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  • 1. 2005 ANNUAL REPORT C O O P E R C A M E R O N C O R P O R AT I O N • 2 0 0 5 A N N UA L R E P O RT BALANCE 13 3 3 We s t Lo o p S o u t h • Su i t e 1 70 0 • H o u s t o n , Te x a s 7 70 2 7 7 13- 5 13-3 3 0 0 • w w w.c o o p e r c a m e r o n.c o m
  • 2. DIRECTORS OFFICERS SHELDON R. ERIKSON COOPER CAMERON CAMERON COOPER COMPRESSION Chairman of the Board, SHELDON R. ERIKSON JACK B. MOORE ROBERT J. RAJESKI President and Chief Executive Officer, Cooper Cameron Corporation Chairman, President and President* President** Houston, Texas Chief Executive Officer STEVEN P. BEATTY JEFFREY G. ALTAMARI NATHAN M. AVERY FRANKLIN MYERS Vice President, Finance Vice President, Finance STRUCTURE Investor Senior Vice President and HAROLD E. CONWAY, JR. JOHN C. BARTOS Houston, Texas Chief Financial Officer President, Drilling Systems Vice President, Engineering and C. BAKER CUNNINGHAM R. SCOTT AMANN Product Development HAL J. GOLDIE President and Chief Executive Officer, Vice President, RONALD J. FLECKNOE Belden CDT Inc. (retired) Investor Relations President, Subsea Systems The three divisions of Cooper Cameron offer balanced solutions to customers worldwide. Clayton, Missouri Vice President, Aftermarket Sales WILLIAM C. LEMMER GARY M. HALVERSON PETER J. FLUOR EDWARD E. ROPER Vice President, President, Surface Systems Chairman and Chief Executive Officer, General Counsel and Secretary Vice President, Marketing and BRITT O. SCHMIDT Texas Crude Energy, Inc. New Unit Sales ERIK PEYRER Houston, Texas Vice President and General Cooper Cameron is a leading international manufacturer of oil and gas CYNTHIA D. SPARKMAN Vice President, Manager, Flow Control LAMAR NORSWORTHY pressure control equipment, including valves, wellheads, controls, chokes, Business Development, Vice President, S. JOE VINSON Chairman and Chief Executive Officer, Asia Pacific and Middle East Human Resources blowout preventers and assembled systems for oil and gas drilling, production Holly Corporation Vice President, JANE C. SCHMITT RICHARD E. STEGALL Dallas, Texas Human Resources and transmission used in onshore, offshore and subsea applications, and Vice President, Vice President, Operations MICHAEL E. PATRICK EDWARD E. WILL Human Resources provides oil and gas separation, metering and flow measurement equipment. WAYNE T. WOOTTON Vice President and Chief Vice President, Marketing CHARLES M. SLEDGE Investment Officer, Vice President, Supply Chain Cooper Cameron is also a leading manufacturer of centrifugal air compressors, Meadows Foundation, Inc. COOPER CAMERON VALVES Vice President and Dallas, Texas PETRECO Corporate Controller integral and separable gas compressors and turbochargers. JOHN D. CARNE DAVID ROSS III DALTON L. THOMAS BRADFORD W. GOEBEL President* Investor Vice President, President Houston, Texas WILLIAM B. FINDLAY Cameron engineers and manufactures systems used in Cooper Compression makes engines and compressors Operations Support LESLIE A. HILLER President, Engineered Valves BRUCE W. WILKINSON oil and gas production and drilling in onshore, offshore for the oil and gas production, gas transmission and Vice President and General Chairman and Chief Executive Officer, KEVIN FLEMING Manager, Western Hemisphere and subsea applications, provides separation equipment process markets, manufactures and services centrifugal air McDermott International, Inc. Vice President, Houston, Texas MITCHELL K. ULREY and furnishes aftermarket parts and service to the energy compression equipment for manufacturing and process Human Resources Vice President, Finance industry worldwide. applications, and provides aftermarket parts and service PATRICK C. HOLLEY DAVID R. ZACHARIAH Cooper Cameron Valves is a leading global provider of Vice President and General for a wide range of compression equipment. Manager, Measurement Vice President and General valves, related products and services for the oil and gas Manager, Eastern Hemisphere DAVID R. MEFFORD production, transmission, refining and process markets. Cooper Cameron’s website: www.coopercameron.com *Also, Senior Vice President, Vice President, Engineering Cooper Cameron Corporation REMBERT B. MORELAND **Also, Vice President, Vice President, Marketing Cooper Cameron Corporation JAN L. ROTHFUSZ Vice President, International Sales R. SCOTT ROWE Vice President, Operations RICHARD A. STEANS Vice President, Finance JAMES E. WRIGHT President, Distributed and Process Valves
  • 3. FINANCIAL Highlights and balances for year s ending December 31 2005 2004 2003 ($ thousands except per share, number of shares and employees) Revenues ................................................................................................................................... $2,517,847 $2,092,845 $1,634,346 Earnings before interest, taxes, depreciation and amortization (EBITDA) ................................................................. 340,303 228,639 164,127 EBITDA (as a percent of revenues) ........................................................................................... 13.5% 10.9% 10.0% Income before cumulative effect of accounting change .................................................................................................................. 171,130 94,415 57,241 Cumulative effect of accounting change .................................................................................. — — 12,209 Net income ...................................................................................................................................... 171,130 94,415 69,450 Earnings per share:1 Basic before cumulative effect of accounting change .................................................. 1.55 0.89 0.53 Cumulative effect of accounting change ............................................................................. — — 0.11 Basic ......................................................................................................................................................... 1.55 0.89 0.64 Diluted before cumulative effect of accounting change ............................................. 1.52 0.88 0.52 Cumulative effect of accounting change .............................................................................. — — 0.10 Diluted .................................................................................................................................................... 1.52 0.88 0.62 Shares utilized in calculation of earnings per share:1 Basic ...................................................................................................................................... 110,732,000 106,545,000 108,806,000 Diluted ................................................................................................................................ 112,608,000 107,708,000 119,601,000 Capital expenditures ..................................................................................................................... 77,508 53,481 64,665 Return on average common equity ........................................................................................... 12.4% 8.2% 6.4% As of December 31: Total assets .................................................................................................................................. $3,098,562 $ 2,356,430 $ 2,140,685 Net debt-to-capitalization2 .................................................................................................................. 5.3% 16.3% 12.0% Stockholders’ equity ................................................................................................................. 1,594,763 1,228,247 1,136,723 Shares outstanding3 .......................................................................................................... 115,629,117 53,137,8154 53,803,0584 Number of employees ................................................................................................................. 12,200 8,800 7,700 1 Basic and diluted shares utilized in the calculation of earnings per share and per share amounts have been revised to reflect the 2-for-1 stock split effective December 15, 2005. 2 Net of cash and short-term investments. 3 Net of treasury shares. 4 Reflects share counts prior to stock split. 3
