<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13884
---------------------------------------------------------
Cooper Cameron Corporation
----------------------------------------------------------------------------
(Exact Name of Registrant in its Charter)
Delaware 76-0451843
- -------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
515 Post Oak Blvd., Suite 1200, Houston, Texas 77027
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(Address of Principal Executive Offices) (Zip Code)
713/513-3300
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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.
Yes X No
--- ---
Number of shares outstanding of issuer's common stock as of October 30, 1998
was 53,230,662.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COOPER CAMERON CORPORATION
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
(dollars in millions, except per share data) 1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES ............................... $ 477.2 $ 474.5 $ 1,406.8 $ 1,291.8
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation
and amortization) ................... 336.6 340.4 983.8 933.1
Depreciation and amortization .......... 18.0 16.3 53.3 48.9
Selling and administrative expenses .... 59.4 54.1 176.9 156.0
Interest expense ....................... 8.6 7.2 24.8 21.5
Nonrecurring/unusual charges ........... 9.4 -- 9.4 --
----------- ----------- ----------- -----------
432.0 418.0 1,248.2 1,159.5
----------- ----------- ----------- -----------
Income before income taxes ....... 45.2 56.5 158.6 132.3
Income tax provision ................... (14.0) (16.7) (49.2) (39.0)
----------- ----------- ----------- -----------
Net income ............................. $ 31.2 $ 39.8 $ 109.4 $ 93.3
=========== =========== =========== ===========
Earnings per share:
Basic ............................... $ 0.59 $ 0.76 $ 2.08 $ 1.80
=========== =========== =========== ===========
Diluted ............................. $ 0.58 $ 0.70 $ 1.98 $ 1.69
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-2-
<PAGE> 3
COOPER CAMERON CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(dollars in millions, except shares and per share data) 1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................... $ 21.7 $ 11.6
Receivables, net ............................................. 410.3 428.6
Inventories, net ............................................. 593.8 495.6
Other ........................................................ 25.3 25.0
---------- ----------
Total current assets .............................. 1,051.1 960.8
---------- ----------
Plant and equipment, at cost ................................. 918.9 791.3
Less: accumulated depreciation .............................. (436.6) (395.8)
Intangibles .................................................. 514.4 445.8
Less: accumulated amortization .............................. (221.3) (205.4)
Other assets ................................................. 64.7 46.5
---------- ----------
TOTAL ASSETS ................................. $ 1,891.2 $ 1,643.2
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt ......................... $ 52.6 $ 48.1
Accounts payable and accrued liabilities ..................... 488.4 470.9
Accrued income taxes ......................................... 12.6 9.8
---------- ----------
Total current liabilities ......................... 553.6 528.8
---------- ----------
Long-term debt ............................................... 437.5 328.8
Postretirement benefits other than pensions .................. 76.9 85.5
Deferred income taxes ........................................ 39.0 35.0
Other long-term liabilities .................................. 24.0 23.1
---------- ----------
Total liabilities ................................. 1,131.0 1,001.2
---------- ----------
Stockholders' Equity:
Common stock, par value $.01 per share, 150,000,000 shares
authorized, 53,235,292 shares issued ................. .5 .5
Capital in excess of par value ........................... 884.8 923.0
Retained deficit (including $441.0 charge on June 30, 1995
related to goodwill impairment) ...................... (148.1) (257.5)
Accumulated other elements of comprehensive income ....... 23.8 7.8
Less: Treasury stock, 16,636 shares at September 30, 1998
and 477,149 shares at December 31, 1997, at cost ..... (.8) (31.8)
---------- ----------
Total stockholders' equity ........................ 760.2 642.0
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 1,891.2 $ 1,643.2
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE> 4
COOPER CAMERON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(dollars in millions) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 31.2 $ 39.8 $ 109.4 $ 93.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................... 13.6 12.4 40.4 37.3
Amortization ............................................... 4.4 3.9 12.9 11.6
Nonrecurring/unusual charges ............................... 7.1 -- 7.1 --
Deferred income taxes ...................................... 3.8 (1.5) 15.6 3.8
Changes in assets and liabilities, net of translation and effects of
acquisitions:
Receivables ................................................ 22.2 (22.1) 35.2 (39.5)
Inventories ................................................ (6.1) (3.6) (66.1) (104.9)
Accounts payable and accrued liabilities ................... (3.0) (14.2) (34.1) 15.3
Other assets and liabilities, net .......................... (2.7) (3.7) 6.5 1.4
