions of the world (dollars in millions):

 

Financial Summary

The following table sets forth the consolidated percentage relationship to revenues of certain income statement items for the periods presented:

 

 

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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Market Conditions

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

1

Based on average monthly rig count data from Baker Hughes

2

Source: Bloomberg

3

Source:  IHS – Petrodata

 

Drilling activity was generally strong for the first nine months of 2014 and then began to weaken toward the end of the year as commodity prices dropped sharply in the fourth quarter and continued their rapid decline during early 2015.  We believe these declines in commodity prices will significantly reduce drilling activity levels in 2015, which will lower the demand for our products and services.  Although the Company has a substantial backlog of work that is scheduled to be executed during 2015, weaker demand for our products and services is expected to have an adverse impact on new orders, revenues and earnings.  Based on the Company’s long history in the energy sector, we believe such declines in commodity prices and demand are cyclical in nature.  During such cyclical downturns, we take steps to adjust our commercial, manufacturing and support operations as appropriate to ensure that the Company remains competitive and financially sound.  The Company cannot predict the duration or depth of this down-cycle.

 

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The increase in drilling rig activity during 2014 as compared to 2013 was primarily due to an increase in North American rigs drilling for oil and higher activity levels in most major regions of the world, except Latin America.  Despite the improvement in natural gas pricing for much of 2014, overall average drilling activity levels reflected only a modest improvement.  The average number of rigs drilling for gas was down in North America during 2014 as compared to 2013.  Rigs drilling for gas were approximately 18% of the total North American rig count in December 2014 compared to 21% in December 2013.  While December 2014 rig count levels were near the averages for the full year, there was a 7% drop in the average global rig count level in January 2015, mainly as the result of a nearly 11% drop in the average U.S. rig count, reflecting the impact of the decline in commodity prices during the latter half of 2014.

Crude oil prices trended downward during the second half of 2014.  For example, after reaching a high of $107.62 in late July, WTI crude prices closed the year at $53.27 per barrel, a decline of over 50%.  The twelve month futures price for crude oil at December 31, 2014 was approximately 6% higher than spot prices at the end of the year.  Prices for Brent crude followed a similar trend, ending the year with a $57.33 futures strip price, or 8% lower than the closing spot price.  The year-end Brent crude spot price was down 44% from mid-year levels.

Natural gas prices were fairly consistent for much of 2014, averaging $4.35 per MMBtu at Henry Hub, which is a 17% increase as compared to 2013, although prices began to decline near the end of 2014.  The 12-month futures strip price for natural gas at December 31, 2014 was $3.06 per MMBtu at Henry Hub, which is comparable to the spot price of $2.99 at December 31, 2014.

The total number of drillships and semi-submersibles available for contract and under contract at December 31, 2014 were generally consistent with the prior year with some redeployment occurring away from Central and South America to the U.S. Gulf of Mexico and certain other regions of the world.  At December 31, 2014, the supply of available semisubmersibles and drillships currently exceeds demand with additional supply expected to come on-line during 2015.  In connection with this and in response to current market conditions, certain drilling contractors have previously announced plans to cold stack or scrap certain older rigs in their existing portfolio during 2015.

Results of Operations

Consolidated Results – 2014 Compared to 2013

Net income attributable to Cameron stockholders for 2014 totaled $811 million, compared to $699 million for 2013.  These amounts included $26 million and $65 million, respectively, of income from discontinued operations for 2014 and 2013.  Discontinued operations include the Company’s Reciprocating Compression business sold in June 2014 and the Centrifugal Compression business for which the Company entered into a definitive agreement to sell in August 2014 (see Note 2 of the Notes to Consolidated Condensed Financial Statements for further information).  The closing of the sale of Centrifugal Compression was effective January 1, 2015.  Consolidated net income also includes $37 million and $25 million, respectively, of income attributable to noncontrolling interests for 2014 and 2013.