  • 4. Our operating and financial performance in 2005 was very good. The combination of a robust market across our business lines and solid performance from all of our divisions generated some of our best financial results ever. As a result, our stock price reached new In this letter a year ago, I referenced the impact that $40/barrel oil and $6/mcf natural gas were having on highs, and our board authorized a 2-for-1 stock split (the second our business. I resisted the temptation to refer to those prices as “high” or to forecast where they might go in the future; instead, I related that we were prepared to deal with whatever might happen with prices, activity in our history) effective in December 2005. and spending in the oilpatch. With oil prices above $60/barrel and natural gas around $10/mcf at the close of 2005, I believe our results demonstrate that we struck the appropriate balance in the way we approached DIRECTION our business. I will again avoid the temptation to forecast what may happen with prices in 2006. To the stockholders of Cooper Cameron Spending on oil and gas exploration and development Following are some of our recent milestones: is the single largest factor influencing our business, and • Cooper Cameron’s 2005 earnings per share through the end of 2005, our customers were showing increased to a record $1.52 (adjusted for our stock no signs of reducing their activity. Industry benchmarks split), up 73 percent from a year ago. like worldwide rig counts and exploration and production • Total revenues set a new record at $2.52 billion. spending showed steady growth throughout the year. Our • Orders reached more than $3.46 billion, and business and the commodities (crude oil and natural gas) backlog more than doubled to $2.16 billion; both of that drive our customers’ behavior typically run in cycles those are also records. that last for a little more than three years. The positive • Since the beginning of 2005 we have spent more phase of this current cycle has extended well beyond that than $300 million on acquisitions — including time frame. Some observers have begun to use terms $217 million on the Dresser acquisition — and still like “paradigm shift” or “secular growth” to describe the have one of the best balance sheets in the industry. business; we will maintain our balanced approach to managing our operations. In other words, we will continue At this time a year ago, we had planned to include in our our productivity enhancement steps, which effectively add financial results an expense related to stock option grants capacity without adding roofline and help us manage costs made to our employees as a part of their compensation. In in the event of a change in the direction of the cycle. early 2005, however, companies were allowed to choose to phase-in such recognition.We elected to defer adoption of this expense recognition until the first quarter of this year, and we expect to record approximately $0.10 per share for stock-based compensation expense during 2006. 4
  • 5. I personally believe that the true financial impact of stock While natural gas productive capacity is forecast to increase in Cooper Compression’s revenues and earnings were their highest Cash generation maintains balance sheet integrity options is already reflected in a company’s results when share 2006 as the industry recovers from the storms of 2005, LNG in more than five years. Their energy-related business benefited, We have always emphasized the importance of cash flow in count increases due to options being exercised (of course, such continues to make up a larger, but overall still small, percentage in both aftermarket and new equipment, from activity in the U.S. taking advantage of opportunities in our business. In recent exercises generally occur because the stock price has gone up). of supply. Supply growth from LNG will need to continue so as natural gas markets. Increased revenues in the air compression years, our people have done an outstanding job of focusing on Since we are now required to recognize some assigned expense, to avoid continuing price shocks. During 2005, LNG imports side were the result of the high backlog that existed entering generating cash — and earnings — in our day-to-day operations. we have reduced the use of stock options in our compensation accounted for about three percent of U.S. natural gas supplies; by 2005 and the ongoing strong demand in international markets That has given us the freedom to search out uses for cash, rather programs so our earnings will not be overly burdened. We regret 2007, it is forecast to exceed five percent. The addition of LNG for industrial compression equipment. than worrying about sources of funds. Beyond daily funding doing so, because options are an effective means of aligning conversion facilities should provide additional opportunities for requirements and capital spending, our primary options have employees’ interests with that of stockholders; if the stock goes some of our products, particularly in Cooper Cameron Valves. With the natural gas markets continuing to drive North been share repurchase and acquisitions; this past year, we spent higher, everyone benefits. Many of our employees are also American business and global manufacturing activity supporting more on the latter than in any single year in our history, and thus stockholders, and they are innately aware of the impact that solid When commodity prices reach historical highs, the tendency is international air compression orders, Cooper Compression limited our repurchases of our own shares. operating and financial performance has on stock price. to expect them to moderate. Growth in demand for natural gas should see another year of gains in both revenues and profits. is expected to resume in 2006, increasing in line with a stronger New product introductions and further attention to cost We spent more than $300 million on acquisitions, including Markets should lead to further improvement in 2006 economy in the U.S. Still, with storage levels relatively high and the reduction efforts will also be important to their bottom line. approximately $217 million on the Dresser transaction, and our Our Cameron division’s total revenues reached a record $1,508 possibility of domestic production increasing slightly, prices may balance sheet is still one of the strongest in the industry. We Hurricanes have minimal impact on operations million during 2005 as the drilling and surface product lines hit come down. Natural gas remains primarily a North American will manage our businesses in a manner that emphasizes fiscal new highs. Subsea revenues declined modestly from year-ago We were fortunate that Cooper Cameron’s manufacturing market commodity, but development of international gas responsibility. While the integration of the Dresser acquisition levels, as we did not have as much large-scale project business operations experienced no significant damage from the reserves and increased funding of LNG will be required in the will require much of our near-term focus, we will continue to delivered in 2005 as in 2004. devastating hurricanes that hit the Gulf Coast region in August future and will have an increasing impact on upstream activity and on evaluate acquisitions and stock repurchases as uses of cash. As and September. While the storms’ paths missed our primary our businesses. of year-end 2005, we had five million shares remaining under our Cameron finished the year with record orders by a wide margin facilities and we had no injuries to employees, a number of board-authorized share repurchase program. Basic economics continue to rule world oil markets and entered 2006 with a backlog nearly twice the level of a our people experienced personal losses of property and the The vast majority of our business is tied directly to exploration Balancing expectations year ago. Some of those orders are for projects that will be attendant disruption in their day-to-day activities. In response, and production of oil, and we have a presence in nearly every Numerous stakeholders have a vested interest in how our delivered over the next couple of years, but the vast majority we established a fund at the Company to aid those employees energy-producing region in the world. Global demand for oil businesses perform and how we treat each of our constituents. of that backlog should be turned into revenue by year-end. Our and their families who needed help with their recovery and increased by about 1.5 percent during 2005. While China’s Balancing the needs and expectations of customers, employees, challenge is to convert that backlog into revenues efficiently restoration efforts. Within a week or so after the hurricanes, demand growth is expected to continue to moderate in 2006, partners, suppliers and investors is a challenging task, but I and the and profitably. Meanwhile, the level of inquiries and orders from our facilities were all back to normal operations, and the financial it will still be a primary driver of incremental oil demand, and rest of our employees know that our reputation is at risk if we customers for Cameron products showed no signs of slowing impact on our results was minimal. U.S. consumption is forecast to increase in both 2006 and 2007. allow our response to one party’s needs to come at the expense as of early 2006. Projected gains in production capacity are anticipated to temper of another’s. We appreciate your support and understanding as Restoration of productive capacity, LNG supplies prices in 2006, but the oil markets are in a fragile state. Political we deal with the challenges this market brings to us and work to needed to address gas demand growth During 2005, Cooper CameronValves (CCV) did an outstanding upheaval, economic crises or weather could all have significant continue to deliver quality and value on all fronts. Natural gas prices in the U.S. were clearly affected by the job of incorporating the late-2004 acquisition of several valve impact on an already unsettled market. disruptions in productive capacity from the hurricanes in manufacturing businesses (the PCC acquisition) and a flow Sincerely, the Gulf. While U.S. gas demand did not increase significantly measurement business acquired in mid-2005 (NuFlo).As a result A year ago, we speculated that higher oil prices might dampen during the year — about 22 trillion cubic feet (Tcf) were of these acquisitions and continuing strength in the valve markets, global economic activity; that did not happen. The global used in 2005, similar to 2004’s consumption — damage CCV’s revenues gained nearly 80 percent year-over-year. economy appeared to readily absorb the price shock. If both to gas infrastructure in the Gulf of Mexico had a very real OPEC and non-OPEC suppliers are able to increase production Sheldon R. Erikson impact on deliverability, leading to new highs in prices. When Now, we are asking them to perform once again by integrating in the next couple of years in line with current expectations, Chairman of the Board, combined with operators’ struggles to replace production the Dresser acquisition facilities into CCV. This $217 million perhaps prices will subside. If not, we will almost certainly President and Chief Executive Officer with new reserves, the need for additional supplies, particularly acquisition is the largest and most challenging we have undertaken reach a point where high prices cause demand destruction, liquefied natural gas (LNG), becomes more apparent. to date. It more than doubles CCV’s revenue base from their and the commodity markets will respond accordingly. Whatever 2004 levels, and at year-end 2005, CCV’s backlog was $469 the case, we realize that our business remains highly dependent million, compared with only $123 million at year-end 2004. on a number of factors over which we have no control, including global demand, inventory levels, geopolitical influences and weather. 6 7