-------- -------- -------- --------
Net cash provided by operating activities .......... 70.5 11.0 126.9 18.3
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of plant and
equipment, net ................................................. (23.1) (17.2) (78.7) (37.0)
Acquisitions ....................................................... (9.2) -- (99.4) (6.3)
-------- -------- -------- --------
Net cash used for investing activities ............. (32.3) (17.2) (178.1) (43.3)
-------- -------- -------- --------
Cash flows from financing activities:
Loan borrowings (repayments), net .................................. (29.8) (10.1) 91.9 2.7
Purchase of treasury stock ......................................... -- -- (36.1) --
Activity under stock option plans and other ........................ (1.8) 13.3 5.3 21.1
-------- -------- -------- --------
Net cash provided by (used for)
financing activities ........................... (31.6) 3.2 61.1 23.8
-------- -------- -------- --------
Effect of translation on cash .......................................... .1 .5 .2 (.5)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents ....................... 6.7 (2.5) 10.1 (1.7)
-------- -------- -------- --------
Cash and cash equivalents, beginning of period ......................... 15.0 9.9 11.6 9.1
-------- -------- -------- --------
Cash and cash equivalents, end of period ............................... $ 21.7 $ 7.4 $ 21.7 $ 7.4
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
COOPER CAMERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Adjustments
The financial information presented as of September 30, 1998 and for
the three- and nine-month periods ended September 30, 1998 and 1997 has been
prepared from the books and records without audit. Financial information as of
December 31, 1997 has been derived from the audited financial statements of the
Company, but does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, except as discussed below,
necessary for a fair presentation of the financial information for the periods
indicated have been included. For information regarding the Company's
accounting policies, refer to the consolidated financial statements and related
notes included in the Company's Annual Report to Stockholders for the year
ended December 31, 1997.
Note 2. Nonrecurring/Unusual Charges
During the third quarter of 1998, the Company recorded $9.4 million of
nonrecurring/ unusual charges covering severance, relocation, idle facility and
other costs mainly associated with the first phase of various cost reduction
initiatives in both segments. The cash flow effect of these charges during the
quarter was approximately $2.3 million, primarily for employee severance and
acquisition-related costs. In the case of the Petroleum Production Equipment
segment the unusual charges, which totaled $5.8 million, related primarily to
the previously announced shutdown of Cooper Cameron Valves' manufacturing
facility in Missouri City, Texas. Production from this facility, which had
declined over the last several years, is in the process of being transferred to
a facility in Oklahoma City, Oklahoma. In addition, certain one-time costs
relating to the acquisition of Orbit Valve International, Inc. (see Note 3)
were recorded. In the case of the Compression and Power Equipment segment,
where the charges totaled $3.6 million, the costs related primarily to
severance and relocation costs for salaried personnel in Cooper Energy
Service's Mount Vernon, Ohio and Grove City, Pennsylvania facilities.
In the fourth quarter of 1998 and continuing throughout the first half
of 1999, the Company expects to recognize additional amounts associated both
with the actions noted above as well as with further personnel reductions and
facility realignments currently under review. When completed, the Company
expects to have reduced total employment by approximately 10% from the mid-year
1998 level of 10,600. Although the various actions and related amounts are
still in the process of being analyzed and communicated to affected employees,
the Company currently anticipates that the future charges could total $20-30
million. Should the Company begin to experience a prolonged decline in order
levels and resulting backlog within the Petroleum Production Equipment segment,
then additional actions could be required in this segment which could result in
a further increase in the current estimate of these one-time costs.
-5-
<PAGE> 6
Note 3. Acquisitions
Effective April 2, 1998, the Company acquired Orbit Valve
International, Inc. for approximately $100 million in cash and debt. Orbit,
which has been integrated into the Cooper Cameron Valves organization in the
PPE segment, is based in Little Rock, Arkansas and manufactures and sells
high-performance valves for the oil and gas and petrochemical industries.
During 1997, Orbit generated revenues of approximately $85 million. The
acquisition has been accounted for under the purchase method resulting in
additional goodwill of approximately $55 million at September 30, 1998.
Additionally, during July 1998, the Company acquired certain assets
and assumed certain liabilities of Brisco Engineering Ltd., a U.K. company, for
approximately $12 million in cash and debt. The acquired operations, which
participate in the repair and aftermarket parts business for control systems,
have been consolidated into the Cameron organization in the PPE segment.