Earnings from continuing operations per diluted share attributable to Cameron stockholders totaled $3.83 in 2014, compared to $2.60 in 2013.  Included in the 2014 and 2013 results were other costs, totaling $0.31 and $0.29 per diluted share, respectively, as described further below.

Absent these costs, diluted earnings from continuing operations per share attributable to Cameron stockholders would have been $4.14 in 2014 and $2.89 in 2013, an increase of approximately 43%.

Total revenues for the Company increased $1.2 billion, or 13.6%, during 2014 as compared 2013.  The vast majority of the increase was attributable to higher revenues in the Drilling and Surface segments reflecting the impact of higher beginning-of-the-year backlog and continued strength throughout a good portion of 2014 in North American activity levels.  Revenues in the Subsea business were also up 9%, whereas V&M segment revenues were essentially flat with 2013.

As a percent of revenues, cost of sales (exclusive of depreciation and amortization) increased from 71.3% during 2013 to 71.9% for 2014, mainly as a result of lower product margins in the Surface and V&M segments largely relating to pricing pressures and higher costs. Comments regarding margins in the Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to Revenues minus Cost of Sales (exclusive of depreciation and amortization) as shown separately on the Company’s Consolidated Results of Operations Statement for each of the three years in the period ended December 31, 2014.

Selling and administrative expenses increased $12 million, or 1%, during 2014 as compared to 2013.  Selling and administrative expenses were 12.4% of revenues for 2014, down from 13.9% for 2013, reflecting the impact of cost control efforts throughout the Company.

 

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Depreciation and amortization expense totaled $348 million for 2014 as compared to $298 million during 2013, an increase of $50 million.  The increase was due primarily to higher depreciation expense as a result of recent increased levels of capital spending, mainly in the Subsea and Surface segments.

Net interest increased $29 million, from $100 million during 2013 to $129 million during 2014, mainly as a result of additional interest associated with (i) $750 million of new senior notes issued by the Company in December 2013, and (ii) $500 million of new senior notes issued in June 2014.

During 2014, the Company incurred $73 million of other costs, net of credits, as compared to $92 million in 2013.  These other costs (credits) consisted of:

The Company’s effective tax rate for 2014 was 23.9% compared to 22.9% during 2013.  The components of the effective tax rates for both years were as follows:

Segment Results – 2014 Compared to 2013

Segment revenues and operating income before interest and income taxes represent the results of activities involving third-party customers and transactions with other segments.  Segment operating income before interest and income taxes represents the profit remaining in the segment after deducting third-party and intersegment cost of sales, selling and administrative expenses and depreciation and amortization expense from third-party and intersegment revenues.  For further information on the Company’s segments, see Note 16 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

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Subsea Segment

Revenues

Revenues increased in 2014 as compared to 2013 primarily as a result of higher international project activity levels on large subsea projects offshore Brazil and Nigeria, partially offset by certain subsea projects nearing completion in the Gulf of Mexico and the Asia-Pacific region, as well as a moderate decline in custom processing equipment revenues.

Segment operating income before interest and income taxes as a percent of revenues

Segment operating income before interest and income taxes as a percent of revenues improved in 2014 as compared to 2013, due mainly to better margin performance on large subsea projects and cost control efforts that limited increases in selling and administrative expenses.  Partially offsetting this improvement was increased depreciation and amortization expense, largely associated with higher amortization of purchased intangibles and additional capital spending in recent periods.

 

Orders

Orders declined significantly in 2014 as compared to 2013, a year in which there were four large project awards received covering more than 90 new subsea trees and two large project awards for custom processing equipment.  No similar-sized large subsea or custom processing equipment orders were received in 2014.

Backlog (at period-end)

A decline in new project awards during 2014, along with increased revenues, were the main drivers for the reduction in backlog levels at December 31, 2014 as compared to December 31, 2013.