  • 6. Different constituents have varying expectations. Employees and the financial community are two of the EXPECTATIONS PECTATIO E ATIO AT O Company’s constituents that have a material stake in Cooper Cameron’s long-term success. ce sh As VP of Human Resources, Jane Schmitt has overall Franklin Myers has also been with Cooper Cameron since responsibility for managing Cooper Cameron’s efforts its inception in 1995, and has served in a couple of different to attract and retain the best people available for roles during his tenure. In his current position as Senior VP our widespread operations. With more than 12,000 and Chief Financial Officer of the Company, much of his employees spread over numerous countries, Jane and time is spent with representatives of the financial community, her associates at the Company’s division offices balance including commercial bankers, who help the Company the competitive environment, local standards and laws finance its operations; investment bankers, who may bring and internal requirements in their efforts to insure that acquisitions or other financial proposals to him; industry employee needs are fairly addressed. Having been with analysts, who are looking for the factors that differentiate Cooper Cameron since its creation ten years ago, Jane Cooper Cameron from other companies in the oil service understands the challenges of dealing with an industry business; and investors, who have a vested interest in the that — due to its reliance on commodity prices — is Company’s prospects and performance. One of Franklin’s overwhelmingly cyclical, and entails a unique set of staffing challenges is to ensure balance in the allocation of the and employee relations issues. Company’s financial resources so that the best interests of these constituents are addressed and we take full advantage of Cooper Cameron’s financial flexibility in order to maximize returns to all stakeholders… including employees. 9
  • 7. Our basic business is the safe and responsible manufacture of equipment used in the energy business and in other industrial applications. Technological innovation and continually improving manufacturing processes allow our products to meet our customers’ needs for safety, reliability and economic and environmental efficiency. COMMITMENT Our goal: Deliver more value while consuming fewer resources and protecting people and the environment. We believe that embracing safe and responsible practices is the As an employer and local citizen: right thing to do and represents a balanced commitment that is • We employ more than 12,000 people worldwide, and Cooper Cameron has established itself as a good corporate citizen ever ywhere we operate. important to the continuing success of our business. provide competitive wages, benefits and job opportunities in the more than 100 countries where we operate. Balance in this context doesn’t mean that we must give up • All of our employees strive to fulfill one of our most something in one area in order to accomplish our goals important values,“No one gets hurt. Nothing gets in another. It means that we strive to achieve operational harmed,” in the performance of their jobs. excellence, use all the tools and resources available to us to • We spend millions of dollars on goods and services with maximize the benefits that accrue from a safe and well-managed local contractors and suppliers, and we expect them to workplace, and minimize the risk of any negative impact on our adhere to our ethical standards and to local laws. stakeholders — including employees, customers, shareholders • We support local and national charitable efforts with and the environment. financial and in-kind contributions, and we encourage and fund employees who volunteer their support to As a publicly owned company and significant participant in local organizations. the global economy, we recognize we have a responsibility to create value for our investors and customers. As a concerned As a major player in international energy markets: corporate citizen, we recognize we have a responsibility to • Many of our facilities have been recognized for their safety provide for our employees and the communities in which records, and a number have posted five years or more of we operate. As a member of the global community, we also operation without a single lost-time incident. recognize we have the responsibility to operate in a manner that • Our HS&E programs include extensive training, education protects people and the environment and preserves the planet and review processes under a framework that applies for future generations. strict criteria across all of our operations. • Our emphasis on safe and responsible standards supports Achieving the goals of economic growth and financial our customers’ need to produce, process and deliver their performance, respect for social issues and care of the products in environmentally-friendly ways. environment are the guiding principles of how we run our business. Our commitment to these pillars of sustainable Our Standards of Conduct Policy sets out the principles under development is demonstrated in the following: which we conduct our global activities. Copies of the Standards As a steward of assets for our investors: are made available to all employees, who are expected to comply • We have demonstrated our ability to consistently meet with these guidelines in every aspect of their work. and exceed our investors’ expectations. Cooper Cameron’s long-term operating performance, • Our financial performance confirms our success in the disclosure standards we are required to meet and the generating earnings and managing cash flow. enhanced transparency of financial reporting rules provide our • We have one of the healthiest balance sheets in the industry. constituents with substantial insight into the social, economic and As an equipment and services provider: environmental impacts of Cooper Cameron’s operations. Our • Our products are noted for their quality, safety and board of directors regularly reviews the Company’s performance long-term reliability. from a social responsibility perspective, and is committed to • We have won awards from government and industry providing the processes, facilities, standards, training, discipline organizations for innovation and technological and work culture to ensure that “No one gets hurt. Nothing advancement. gets harmed.” • Many of our technology innovations deliver greater value to customers, consume fewer resources and are Our products are essential to meeting present and future more environmentally and ecologically efficient. • We strive to comply with the highest ethical standards energy and other industrial needs in environmentally and and the local laws and guidelines in the many locales where we do business. socially responsible ways. 10
  • 8. The performance of Cooper Cameron’s products is critical to the success of our customers. In many PROCESS cases, if our equipment doesn’t perform, our customers’ profitability is directly affected. Appropriate balance in the allocation of resources leads to deliver y of quality products that provide value. While we have established a reputation as a provider During 2006, we plan to embark on our most ambitious of high-quality, reliable products, we realize that the capital expenditure program to date. We expect to spend need to deliver value to customers must be balanced as much as $130 to $150 million this year, with the majority with the responsibility to deliver value to shareholders. of those funds directed toward upgrading machine tools, Concurrently, we have always looked for ways to do things applying more efficient technologies to manufacturing better, or faster, or at lower cost. processes and generally making more effective use of our resources. This effort is a direct result of the current Cooper Cameron’s Six Sigma program was launched in heightened demand for product from our customers, 2000 with the goal of making constant improvement in and will allow us to essentially increase capacity without quality and productivity “The way we run our business.” investing in additional roofline. It will also serve us, and our Six Sigma provides the methodology, tools and support shareholders, in the event of a slowing in business activity to allow our employees to improve business processes by effectively lowering our manufacturing costs. across the Company. There are now more than 140 employees in the Company who have qualified as “Black Belts” — trained to measure, analyze, improve and control processes in order to increase productivity, reduce costs and maximize customer satisfaction. 13