Additional goodwill arising from accounting for this acquisition under the
purchase method was approximately $2 million.
The results of operations from both acquisitions have been included
with the Company's results for the three- and nine-month periods ended
September 30, 1998 from the respective acquisition dates forward.
Note 4. Inventories
<TABLE>
<CAPTION>
September 30, December 31,
(dollars in millions) 1998 1997
---------- ----------
<S> <C> <C>
Raw materials ................................... $ 64.9 $ 60.3
Work-in-process ................................. 234.4 203.3
Finished goods, including parts and
subassemblies .............................. 377.2 327.3
Perishable tooling and supplies ................. 3.5 3.1
---------- ----------
680.0 594.0
Allowances ...................................... (86.2) (98.4)
---------- ----------
Net inventories ................................. $ 593.8 $ 495.6
========== ==========
</TABLE>
Note 5. Debt
During the third quarter of 1998, the Company entered into agreements
with five banks providing for additional committed credit facilities totaling
$155 million. The agreements allow the Company to borrow funds on an unsecured
basis at floating or negotiated fixed rates of interest. The agreements expire
at various dates during the third quarter of 1999 and provide for the payment
of facility fees at varying rates based on the amount of each credit facility.
As of September 30, 1998, the entire $155 million was available for borrowing
as well as $154 million under the Company's existing long-term credit facility.
The new agreements did not provide for any additional material debt covenants
apart from those contained in the long-term credit facility.
-6-
<PAGE> 7
Note 6. Forward Purchase Agreement
On August 5, 1998 the Company entered into a forward purchase
agreement pursuant to which a third party may, from time to time, acquire
Cooper Cameron stock in open market transactions. At the end of the agreement,
or such earlier termination date as the Company may elect, the Company has the
option to pay the third party the total cost of the acquired shares and record
the shares as treasury stock or to receive or pay net cash or net Cooper
Cameron stock equal to the market gain or loss following an orderly disposition
of such shares. Under existing accounting rules, this agreement will be
accounted for as an equity transaction with no effect on the balance sheet
except, as and when funds are paid or shares are actually issued, and will not
result in any income or expense in the Company's consolidated results of
operations. As of October 12, 1998, a total of 2,500,000 shares of Company
stock had been acquired by the third party at a total cost of approximately $67
million.
Note 7. Stockholder Actions
During the Annual Meeting of Stockholders held on May 14, 1998, an
Amended and Restated Certificate of Incorporation was approved resulting in an
increase in the amount of Common stock the Company is authorized to issue from
75,000,000 shares to 150,000,000 shares. Additionally, stockholders gave their
approval to an amendment to the Amended and Restated Cooper Cameron Long-Term
Incentive Plan (the Plan) which had the effect of increasing by 3,000,000 the
number of shares of Common stock reserved for issuance under the Plan.
Note 8. Retained Deficit
While the Company has a retained deficit, it could declare and pay
dividends from its current surplus. Under Delaware Law the amount potentially
available for dividends equals the net of capital in excess of par value less
the retained deficit, or approximately $736.7 million at September 30, 1998.
Note 9. New Accounting Pronouncements
Effective, January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 (Reporting Comprehensive Income). As a
result, the Company has modified its Consolidated Balance Sheets to include a
caption entitled "Accumulated other elements of comprehensive income". The
amount of comprehensive income for each of the three and nine-month periods
ended September 30, 1998 and 1997 and the components of accumulated other
elements of comprehensive income at September 30, 1998 and December 31, 1997
are as follows:
-7-
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------- ----------------------
(dollars in millions) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income per Consolidated Results of
Operations ......................... $ 31.2 $ 39.8 $ 109.4 $ 93.3
Foreign currency translation gain
(loss)................................ 16.1 (9.4) 16.0 (36.0)
Minimum pension liability adjustment ... -- -- -- 2.2
--------- --------- --------- ---------
Comprehensive income ................... $ 47.3 $ 30.4 $ 125.4 $ 59.5
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
(dollars in millions) September 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Amounts comprising accumulated other elements of comprehensive income:
Accumulated foreign currency translation adjustments.......... $ 24.1 $ 8.1
Accumulated adjustments to record minimum pension
liabilities ................................................ (.3) (.3)
-------- --------
Accumulated other elements of comprehensive income ... $ 23.8 $ 7.8
======== ========
</TABLE>
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133 (Accounting for
Derivative Instruments and Hedging Activities). This new standard, which is not
required to be adopted by the Company until January 1, 2000, will change
current accounting rules relating to derivatives and hedging activities.