Surface Segment

 

Revenues

Revenues increased in 2014 as compared to 2013 due mainly to higher activity levels, as well as increased market penetration, in various North American unconventional resource regions and higher deliveries to customers in the North Sea, Saudi Arabia and Oman, as well as higher sales to the Company’s Drilling segment.

Segment operating income before interest and income taxes as a percent of revenues

Segment operating income before interest and income taxes as a percent of revenues was flat in 2014 as compared to 2013 as overall cost increases mostly mirrored the increase in revenues during 2014.

 

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Orders

Orders were up modestly in 2014 as compared to 2013 as increased activity levels, along with higher market penetration in various North American unconventional resource regions, more than compensated for a decline in 2014 demand from customers operating in Iraq, in comparison to the strong order levels received for that region in 2013.

Backlog (at period-end)

The increase in segment backlog at December 31, 2014 as compared to December 31, 2013 was entirely due to new equipment order rates exceeding deliveries during the year.

Drilling Segment

 

 

Revenues

Revenues increased in 2014 as compared to 2013 driven by execution of orders from the segment’s substantial beginning-of-the-year backlog levels and better project execution, as well as an increased demand for the Company’s services.

Segment operating income before interest and income taxes as a percent of revenues

The increase in segment operating income before interest and income taxes as a percent of revenues in 2014 as compared to 2013 was due primarily to cost control efforts which limited the amount of increase in selling and administrative expenses as compared to 2013.

Orders

Order rates declined in 2014 as compared to 2013 as a result of a slowdown in large rig construction and drilling stack project awards in 2014, partially offset by a modest improvement in orders for services.

Backlog (at period-end)

Backlog at December 31, 2014 decreased from December 31, 2013 mainly due to the slowdown in large rig construction and drilling stack project awards in 2014, as described above.

 

V&M Segment

 

 

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Revenues

Overall, segment revenues for 2014 were relatively flat when compared to 2013 as increased sales of distributed valves and measurement products, mainly resulting from continued strength in the North American market for much of the year, were mostly offset by lower engineered and process valves sales due largely to project slippage, recent order weakness and delayed timing of valve deliveries due to various customer changes.

Segment operating income before interest and income taxes as a percent of revenues

The ratio of segment operating income before interest and income taxes as a percent of revenues declined in 2014 as compared to 2013 due primarily to lower engineered and process valve product margins, resulting mainly from pricing pressures and the impact of higher manufacturing costs, partially offset by lower selling and administrative costs.

Orders

Orders were essentially flat in 2014 as compared to 2013.  Higher North American activity levels for much of 2014 resulted in full year order increases for distributed valves and measurement products. Sequentially, however, order rates declined in both product lines in the fourth quarter of 2014 as compared to the third quarter of 2014 as a result of weakening commodity prices and activity levels during the latter half of 2014.

The full year product line increases described above were largely offset by a decline in demand for both engineered and process valves resulting mainly from project slippage and customer spending constraints associated with large international production expansion projects.

Backlog (at period-end)

Backlog levels for the V&M segment at December 31, 2014 decreased from December 31, 2013, as recent order rates for new engineered and process valves have not kept pace with recent deliveries. These decreases were partially offset by strong demand for distributed valves during much of 2014.

 

Corporate Expenses

Corporate expenses were $145 million for 2014, a decline of $17 million from $162 million in 2013.  The decrease was due primarily to lower spending associated with the Company’s information technology systems and lower costs associated with various legal matters.

 

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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Market Conditions

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

1

Based on average monthly rig count data from Baker Hughes

2

Source: Bloomberg

3

Source:  IHS – Petrodata

The average number of worldwide operating rigs during 2013 declined 3% from 2012 due primarily to a lower average number of gas rigs working in North America.  During 2013, rig count levels dropped to their lowest point in May before recovering 9% by December.  Average worldwide rig count levels for the month of December 2013 were up 3% from the average number of rigs operating during the month of December 2012 but were down 11% from February 2012, the highest monthly average level of operating rigs counted during the last ten year period.