  • 9. Cameron is one of the world’s leading providers of systems and equipment used to control pressures and direct flows of oil and gas wells. Its products are employed in a wide variety of operating environments,including basic onshore fields, highly complex onshore and offshore environments, deepwater subsea applications and ultra-high temperature geothermal operations. Products — Surface and subsea production systems, Customers — Oil and gas majors, national oil companies, PERFORMANCE blowout preventers, drilling and production control independent producers, engineering and construction systems, oil and gas separation equipment, gate valves, companies, drilling contractors, rental companies and actuators, chokes, wellheads, drilling riser and aftermarket geothermal energy producers. parts and services. S TAT I S TI C A L/ O P E RATI N G H I G H LI G H T S ($ millions) 2005 2004 2003 Revenues .......................................................................................................... $1,507.8 .................. $1,402.8 .................. $1,018.5 EBITDA .................................................................................................................... 222.7 ......................... 170.2 ......................... 114.6 EBITDA (as a percent of revenues) .............................................................. 14.8% ........................ 12.1% ........................ 11.2% Capital expenditures ........................................................................................... 49.8 ............................ 28.9 ............................ 40.2 Orders .................................................................................................................. 2,301.1 ..................... 1,274.4 ..................... 1,082.4 Backlog (as of year-end) ................................................................................... 1,503.6 ......................... 752.9 ......................... 771.8 14
  • 10. Cameron continued to deliver new surface technology for During 2005, Cameron upgraded several drilling aftermarket FINANCIAL OVERVIEW - Cameron’s revenues increased to $1,507.8 million in 2005, up seven percent traditional North Sea customers. BP plans to use Cameron’s locations with new machine tools, including Berwick, Louisiana; from $1,402.8 million in 2004. EBITDA was up 31 percent from a year ago, at $222.7 million, compared premium land and platform wellhead system,the SSMC model,on Oklahoma City; Macae, Brazil and Vera Cruz, Mexico. The Rock with 2004’s $170.2 million. EBITDA as a percent of revenues was 14.8 percent in 2005, up from 12.1 their Claire platform, and will use Cameron’s Conductor Sharing Springs, Wyoming facility will be upgraded and expanded to Wellheads (CSW), which allow multiple completions in a single address the growing natural gas market in the Northern Rockies. percent. Orders totaled $2,301.1 million, up 81 percent from the prior year. well slot, for use in the expansion of the BP Magnus platform in Plans are also in development for a new facility in India to service the North Sea. Statoil Norway engaged Cameron in a program a major customer in the region. Cameron organization realigned Drilling Systems to extend the life of the Statfjord field by incorporating artificial In late 2005,Cameron changed its organization to a more product- Cameron is a leading global supplier of integrated drilling Surface Systems lift technologies as wells are re-entered for workover. specific alignment to better address the dramatic growth across systems for land, offshore, platform and subsea applications, Cameron is the global market leader in supplying surface its business lines. Cameron now has four distinct business units: and is committed to providing its worldwide drilling customers Customers in the growing natural gas markets in the Middle East equipment, including wellheads, Christmas trees and chokes used Drilling Systems, Surface Systems, Subsea Systems and Flow with innovative system solutions that are safe, reliable and cost- on land or installed on offshore platforms, and has the largest acknowledged Cameron’s performance and technical capabilities Control, as well as its separation systems provider, Petreco. effective. Drilling equipment designed and manufactured by installed base of surface equipment in the industry. with significant contract awards for wellhead systems in Qatar, Cameron includes ram and annular blowout preventers (BOPs), Abu Dhabi and Saudi Arabia. Rig activity in the Saudi Arabian Cameron’s prior structure split management responsibilities on drilling risers, drilling valves, choke and kill manifolds, surface and Steady increases in rig count, well completions and workovers markets continues to grow at a rapid rate; Cameron’s total orders both a product and geographic basis. Under the new organization, subsea BOP control systems, multiplexed electro-hydraulic across the North American region provided a constant flow of in the region doubled in 2005. In addition, Cameron booked the each business unit has global responsibility for specific product (MUX) control systems, and diverter systems. Cameron also business for Cameron throughout the year. Prices were raised on first CSW systems to be used in a Mideast project outside Egypt, lines. The new alignment encourages greater responsiveness provides services under CAMCHEC™, an inspection system surface wellhead equipment in response to continuing increases with an award for 10 systems to be installed in Abu Dhabi. to customers’ needs in product-specific markets; focuses each that allows drilling contractors to inspect drilling riser on in raw material and transportation costs. Several of Cameron’s unit’s managers on identifying cost reduction opportunities that their rigs offline, saving time and money on maintenance and larger customers requested longer-term supply agreements In Asia, Cameron supplied more than 100 wellhead systems to benefit their products and processes; and ensures that technology unnecessary transportation. in exchange for security of equipment supply and in hopes of Total Indonesia as part of a continuing supply agreement; and the advancements and expansion opportunities in specific product minimizing cost inflation in their supply chains. Company booked orders from Woodside in Australia and from lines are spread across global boundaries. During 2005, Cameron’s drilling business experienced a level STOS in New Zealand, both representing market share gains in of activity not seen since the early 1980s. Cameron continued This product- and systems-driven organization will allow Cameron’s performance in the delivery of new equipment and these respective regions. to book orders for new surface BOPs for land rigs, continuing Cameron to better serve customers’ needs and support the in providing service has allowed the surface organization to a trend that had begun in 2004, as the industry embarked on Subsea Systems attainment of growth and profit targets for the coming years, record market share gains in numerous regions; the Company’s what appeared to be a multi-year capital expansion to make up while leveraging off the strength of the Company’s global network field training program has grown through an employee referral Cameron has been a key player in the subsea industry since for years of limited reinvestment. The offshore drilling market of manufacturing and aftermarket locations. program, allowing Cameron to staff the service organization its beginning more than forty years ago, and continues to be a was already picking up, but the arrival of Hurricanes Katrina appropriately in response to growing demand; and the sales leader in providing subsea wellheads, Christmas trees, manifolds Operating milestones and Rita in August and September put a considerable strain staff has received targeted training in sales order management in and production controls, as well as complete production systems, Significant accomplishments in the Cameron division during on the industry. The storms damaged or destroyed more than order to better deal with the pace of business. to the industry. Cameron’s Subsea Systems organization, created 2005 included the following: 30 mobile offshore drilling units in the Gulf of Mexico, with an in 2005, has global responsibility for R&D, engineering, sales, • Cameron was awarded Total’s AKPO project, the largest estimated eight jackups deemed to be total losses. By year-end, North American activity was punctuated by the 2005 hurricanes manufacturing, installation and aftermarket support for subsea Subsea Systems project to date, with a value of more than 50 new offshore rig orders had been placed, including 33 jackups, in the Gulf of Mexico. The related disruption and damage to products and systems, and performs the role previously filled $350 million. 