Because the Company's only derivative and hedging activities currently relate
to interest rate swap agreements, including treasury locks, a forward purchase
agreement (see Note 6) and certain foreign currency hedges related to specific
transactions, the impact of the new standard on the Company is not expected to
be material.
Note 10. Earnings Per Share
The weighted average number of common shares (utilized for basic
earnings per share presentation) and common stock equivalents outstanding for
each period presented was as follows:
-8-
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
(amounts in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Average shares outstanding ......... 53.1 52.7 52.7 51.8
Common stock equivalents ........... 1.0 4.0 2.5 3.3
------ ------ ------ ------
Number of shares utilized in diluted
earnings per share calculation.. 54.1 56.7 55.2 55.1
====== ====== ====== ======
</TABLE>
-9-
<PAGE> 10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
In addition to the historical data contained herein, this document
includes forward-looking statements regarding the future revenues and
profitability of the Company made in reliance upon the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company's actual
results may differ materially from those described in forward-looking
statements. Such statements are based on current expectations of the Company's
performance and are subject to a variety of factors, not under the control of
the Company, which can affect the Company's results of operations, liquidity or
financial condition. Such factors may include overall demand for the Company's
products; changes in the price of (and demand for) oil and gas in both domestic
and international markets; political and social issues affecting the countries
in which the Company does business; fluctuations in currency markets worldwide;
and variations in global economic activity. In particular, current and
projected oil and gas prices directly affect customers' spending levels and
their related purchases of the Company's products and services; as a result,
changes in price expectations may impact the Company's financial results due to
changes in cost structure, staffing or spending levels.
Because the information herein is based solely on data currently
available, it is subject to change as a result of changes in conditions over
which the Company has no control or influence, and should not therefore be
viewed as assurance regarding the Company's future performance. Additionally,
the Company is not obligated to make public indication of such changes unless
required under applicable disclosure rules and regulations.
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
Cooper Cameron Corporation had net income of $31.2 million, or $.58
per share, for the third quarter of 1998, including an after-tax charge of $6.5
million, or $.12 per share for cost rationalization efforts, including a plant
closing and staff reductions. This compares to $39.8 million, or $.70 per
share, for the same period in 1997. (All per share amounts are based on diluted
shares.) The third quarter 1998 charge totaled $9.4 million pre-tax and is
discussed further in Note 2 of the Notes to Consolidated Financial Statements.
Excluding the effect of this charge, the Company's results were flat with the
third quarter of 1997, with a 23% improvement in the Petroleum Production
Equipment (PPE) segment offset by a 69% decline in the Compression & Power
Equipment (CPE) segment.
REVENUES
Revenues for the third quarter of 1998 totaled $477.2 million and were
essentially flat with the $474.5 million in the third quarter of 1997. The
acquisition of Orbit Valve International, Inc. on April 2, 1998 and increased
major project shipments in the PPE segment were offset by continued weakness in
the CPE segment. The Orbit Valve acquisition is discussed further in Note 3 of
the Notes to Consolidated Financial Statements. The Brisco Engineering Ltd.
acquisition in July 1998, also discussed in Note 3, did not have a material
effect on the quarter.
-10-
<PAGE> 11
Natural gas and oil commodity prices and the expectations for future
price levels heavily influence the energy-related markets served by the
Company. While natural gas prices have remained relatively stable during 1998
at levels that are reasonably high from a historical perspective, oil prices
have declined significantly. Weaker demand, largely from the economic and
financial unrest in Asia, and excess production concerns fueled this price
decline. Thus far however, the lower oil prices have not had a significant
effect on the Company's financial performance.
Through the second quarter of 1998, confidence that worldwide demand
for oil and natural gas will grow over the longer-term provided impetus for
continued spending by national oil companies and major and independent
producers. During the third quarter however, customers began to delay spending.
These market conditions were reflected in the Company's backlog, defined as
firm customer orders for which a purchase order has been received, satisfactory
credit or financing arrangements exist and delivery is scheduled. Backlog
declined 6% during the third quarter of 1998 to $922.9 million, but remained
17% higher than year-end 1997 and 10% greater than the third quarter 1997
level. See section entitled "Outlook" for information regarding the Company's
current expectations regarding the fourth quarter of 1998.