The decline during 2013 in the average annual United States rig count was the result of a 31% decline in the average number of working gas rigs.  Oil rigs accounted for 78% of the average 2013 U.S. rig count compared to 71% for 2012.  The U.S. rig count level during the month of December 2013 increased from earlier months in the year and was just under the average U.S. rig count level for the month of December 2012.

 

A decline in the average number of operating oil rigs accounted for the drop in the average Canadian rig count from 2012 to 2013. Oil rigs accounted for nearly 66% of the average 2013 Canadian rig count compared to almost 72% for 2012.

 

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For the rest of the world, increased drilling activity in Africa contributed to almost half of the 5% increase in average operating rigs in 2013 as compared to 2012.

WTI crude oil prices during 2013 went from a low of under $87 per barrel in April to a high of over $110 per barrel in September before declining during the remainder of the year to close at $98.42 per barrel at December 31, 2013, in line with the average daily price for the year and up 7% from the closing price at December 31, 2012.   The 12-month futures strip price for WTI crude oil was $95.79 at December 31, 2013, down 3% from 2013’s year-end closing spot price.  In comparison, Brent crude oil spot prices averaged almost $106 per barrel for 2013, compared to $109 per barrel in 2012.

Natural gas spot prices trended upward throughout much of 2013 from a low of $3.08 per MMBtu at Henry Hub in January to a high of $4.52 per MMBtu at Henry Hub during December.  The December 31, 2013 closing price was 26% higher than the closing price at December 31, 2012.  However, the 12-month futures strip price for natural gas at Henry Hub at December 31, 2013 was $4.19, down 3% from 2013’s year-end closing price, but up 12% from the average 2013 price level.

The decline during 2012 in the price of natural gas negatively affected gas drilling activity levels in North America and order rates that year for certain of the Company’s products used in natural gas drilling and production, in particular distributed valves, which serve this market.  Although natural gas prices recovered somewhat during 2013 from 2012 levels, North American gas rig count levels did not show a similar recovery during that same period.

Results of Operations

Consolidated Results – 2013 Compared to 2012

Net income attributable to Cameron stockholders for 2013 was $699 million compared to $751 million for 2012.  These amounts included $65 million and $66 million, respectively, of income from discontinued operations for 2013 and 2012.  Consolidated net income for 2013 also includes $25 million of income attributable to noncontrolling interests (none for 2012).

Earnings from continuing operations per diluted share attributable to Cameron stockholders for 2013 were $2.60 down from $2.76 per share in 2012.  The Company incurred approximately $0.29 per share of other costs in 2013, as described further below.  Such other costs in 2012 amounted to approximately $0.11 per share.  Absent these costs, the Company’s diluted earnings per share from continuing operations would have been $2.89 in 2013 compared to $2.87 in 2012, an increase of approximately 1%.

Total revenues for the Company increased by $1.3 billion, or 17.2%, from $7.8 billion in 2012 to $9.1 billion for 2013, with the improvement noted mainly in the Subsea and Drilling segments. Businesses acquired since the beginning of 2012 accounted for approximately 34% of the increase.  Absent the effect of these newly acquired businesses, revenues climbed 11% in 2013 as compared to 2012.  A further discussion of revenues by segment may be found below.

As a percent of revenues, cost of sales (exclusive of depreciation and amortization) increased from 70.8% in 2012 to 71.3% for 2013.  The increase was due largely to execution issues in the Drilling segment.

Selling and administrative expenses increased $205 million, or 19.2%, during 2013 as compared to 2012.

•

As a percent of revenues, selling and administrative expenses increased from 13.7% in 2012 to 13.9% in 2013.

•

Higher employee and facility-related costs as a result of increased headcount, business volumes and international and services expansion efforts, particularly in the Surface and Drilling segments, accounted for most of the dollar increase.