14 semi-submersibles, two drillships and one tender rig with customer facilities created a need for Cameron’s service by Cameron Offshore Systems in providing customers with • In early 2005, Cameron’s Leeds, England facility produced options to build an additional 17 units. organization to shift its focus from new installations to performing integrated solutions to subsea field development requirements its 600th subsea tree — 400 of which have been the critical workover and restoration activities. Cameron played an under engineering, procurement and construction (EPC) Cameron booked orders for two complete subsea drilling patented SpoolTree™ design. important role in supporting customers’ efforts to restore oil contracts. systems in 2005; the Stena Drill Max, a drillship, and Eastern • Cameron’s multi-patented all-electric subsea production and gas production as safely and as quickly as possible. Drilling’s West E-Drill, a semi-submersible. Both will be outfitted system, CameronDC™, received two notable awards Timely execution of projects in backlog continued as a primary with Cameron’s 18-3/4 inch, 15,000 psi subsea stacks, a MUX during 2005: the “Spotlight on New Technology” award Eastern Hemisphere surface markets grew steadily during 2005, focus in 2005, driven by delivery of multiple major subsea control system and Cameron’s patented LoadKing™ riser system. from the Offshore Technology Conference and World Oil’s with Cameron providing equipment to new developments systems in West Africa. Cameron delivered a total of 100 subsea Several more complete subsea system bookings are anticipated “Innovative Thinkers” award. in Azerbaijan, Sakhalin Island, Russia and North Africa. BP’s trees during the year, including several under project agreements, in early 2006, and Cameron expects to continue to book its • Cameron’s Six Sigma program now includes 100 Black Azerbaijan unit awarded Cameron the contract to supply as well as many for small field developments requiring as few as historic market share of such business. Belts and more than 650 Green Belts who serve as internal SSMC wellhead and surface SpoolTree systems for four 48- one to five subsea trees. Capacity expansions in Leeds, England, consultants, applying productivity improvement techniques slot platform installations in the Caspian Sea. Cameron was Taubate, Brazil and Berwick, Louisiana will support expected Cameron’s long-time leading market position in drilling has to create benefits for Cameron and its customers. Six involved in the first stages of exploration on Sakhalin Island; this deliveries during 2006 of more than 130 subsea trees and created the largest installed base of BOPs in the industry. With Sigma projects routinely generate significant savings and has grown into an arrangement for the supply of wellheads and associated manifolds, production controls and other equipment. safety and reliability issues reinforcing demand for parts and productivity improvements for both Cameron and trees for ExxonMobil’s Chayvo field, and the supply contract for service from original equipment manufacturers, Cameron offers its customers. gas wells on the Orlan offshore platform. Following the opening worldwide aftermarket services under the CAMSERV™ brand • The ongoing integration of the Sterom facility in of Libyan markets to U.S. companies, Cameron’s North African and provides replacement parts for drilling equipment through a Romania, acquired in an acquisition in late 2004, has business activities have expanded to include project awards comprehensive global network. provided the Company with significant incremental from Total, Wintershall and Woodside in this growing region. manufacturing capacity at very low cost. 16 17
  • 11. Cameron played an important role in ExxonMobil’s ability to bring Flow Control Petreco The majority of Cameron’s subsea tree orders during 2005, its Kizomba B subsea project on production six months ahead of other than AKPO, were for relatively small projects and Cameron’s Flow Control business provides chokes and actuators Petreco produces highly engineered equipment, systems and plan by meeting an accelerated delivery schedule. Additionally, extensions to existing fields. Although a significant number of for the surface and subsea production and drilling markets, as services for oil, gas, water and solids separation, and provides Cameron delivered all of the equipment for the ExxonMobil subsea development projects are under consideration, the well as drilling choke control panels and surface wellhead fully integrated systems and individual components to operators Erha project in Nigeria on target and provided ExxonMobil’s Erha timing remains uncertain. With many of those larger projects safety systems. Flow Control provides these products for in oil- and gas-producing regions worldwide. In October 2005, North project with subsea systems within a 14-month window, not expected to be awarded until 2007 or later, subsea tree Cameron installations as well as those serviced by other tree Petreco added to its offerings with the acquisition of the Howe- creating an opportunity for ExxonMobil to generate significant orders during 2006 will likely be comprised of a number of manufacturers, and has benefited from the market’s acceptance Baker line of electrostatic desalting, dehydration and distillate additions to production from the Erha Field. Cameron’s “design smaller projects. of its new product offerings and from overall increases in drilling treating products. Petreco’s products are sold to contractors and one, build many” philosophy, as demonstrated in these projects, and completion activity worldwide. to end-users for both onshore and offshore applications, with has proven valuable to both Cameron and its customers. Cameron’s history of innovation in the industry is highlighted by more than half of its revenues coming from offshore projects. the global acceptance and use of its SpoolTree horizontal subsea In 2005, Flow Control sold its first electric surface actuator, Other subsea activity during the year included Husky’s White production system design, developed and patented by Cameron which offers operators an environmentally-friendly actuation Deliveries during 2005 included a major produced water treating Rose project offshore Newfoundland, which began production in the early 1990s, and now a standard for subsea completions. package and reduces the costs and maintenance problems and produced gas dehydration system for aTotal project offshore in 2005, and where all 15 trees for the first phase of the project associated with hydraulic power units and hydraulic tubing runs. West Africa; advanced produced water filtration equipment have been delivered. Although much of Cameron’s subsea Cameron’s latest innovation is CameronDC™, the industry’s first Operators in remote areas who are faced with the challenges for a new water injection project in Kuwait; oil, water and gas equipment, including the subsea control modules, had been all-electric, direct current-powered subsea production system, of temperature extremes can expect both increased diagnostic processing equipment for the P-51 and P-52 Petrobras projects placed on the sea floor as much as 18 months earlier, the system which was introduced at the Offshore Technology Conference capability and greater reliability from integrating this electric in Brazil; and the world’s largest MEG reclamation unit, which will worked as designed at startup. Husky has now ordered additional in 2004. By eliminating hydraulically controlled actuators, the actuator into their existing systems. be used to purify, reclaim and regenerate ethylene glycol used in equipment to support future expansions of this field. system is designed to provide greater reliability and cost savings separating water from gas, and is currently being installed in the and give operators the ability to extend stepouts on multi-well Also during 2005, Flow Control introduced a new three-inch Gulf of Mexico. Offshore Brazil, Cameron completed delivery of several subsea developments far beyond traditional limits. Several operators underbalanced drilling choke, the DR30, in response to drilling systems to Petrobras, and was awarded a total of 16 trees are evaluating possible applications for the system, and one has customers’ increasing demand for higher-capacity chokes for Petreco recorded its fourth consecutive year of record orders for future delivery, securing a record year-end backlog in the engaged Cameron’s engineering staff to perform the upfront use in underbalanced drilling applications. The initial unit has and revenue, including the largest order in the Company’s Brazilian market. Petrobras designated Cameron as a “Supplier system design work on a funded basis for possible installation in been delivered and there should be significant opportunities for history. Petreco received an order in excess of $55 million — of Choice” for subsea trees and tools based on Cameron’s an existing field in 2006. additional sales into this market in 2006 and beyond. more than double the previous record — to supply oil, water history of consistently achieving on-time delivery, as well as its and gas processing equipment for the Petrobras P-53 project performance in quality, aftermarket support and service and the During 2005, Cameron introduced a new subsea controls Bookings in the Flow Control business were up nearly 90 percent in Brazil. Other significant orders received in 2005 included an Company’s health, safety and environmental record. Cameron is system that combines the traditional subsea control module during 2005. While orders increased across all the Company’s order for six electrostatic dehydrators for a major new oil field expanding its manufacturing facility in Taubate, Brazil, based on and the subsea accumulator module in a single