The PPE segment's revenues of $338.8 million increased by 13% over
third quarter 1997 revenues of $300.2 million. The segment's revenue growth was
across all product lines with the exception of surface equipment, which has a
shorter delivery cycle and responds more quickly to changes in order activity.
The increase in the other product lines was primarily due to the strong market
conditions in prior quarters, which resulted in volume growth as well as
favorable pricing, and the Orbit Valve acquisition, which contributed revenues
of approximately $29 million in the quarter. Of particular note in the quarter
were increased drilling and subsea equipment shipments for deep-water projects
in the Gulf of Mexico. Also contributing to the revenue growth was improved
aftermarket activity, as demand for spare parts and refurbished equipment
increased. Order activity for the segment decreased by 16% from the third
quarter 1997 level due to the effect of continued weak oil prices. This decline
was across all business lines, except the valve business, which benefited from
the Orbit Valve acquisition. Backlog for the segment declined 4% during the
quarter to $755.7 million, but remained 31% higher than year-end 1997 and 30%
greater than the third quarter 1997 level. As a result of the increase in the
longer cycle time drilling and subsea project orders in prior quarters,
approximately 10% of this backlog is not scheduled for delivery until the year
2000.
Revenues for the CPE segment of $138.4 million decreased by 21% from
$174.3 million in the third quarter of 1997, with similar percentage declines
in both natural gas compression equipment and centrifugal air compressors. The
energy-related markets served by the natural gas compression equipment business
continued to be very competitive with the timing of new major projects being
pushed further into the future. The most significant revenue decline was in gas
turbine and compressor projects, while aftermarket activity was virtually
unchanged and reciprocating units improved slightly. The decline in centrifugal
air compressor sales was largely due to the continuing effect of the "Asian
crisis". Order activity in the CPE segment declined by 8% from the third
quarter of 1997, due largely to lower levels of Asian activity for centrifugal
air compressors. Backlog for the segment declined 14% during the quarter and
ended the third quarter of 1998 at $167.2 million, a decrease of 20% from
year-end 1997 and 36% from the third quarter 1997 level.
-11-
<PAGE> 12
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation and amortization) of $336.6
million in the third quarter of 1998 decreased by $3.8 million, or 1%, compared
with $340.4 million in the same period of 1997. The gross margin percentage
(defined as revenues less cost of sales as a percentage of revenues) was 33.0%
for the PPE segment, compared to 31.0% in the third quarter of 1997. This
increase resulted from improved pricing, the leveraging of various
manufacturing support costs that are relatively fixed in the short-term, and
manufacturing cost reductions, including benefits from capital expenditures.
For the CPE segment, the gross margin percentage declined from 23.6% in the
third quarter of 1997 to 20.9% in the third quarter of 1998. Pricing pressure
continued during the period and cost reduction efforts were not able to keep
pace with the revenue decline.
Depreciation and amortization increased by $1.7 million, from $16.3
million in the third quarter of 1997 to $18.0 million in the third quarter of
1998, mainly in the PPE segment. This was due primarily to the Orbit Valve
acquisition and increased capital spending in response to improved market
conditions.
Selling and administrative expenses increased by $5.3 million, or 10%,
from $54.1 million in the third quarter of 1997 to $59.4 million in the third
quarter of 1998, primarily in the PPE segment. This increase was due to the
Orbit Valve acquisition, higher revenue levels, and the Company's effort to
improve its market presence. As an example, during 1997 Cameron established
separate management teams and focused additional marketing resources on the
controls and choke businesses, where there is believed to be significant growth
potential. As a percentage of revenues, selling and administrative costs for
the Company increased from 11.4% in the third quarter of 1997 to 12.5% in the
third quarter of 1998. In the PPE segment, these costs increased from 11.2% to
11.7% of revenues due primarily to the acquired Orbit Valve operations, which
historically had higher levels of such costs. The CPE segment increased from
9.6% of revenues to 12.4%, as costs that are relatively fixed in the short-term
were not reduced at the rate of the revenue decline.
Reflecting the various factors discussed above, operating income
(defined as earnings before nonrecurring/unusual charges, corporate expenses,
interest, and taxes) totaled $66.0 million for the Company, a decrease of $1.5
million from the third quarter of 1997. The PPE segment improved from $49.2
million to $60.3 million, while the CPE segment decreased from $18.3 million to
$5.7 million.