Depreciation and amortization increased $60 million, or 25.2%, during 2013 as compared to 2012 mainly due to:

•

increased capital spending in recent periods primarily for (i) expansion of the fleet of rental equipment available in the Surface segment, (ii) enhancing the manufacturing capacity in the Drilling segment, and (iii) development of the Company’s enhanced business information systems as well as,

•

the impact of newly acquired businesses, which accounted for nearly 46% of the increase in costs during 2013.

Net interest for 2013 totaled $100 million, an increase of $10 million from 2012.  The increase was due mainly to (i) the full year impact of interest during 2013 on the $500 million principal amount of debt issued in May 2012 and (ii) the $750 million principal amount of debt issued in December 2013, as well as additional interest associated with prior years’ income tax liabilities.

 

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During 2013, the Company incurred $92 million of other costs as compared to $33 million in 2012.  These other costs consisted of:

The Company’s effective tax rate for 2013 was 22.9% compared to 18.6% during 2012.  The components of the effective tax rates for both years were as follows:

 

Segment Results – 2013 Compared to 2012

Subsea Segment

 

 

Revenues

Revenues increased in 2013 as compared to 2012 mainly due to (i) the impact of businesses contributed by Schlumberger upon the formation of OneSubsea, effective June 30, 2013, (ii) higher subsea project activity levels, mainly for fields offshore Brazil and Australia, and (iii) higher international project activity levels associated with processing solutions.

 

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Segment operating income before interest and income taxes as a percent of revenues

Segment operating income before interest and income taxes as a percent of revenues increased in 2013 as compared to 2012 mainly as a result of improved margins on large subsea projects, as well as stronger volumes and better absorption of costs in the process systems product line.

Orders

Orders increased significantly in 2013 as compared to 2012 largely due to (i) an 87% increase in the number of new subsea trees awarded in 2013, mainly for projects offshore Brazil and in the UK North Sea, (ii) an award of nearly $250 million for a gas processing facility in Malaysia, and (iii) the impact of businesses contributed by Schlumberger upon the formation of OneSubsea in June 2013, which accounted for almost 19% of the increase.

Backlog (at period-end)

Similar to orders, backlog at December 31, 2013 was significantly higher than at December 31, 2012.  Nearly 25% of the increase in backlog from December 31, 2012 was due to the impact of businesses contributed by Schlumberger as part of the formation of OneSubsea in June 2013.  The remaining increase largely reflected the high level of new major project awards received in 2013, as described above.

Surface Segment

 

Revenues

Revenues increased in 2013 as compared to 2012 due primarily to (i) higher activity levels and increased deployment of rental equipment in unconventional resource regions of North America and (ii) higher shipments for projects in the U.K. North Sea, the Caspian Sea, the Middle East and in the Asia-Pacific region.  Partially offsetting this improvement was a significant decline in revenues for wellhead processing equipment and services, primarily in North America.

Segment operating income before interest and income taxes as a percent of revenues

Segment operating income before interest and income taxes as a percent of revenues increased in 2013 as compared to 2012.  Improved product margins, resulting mainly from better price realization and product mix on various international projects, was partially offset by (i) higher depreciation and amortization expense from purchased intangibles and recent capital spending for the expansion of the fleet of rental equipment available and (ii) increased selling and administrative expenses largely associated with higher employee-related costs.

Orders

Orders increased during 2013 as compared to 2012 mainly as a result of (i) high demand for new equipment in Saudi Arabia and Iraq, (ii) higher activity levels, increased market penetration and rental equipment deployments in North America, and (iii) increased demand for equipment in the U.K. North Sea and the Caspian Sea.  Partially offsetting these gains was a significant decline in demand for wellhead processing equipment and services, primarily in North America.

Backlog (at period-end)

Increased levels of demand during 2013 resulted in the increase in backlog from December 31, 2012 to December 31, 2013.

 

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