package, allowing product offerings, the surface wellhead safety system area was in Saudi Arabia, a produced gas treating system for a major field demand from Petrobras as well as projects planned by foreign for more efficient operation of the subsea tree and manifold particularly strong, with bookings more than doubling during the expansion in the U.K. North Sea and an order for enhanced operators in Brazil. valves. Additionally, a new state-of-the-art subsea test chamber year, driven by activity in the Mideast and Asian markets. In the produced water treating and filtration equipment for a major in Cameron’s controls engineering facility in Celle, Germany fourth quarter of 2005, Flow Control established a dedicated expansion project in California. In the North Sea, Cameron was awarded a seven-year facilitates testing of the Company’s control systems. sales force that will target growing its business outside of the frame agreement from BG for their fields in the region, traditional Cameron installations. The combination of this focused Petreco’s orders were up 44 percent over 2004, with projects in as well as certain other locations. In addition, Cameron Also in 2005, Cameron launched its updated CAMTROL subsea sales effort and continuing strong global activity is expected to South America providing the largest increase, followed by Europe is now in the ninth year of a frame agreement with BP control module, which includes new electronics, lower power lead to continued growth in bookings with operators, engineering and North America; orders in the former Soviet Union and the Exploration to provide subsea trees, wellheads and associated demand, a DC power option and fiber optic communications houses and other tree suppliers in 2006. Middle East declined from a year ago. Petreco finished 2005 with services in the U.K. North Sea. During 2005, BP placed orders to further increase reliability and enable extended offset the highest year-end backlog in its history. for ten subsea trees for installation in various North Sea fields, developments and high-bandwidth intelligent completions. During the second half of 2005, the Longford, Ireland plant and BP also used the frame agreement principles for the expansion was completed, increasing manufacturing capacity by In 2005, Cameron and Petreco formed a joint technology procurement of six water injection trees for use in the Azerbaijan approximately 20 percent. By the end of 2005, Flow Control development team to pursue market opportunities in the sector of the Caspian Sea. had hired most of the additional personnel required to increase subsea processing area. The group is focused on leveraging production. The global market for all Flow Control products is Cameron’s proven capabilities in subsea equipment design and Cameron’s most significant order for 2005 was the expected to continue to grow in 2006 as customers increase Petreco’s well-established processing and separation technology largest subsea EPC contract awarded to date: Total’s their spending on both upstream and midstream oil and gas for seabed applications. AKPO project, offshore Nigeria. The contract includes 39 projects in response to commodity prices. subsea trees and associated subsea chokes, 10 manifolds, insulated horizontal connection systems, MUX subsea production controls and intervention and workover systems. The initial contract is valued at more than $350 million. 18 19
  • 12. Financial Overview The Dresser acquisition affects this group positively on a number CCV’s revenues were $625.1 million for the year, up more than of fronts. 78 percent from 2004’s $350.1 million. EBITDA was $118.3 • Product line offerings now include the brand names of Grove, million, up nearly 137 percent from $50.0 million the previous Ring-O and Tom Wheatley, significantly strengthening CCV’s year. Orders nearly doubled, from $365.7 million in 2004 to capabilities.These newly-acquired products will be combined $710.8 million in 2005. The year-over-year increases in orders and with the Cameron line of fully-welded ball valves, broadening revenues reflect a combination of acquisitions and strong demand CCV’s ability to meet a wide scope of customer needs. across CCV’s product lines. • Three additional facilities — in Oklahoma, Brazil and Dresser acquisition enhances CCV’s role as Nigeria — provide CCV with the opportunity to focus on global supplier tailoring Cameron and Grove valve products and Ledeen The acquisition of the On/Off valve business unit of the Flow actuators to meet specific customer requirements. Control segment of Dresser, Inc. was essentially completed in In 2005, increased orders and revenues in the Cameron ball valve late 2005, with a closing on one facility coming in early 2006. Cooper Cameron Valves (CCV) is a leading provider of valves and related product line were driven by pipeline activity in the Middle East Notable product brands acquired in this transaction include systems primarily used to control pressures and direct the flow of oil and gas and Asia, particularly China, while the business also benefited Grove®, Entech®, International Valves Ltd. (U.K.), Wheatley®, from pipeline integrity projects and key customer alliances in Ledeen®, Texsteam® plug valves, Ring-O®, Tom Wheatley™, TK as they are moved from individual wellheads through flow lines,gathering lines North America. Valve® and Control Seal™. and transmission systems to refineries, petrochemical plants and industrial Process — The process group provides valves for refinery, This acquisition, along with others made during the past couple petrochemical and industrial applications through the Orbit® line of years, gives CCV a premier market position with an expanded centers for processing. Equipment used in these environments is generally of valves. The Orbit brand is the world’s most accepted rising-stem international customer base. The Company’s broad portfolio ball valve, and its unique design and sealing characteristics make required to meet demanding standards, including API 6D and the American of quality products and brands provides a solid platform for it well-suited for critical liquefied natural gas (LNG) applications. continued growth across the oil and gas production, pipeline and Society of Mechanical Engineers (ASME). Major project awards in LNG and gas processing, especially in the process markets. international arena, were an important contributor to revenues Distributed Products and orders during 2005. The acquisition of the General Valve® Valve products in this market are sold through distributor product line in 2004 proved to be important to CCV’s efforts to Products — Gate valves, ball valves, butterfly valves, Orbit Customers — Oil and gas majors, independent producers, networks, primarily in North America, for use in oil and gas enhance its position within the liquids processing, transportation applications and include such widely recognized brand names valves, block & bleed valves, plug valves, globe valves, engineering and construction companies, pipeline and storage segments. The Dresser acquisition also added new as W-K-M®, Demco®, Nutron®, TBV®, AOP® and Thornhill offerings to the process group, as the TK Valve and Control Seal check valves, actuators, chokes and aftermarket parts operators, drilling contractors and major chemical, Craver®. New brand offerings from the Dresser acquisition brands will complement the Orbit products. include Texsteam plug valves and Wheatley check valves. These and services. petrochemical and refining companies. In 2006, continued expansion in international energy markets, enhancements to the Company’s historical product lines will particularly Europe, South America, the Middle East and Asia, strengthen CCV’s abilities to serve an expanded range of is expected to drive demand for the equipment and services customer requirements. The acquisition also added the Valgro S TAT I STI C A L/ O P E RATI N G H I G H LI G H T S ($ millions) of the pipeline and process segments. This growth, combined (Canada) and International Valves Ltd. (U.K.) operations to this with the added revenue from the businesses acquired in 2005, division, thereby improving their channels to market. 2005 2004 2003 should generate a significant increase in revenues and profits Business in the Distributed Products division tends to closely track during the year. Revenues ............................................................................................................... $625.1 .................... $350.1 ...................... $307.1 North American oil and gas activity, particularly as measured by Aftermarket Services EBITDA ..................................................................................................................... 118.3 .......................... 50.0 ............................ 46.4 rig count. Continuing growth in rig activity and increased spending CCV’s Aftermarket Services group provides such services as OEM from oil and gas operators kept demand for oilfield valves and EBITDA (as a percent of revenues) ............................................................... 18.9% ...................... 14.3% ........................ 15.1% parts, repair, field service, asset management and remanufactured related products high during 2005, and the Distributed Products Capital expenditures ............................................................................................ 13.8 .......................... 13.7 ............................... 