Interest expense increased from $7.2 million in the third quarter of
1997 to $8.6 million in the third quarter of 1998. This increase was due to a
higher average debt level related to acquisitions and greater working capital
requirements in support of the revenue and backlog growth in the PPE segment.
-12-
<PAGE> 13
Income taxes were $14.0 million in the third quarter of 1998, a
decrease of $2.7 million from the same period in 1997. This decrease was the
result of the tax effect of the third quarter 1998 pre-tax charge of $9.4
million. The effective tax rate increased from 29.5% in the third quarter of
1997 to 31.0% in the third quarter of 1998 due to an estimated change in the
mix of domestic and foreign earnings for 1998 versus 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
The Company had net income of $109.4 million, or $1.98 per share, for
the nine months ended September 30, 1998, compared to $93.3 million, or $1.69
per share, for the same period in 1997. (All per share amounts are based on
diluted shares.) Included in the 1998 results was a $6.5 million, or $.12 per
share, after-tax charge ($9.4 million pre-tax) discussed in Note 2 of the Notes
to Consolidated Financial Statements. Excluding this charge, the Company's
earnings per share improved by 24% due to the strong performance of the
Petroleum Production Equipment (PPE) segment, where earnings increased by 48%,
partially offset by a 44% decline in the Compression & Power Equipment (CPE)
segment.
REVENUES
Revenues for the nine months ended September 30, 1998 totaled $1,406.8
million, an increase of 9% from the $1,291.8 million in the first nine months
of 1997. The major factors discussed in the quarterly comparison were
essentially the same for the Company throughout the nine-month period.
The PPE segment's revenues of $990.8 million increased by 21% over the
$819.1 million in the first nine months of 1997. The segment's revenue growth
was across all product lines. As discussed in the quarterly comparison, this
increase was primarily due to improved market conditions through the second
quarter of 1998 and the Orbit Valve acquisition, for which revenues totaled $53
million since its acquisition on April 2, 1998. Order activity for this segment
increased by 15% from the first nine months of 1997. This improvement was
across all product lines with the exception of surface equipment, which
declined by 11% due to the effect of lower oil prices. The strength in orders
is most apparent in the market for drilling and related controls equipment,
driven by rig upgrades and new construction.
Revenues for the CPE segment were $416.0 million for the first nine
months of 1998, a decrease of 12% from the $472.7 million for the same period
in 1997, with similar percentage declines in both natural gas compression
equipment and centrifugal air compressors. As noted in the quarter-to-quarter
discussion, the energy-related markets served by the natural gas compression
equipment business continued to be very competitive, with industry-wide over
capacity. The most significant revenue decline was in gas turbine and
compressor projects, while reciprocating units and aftermarket activity were
virtually unchanged. The decrease in centrifugal air compressor shipments was
primarily due to the "Asian crisis". Order activity in this segment for the
first nine months of 1998 totaled $377.8 million, a decrease of 16% from the
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<PAGE> 14
same period in 1997. This decline was primarily due to the large gas turbine
and compressor project business and the centrifugal air compressor business,
both affected by the weakness in Asia.
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation and amortization) of $983.8
million in the first nine months of 1998 increased by $50.7 million, or 5%,
compared with the same period of 1997. The increase was largely the result of
the previously discussed 9% revenue growth. The gross margin percentage
(defined as revenues less cost of sales as a percentage of revenues) was 33.2%
for the PPE segment, compared to 30.1% in the first nine months of 1997. This
improvement resulted from the same factors discussed in the quarterly
comparison. For the CPE segment, the gross margin percentage decreased from
23.7% in the nine months ended September 30, 1997 to 22.7% in the first nine
months of 1998, due largely to the same factors discussed in the quarterly
comparison.
Depreciation and amortization increased by $4.4 million, from $48.9
million in the first nine months of 1997 to $53.3 million in the nine months
ended September 30, 1998, with both segments reflecting increases. This
increase in the PPE segment was due to the same factors discussed in the
quarterly comparison, while the CPE segment increase was in the centrifugal air
compressor business for additional assembly and test capacity to improve
manufacturing throughput on large process air machines.
Selling and administrative expenses increased by $20.9 million, or
13%, from $156.0 million in the nine months ended September 30, 1997 to $176.9
million in the first nine months of 1998, primarily in the PPE segment. This
increase was due to the same factors discussed in the quarterly comparison. As
a percentage of revenues, selling and administrative costs for the Company
increased from 12.1% in the nine months ended September 30, 1997 to 12.6% in
the first nine months of 1998. This relationship was unchanged in the PPE
segment, while the CPE segment increased, as costs that are relatively fixed in
the short-term were not reduced at the rate of the revenue decline.
Reflecting the various factors discussed above, operating income
(defined as earnings before nonrecurring/unusual charges, corporate expenses,
interest, and taxes) totaled $202.2 million for the Company, an increase of
$38.3 million from the first nine months of 1997. The PPE segment improved from
$119.8 million to $177.7 million, while the CPE segment decreased from $44.1
million to $24.5 million.
Interest expense increased from $21.5 million in the first nine months
of 1997 to $24.8 million for the same period in 1998 due to the factors
discussed in the quarterly comparison.
Income taxes were $49.2 million in the nine months ended September 30,
1998, an increase of $10.2 million from the same period in 1997 due to the
year-to-year improvement in earnings. The effective tax rate increased from
29.5% in the nine months ended September 30, 1997 to 31.0% in the first nine
months of 1998 due to an estimated change in the mix of domestic and foreign
earnings for 1998 versus 1997.
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<PAGE> 15
OUTLOOK
As discussed earlier in this report, oil prices have declined
significantly over the last 12 months and most major oil companies have now
announced major reductions in their capital spending plans for 1999.
Additionally, the Company continues to experience a very weak and extremely
price competitive environment in gas turbine and compressor project markets and
has not achieved planned growth in the Company's share of aftermarket activity.
As a consequence, the results for Cooper Energy Services (CES) will be
substantially below the performance achieved by this business in the fourth
quarter of 1997, while the industrial air compressor business will be reduced
by the continuing effects of the "Asian crisis." The PPE segment, despite its
significant levels of backlog, has also softened, particularly in the shorter
cycle surface equipment business. Cost reduction efforts are ongoing and
additional nonrecurring/unusual charges related to these efforts are expected
during the fourth quarter of 1998 and continuing throughout the first half of
1999. A further discussion of these nonrecurring/unusual charges is included in
Note 2 of the Notes to Consolidated Financial Statements. No substantial
benefits from these charges are expected until 1999. Given all of the above,
the Company's fully diluted earnings per share for the fourth quarter of 1998
are expected to be substantially below the $.83 reported in the fourth quarter
of 1997. The expectations discussed above are based on current market
fundamentals. Additional declines or even a longer-term expectation for no
improvement in oil prices, or reductions in natural gas prices, could cause the
Company's customers to further reduce their spending and further adversely
affect the Company's performance. Although order cancellations have to date
been minimal, and while the Company's normal purchase order provisions attempt
to provide a degree of protection against such cancellations, the risk of
cancellations exists, which could further deteriorate the Company's anticipated
performance. The foregoing information should be read in the context of the
italicized comments set forth at the beginning of this management discussion.
CASH FLOW, LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION
During the first nine months of 1998, the Company generated nearly
$127 million of cash from operating activities as income from operations
exceeded increased working capital requirements in both segments. The cash
generated from operating activities, along with $92 million of additional
borrowings under the Company's credit facilities and $5 million from stock
option exercises and other sources, was utilized to fund the $84 million cash
cost of Orbit Valve International Inc. (see Note 3 of the Notes to Consolidated
Financial Statements) as well as a total of $15 million for the third quarter
1998 purchase of Brisco Engineering Ltd. and the acquisition of three small
product lines earlier in the year. In addition, capital expenditures, net of
proceeds from sales of plant and equipment, amounted to $79 million for the
nine months ended September 30, 1998. Over 75% of the capital spending was in
the Petroleum Production Equipment segment, primarily for projects to increase
factory throughput and improve delivery times within the Cameron business.
Based on current market conditions and recent order levels, the Company
anticipates significantly reducing 1999 capital spending compared to 1998
levels. Finally, excess cash flow was utilized to acquire $36 million (710,000
shares) of treasury stock during the first quarter of 1998.
-15-
<PAGE> 16
On May 4, 1998 the Company filed a traditional "shelf" registration
statement with the U.S. Securities and Exchange Commission in connection with
the possible issuance, from time to time, in one or more offerings, of up to
$500 million in securities, consisting of either (1) unsecured debt securities,
(2) shares of preferred stock, (3) shares of common stock or (4) warrants for
the purchase of debt securities, preferred stock or common stock. In connection
with this registration statement, the Company has entered into treasury locks,
or forward rate agreements, which lock in a weighted average interest rate of
5.73% on a notional amount of debt totaling $175 million at September 30, 1998.