9.7 product to customers. Revenues in the aftermarket business were group saw significant gains in orders and revenues throughout the up by nearly 45 percent during 2005, a result of growth in both year. Programs to increase manufacturing productivity and improve Orders ....................................................................................................................... 710.8 ....................... 365.7 ......................... 324.0 the U.S. and international markets and the acquisitions of three supply chain management in these operations were implemented Backlog (as of year-end) ......................................................................................... 469.0 ....................... 122.9 ............................ 72.4 aftermarket businesses, two in Canada and one in the U.S., since in 2004; those steps proved to be essential in responding to the mid-year 2004. CCV’s installed base of long-lived equipment, demands placed on CCV by customers during 2005. which generates demand for replacement parts and service Engineered Valves over the life of the product, is a vital component of a successful aftermarket business. Pipelines — The pipeline group of the Engineered Valve division provides large-diameter valves for use in natural gas, crude oil Acquisition of NuFlo extends product offerings and refined products transmission lines, most often through its Nuflo Measurement Systems, acquired in 2005, designs, line of traditional Cameron® brand products. manufactures and distributes measurement and control instrumentation for the global oil and gas and process control industries. The transaction represented a logical extension of CCV’s product line into the flow measurement and process markets, and NuFlo’s position as a market leader provides a platform for additional expansion or acquisitions. 20 21
  • 13. Financial Overview relationships with new “channel-to-market” partners led to Cooper Compression’s revenues totaled $384.9 million during significant growth in other domestic markets; and a strong 2005, up 13 percent from $340.0 million in 2004. EBITDA record of recent performance provided the impetus for gains was $42.1 million, up from $41.5 million in 2004. EBITDA as in international markets, particularly in the Former Soviet Union a percent of revenues was 10.9 percent, compared with 12.2 (FSU), Mexico and Europe. percent during 2004. Orders totaled $449.8 million, up nearly 22 percent from 2004’s $369.3 million. The Company’s Superior-brand separable compressor product Reciprocating Technology also saw gains in orders during 2005. Strength in global natural gas markets, especially in the Asia-Pacific and Latin America Cooper Compression is a leading provider of reciprocating regions, was a primary factor. In addition, Cooper Compression’s compression equipment and related aftermarket parts and 2005 rationalization of Superior’s distribution channels, including services for the oil and gas industry. Its products and services are adding new domestic and international packagers and eliminating marketed under the Ajax®, Superior®, Cooper-Bessemer®, Penn™, marginal distributors, also contributed to the improvement. Enterprise™,Texcentric®, Compression Specialties™ and Turbine Specialties™ brand names. Cooper Compression provides global 2006 Outlook — Reciprocating support for its products and maintains sales and/or service offices Cooper Compression is a leading provider of reciprocating and centrifugal Domestic gas producers are expected to continue development in key international locations. of new gas reserves and exploitation of existing fields during compression equipment and aftermarket parts and services. Reciprocating 2006. Such activity will support both new compressor sales and Products — Aftermarket parts and services, integral engine- the aftermarket business related to installed equipment. On the compressors, separable compressors and turbochargers. compression equipment (Reciprocating Technology) is used throughout international front, natural gas will continue to be the fuel of choice for developing countries like China, India and the FSU Customers — Gas transmission companies, compression leasing the energy industry by gas transmission companies, compression leasing nations, and compressed natural gas (CNG) applications are companies, oil and gas producers and processors and independent companies, oil and gas producers and independent power producers. expected to take on greater emphasis. power producers. Integrally geared centrifugal compressors (Centrifugal Technology) are Two new offerings were recently introduced in the reciprocating Aftermarket initiatives key to reciprocating business product line. The AXIS™ reciprocating compressor is an all-new Approximately 75 percent of Cooper Compression’s reciprocating used by customers around the world in a variety of industries, including air barrel-frame design targeted at the natural gas lease fleet markets. business revenues are generated by aftermarket parts and This new, more flexible design replaces two prior offerings, allows separation, petrochemical and chemical. services in support of the Company’s worldwide installed base the buyer to select a variety of crankshaft configurations and of compression equipment. Cooper Compression’s aftermarket results in a lighter-weight frame with added dynamic stiffness.The strategy combines cost-effective products and services with the new C-Force™ compressor was created through the addition of development of business alliances with select customers. This new tandem cylinders to a small Superior reciprocating frame, multi-year effort helps customers reduce their vendor population S TAT I STI C A L/ O P E RATI N G H I G H LI G H T S ($ millions) providing an offering ideally suited to CNG applications. and aligns them with strong partners — like Cooper Compression — who offer a broad range of capabilities and expertise on a 2005 2004 2003 Another new development by Cooper Compression for global basis. Revenues ............................................................................................................... $384.9 .................... $340.0 ...................... $308.8 aftermarket application is a magnetic, springless poppet valve for use in reciprocating compressors. The new Magneta™ valve Additional strategies for taking advantage of opportunities with EBITDA ........................................................................................................................ 42.1 .......................... 41.5 ............................ 27.5 replaces springs — one of the leading failure components in aftermarket customers include: increasing the number and types EBITDA (as a percent of revenues) ............................................................... 10.9% ...................... 12.2% ........................... 8.9% reciprocating compressors — with a magnet. The Magneta valve of customer alliances, bundling repair capabilities, expanding is expected to provide increased reliability and, with the capability Capital expenditures ............................................................................................... 7.3 ............................. 6.9 ............................... 7.2 vendor consignment agreements to assure parts availability, to provide higher valve lifts, improved overall operating efficiency. developing and marketing retrofit enhancements and realignment Orders ....................................................................................................................... 449.8 ....................... 369.3 ......................... 340.2 The Magneta valve is being field tested in the first half of 2006, of the sales force to better meet market and customer demands. Backlog (as of year-end) ......................................................................................... 183.2 ....................... 124.2 ......................... 102.4 and is expected to be offered commercially later in the year. The Company will also continue to provide customers with contract maintenance agreements, assuring them ready access to While 2006 should be another active order year, keeping parts and services. pressure on delivery deadlines, the pace is not expected to be as robust as 2005. Cooper Compression’s efforts will be aimed Reciprocating compressor market steps up at gaining market share with its reciprocating unit products, and In 2005, record natural gas prices in the U.S. generated significant maintaining share in its large — but declining — aftermarket increases in compression equipment orders for all suppliers. services on the installed base of Cooper Compression’s Cooper Compression’s orders for new gas compressor units equipment. Results for 2006 will depend on activity in global more than doubled during the year. If natural gas prices remain gas markets, further refinement of the Company’s channels to at historically high levels, the pace of activity is likely to continue market, the success of new product offerings and continued in 2006. focus on cost reduction. Ajax integral compressor orders reached a record level in 2005. Ajax’s reputation for reliability and ease of maintenance was a key factor in its penetration of the lease fleet market; 22 23