The Company anticipates renewing these agreements, which currently are set to
expire in December 1998, through at least the middle of 1999.
As described in Note 5, the Company expanded its committed credit
facilities by $155 million during the third quarter of 1998. The new
facilities, involving five banks, provide the Company with additional
short-term borrowing capacity at floating or fixed interest rates until the
third quarter of 1999. As of September 30, 1998, the Company had $309 million
of available borrowing capacity under both the new short-term and its existing
long-term credit facilities.
YEAR 2000
The Company has in place a program, dating back to 1997, which is
designed to address the ability of the Company's worldwide internal business,
financial, engineering, manufacturing, facility and other systems (including
date-sensitive equipment as well as computer hardware and software) to handle
transactions beyond 1999. Where necessary, such systems will be modified or
replaced in an attempt to ensure that they are "Year 2000 compliant".
The process of identifying the Company's date-sensitive systems has
largely been completed and testing and remediation work is now underway. The
Company currently estimates that the overall project is approximately 70%
complete and that the majority of the remaining testing and remediation will be
completed by early 1999. Estimated costs are expected to total approximately
$2.2 million, excluding internal personnel costs. This includes new capital
assets that are required because of Year 2000 issues. All non-capital costs are
being expensed as incurred.
A second phase of the Company's Year 2000 program involves the
products that the Company produces and sells. Although the nature of the
Company's products does not involve a significant number of date-sensitive
components, the Company believes that all products currently being sold will
perform properly beyond the year 1999. The Company is currently working with
customers on an individual basis to ensure that products sold prior to 1998
will also perform properly beyond 1999.
The third phase of the Company's Year 2000 program involves
third-party vendors and suppliers who provide materials and components utilized
in the products which the Company sells as well as those such as banks,
utilities, insurance companies, etc. who provide services the Company directly
or indirectly relies on. The Company has contacted each of its key third party
vendors and suppliers and will continue to monitor the progress of their Year
2000 programs. On a worst-case basis, it may become necessary as this phase
evolves during the remainder of 1998 and into early 1999 to develop alternative
suppliers and contingency plans to deal with those third party vendors and
suppliers who will not be Year 2000 compliant in a timely manner.
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<PAGE> 17
The Company's Year 2000 program is being reviewed and monitored on a
proactive basis by the Company's senior management as well as the Board of
Directors. Due to the complexity of the problem and the necessary reliance on
parties and factors which may be outside the control of or currently unknown to
the Company, complete Year 2000 compliance cannot be guaranteed. However, based
on information currently available, the Company believes it will achieve a
level of compliance such that any unforeseen problems will not have a material
adverse effect on the Company's results of operations, liquidity or financial
condition after 1999.
EURO CURRENCY
Effective January 1, 1999, eleven participating European Union member
countries plan to introduce a new common currency (the euro) and will, at that
time, establish a fixed conversion rate between their legacy currencies and the
euro. The legal currency of each country will continue to be used as legal
tender along with the euro through January 1, 2002. Thereafter, the legacy
currencies will be cancelled and the euro will be used for all financial
transactions in the participating countries. During this three-year
dual-currency environment, special rules apply for converting among legacy
currencies. Based on information currently available, the Company does not
anticipate any material adverse consequences to its operations or its financial
results from participating in euro currency-denominated transactions.
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<PAGE> 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended September 30, 1998.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cooper Cameron Corporation
--------------------------
(Registrant)
Date November 13, 1998 /s/ Thomas R. Hix
----------------------- -------------------
Thomas R. Hix
Senior Vice President &
Chief Financial Officer
and authorized to sign on
behalf of the Registrant
-18-
<PAGE> 19
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
27 - Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 22
<SECURITIES> 0
<RECEIVABLES> 410
<ALLOWANCES> 0
<INVENTORY> 594
<CURRENT-ASSETS> 1,051
<PP&E> 919
<DEPRECIATION> 437
<TOTAL-ASSETS> 1,891
<CURRENT-LIABILITIES> 554
<BONDS> 437
0
0
<COMMON> 0
<OTHER-SE> 760
<TOTAL-LIABILITY-AND-EQUITY> 1,891
<SALES> 1,407
<TOTAL-REVENUES> 1,407
<CGS> 984
<TOTAL-COSTS> 984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 158
<INCOME-TAX> 49
<INCOME-CONTINUING> 109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 1.98
</TABLE>