  • 14. Centrifugal Technology Management’s Discussion and Analysis of Results of Operations and New product offerings in the centrifugal line include the TA- Financial Condition of Cooper Cameron Corporation Cooper Compression manufactures and supplies integrally 2020 line of plant air compressors, which represent a streamlined geared centrifugal compressors and aftermarket services to version of Cooper Compression’s smallest frame. With an customers worldwide. Centrifugal air compressors, used primarily The following discussion of Cooper Cameron Corporation’s (the Company or Cooper Cameron) historical results of operations and financial effective capability from 250 to 400 horsepower, this new model in manufacturing processes (plant air), are sold under the trade condition should be read in conjunction with the Company’s consolidated financial statements and notes thereto included elsewhere in this Annual is targeted toward the large oil-free screw compressor market. In name of Turbo Air®, with specific models including the TA-2000, Report. All per share amounts included in this discussion are based on diluted shares outstanding and have been revised to reflect the 2-for-1 late 2005, the TA-9000 was introduced as an entirely new frame TAC-2000, TA-2020, TA-3000, TA-6000 and TA-9000. Cooper stock split effective December 15, 2005. size. As the largest plant air frame in Cooper Compression’s Compression engineered compressors are used in the process air lineup, the TA-9000 represents a cost-effective alternative to and gas industries and are identified by the MSG® trade name. Overview previous offerings in the 1,500 to 2,250 horsepower range. The Company’s operations are organized into three business segments — Cameron, Cooper CameronValves (CCV) and Cooper Compression. Products — Integrally geared centrifugal compressors, compressor Based upon the amount of equipment installed worldwide and available industry data, Cameron is one of the world’s leading providers of 2006 Outlook — Centrifugal systems and controls. Complete aftermarket services including systems and equipment used to control pressures, direct flows of oil and gas wells and separate oil and gas from impurities. Cameron’s products Centrifugal compressor demand is closely tied to global spare parts, technical services, repairs, overhauls and upgrades. are employed in a wide variety of operating environments including basic onshore fields, highly complex onshore and offshore environments, manufacturing activity and overall economic health. Strategically deepwater subsea applications and ultra-high temperature geothermal operations. Cameron’s products include surface and subsea production important markets like China, Taiwan, Turkey, India, South Korea, Customers — Petrochemical and refining companies, natural gas systems, blowout preventers, drilling and production control systems, oil and gas separation equipment, gate valves, actuators, chokes, wellheads, Brazil and the U.S. are expected to offer continuing opportunities processing companies, durable goods manufacturers, utilities, air drilling risers and aftermarket parts and services. Cameron’s customers include oil and gas majors, national oil companies, independent producers, for Cooper Compression during 2006. separation and chemical companies. engineering and construction companies, drilling contractors, oilfield rental companies and geothermal energy producers. Based upon the amount of equipment installed worldwide and available industry data, CCV is a leading provider of valves and related systems primarily used to control Cooper Compression plans to more fully participate in the Centrifugal compressor market pressures and direct the flow of oil and gas as they are moved from individual wellheads through flow lines, gathering lines and transmission systems Chinese steel manufacturing markets by offering a larger Centrifugal unit orders in both air separation and engineered to refineries, petrochemical plants and industrial centers for processing. CCV’s products include gate valves, ball valves, butterfly valves, Orbit valves, engineered compressor, and by increasing the Company’s facilities air applications showed increases during 2005, driven primarily and staffing in China, on the heels of having moved a regional rotary process valves, block and bleed valves, plug valves, globe valves, check valves, actuators, chokes and aftermarket parts and service. CCV’s by new orders from Europe, the FSU and China. Continued headquarters from Singapore to Beijing. Indonesia, Korea and weakness in the U.S. dollar gave some price advantage to domestic customers include oil and gas majors, independent producers, engineering and construction companies, pipeline operators, drilling contractors Thailand also offer opportunities for standard machine sales into manufacturers like Cooper Compression in selling into Europe, and major chemical, petrochemical and refining companies. Cooper Compression provides reciprocating and centrifugal compression equipment the strong electronics markets. but the meaningful growth in this market again came from new and related aftermarket parts and services. The Company’s compression equipment is used by gas transmission companies, compression leasing market inroads with existing and new products. companies, oil and gas producers, independent power producers and in a variety of other industries around the world. The major European economies, including the United Kingdom, In addition to the historical data contained herein, this Annual Report, including the information set forth in the Company’s Management’s Germany and Italy, all experienced flat to declining industrial Standard plant air markets, however, became significantly more Discussion and Analysis and elsewhere in this report, may include forward-looking statements regarding the Company’s future revenues and earnings, production and capacity utilization in the last couple of years, competitive during 2005. With the Company’s manufacturing equity compensation charges, cash generated from operations, costs associated with integrating the recently acquired Flow Control segment of and are projecting only marginal GDP growth in the near future. capacity operating at relatively high utilization levels, Cooper Dresser, Inc. (the Dresser Flow Control Acquisition) and capital expenditures, as well as expectations regarding rig activity, oil and gas demand Cooper Compression plans to expand its presence in promising Compression chose not to compete for lower-margin business, and pricing and order activity, made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The regions like the UAE, Saudi Arabia, Egypt, Algeria and Nigeria. and declined jobs that would have generated less-than-acceptable Company’s actual results may differ materially from those described in any forward-looking statements. Any such statements are based on current Centrifugal aftermarket growth should continue to be strong margins. With a series of cost reduction initiatives currently expectations of the Company’s performance and are subject to a variety of factors, some of which are not under the control of the Company, after a record year in 2005. Continuing initiatives to increase underway, the Company will consider taking on additional plant which can affect the Company’s results of operations, liquidity or financial condition. Such factors may include overall demand for, and pricing of, market share include alliances, unit exchanges, e-business and air business in 2006, but only at margins that generate appropriate the Company’s products; the size and timing of orders; the Company’s ability to successfully execute large subsea projects it has been awarded; repair services, building on the additions to sales staff and service returns. Recent efforts to diversify both the products and the 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 facilities that were made in 2005. markets served by the Company’s centrifugal products have led to which the Company does business (including social issues related to the integration of the Dresser Flow Control Acquisition); prices and availability improved results, growth opportunities and the ability to absorb a of raw materials; fluctuations in currency and financial markets worldwide; and variations in global economic activity. In particular, current and decline in any single market. projected oil and gas prices have historically affected customers’ spending levels and their related purchases of the Company’s products and services. Additionally, the Company may change its cost structure, staffing or spending levels due to changes in oil and gas price expectations and the Company’s judgment of how such changes might affect customers’ spending, which may impact the Company’s financial results. See additional factors discussed in “Factors That May Affect Financial Condition and Future Results” contained herein. Because the information herein is based solely on data currently available, it is subject to change as a result of, among other things, changes in conditions over which the Company has no control or influence, and should not therefore be viewed as assurance regarding the Company’s future performance. Additionally, the Company is not obligated to make public indication of such changes unless required under applicable disclosure rules and regulations. The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to warranty obligations, bad debts, inventories, intangible assets, assets held for sale, exposure to liquidated damages, income taxes, pensions and other postretirement benefits, other employee benefit plans, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. 24 25
  • 15. Critical Accounting Policies rate assumptions on investment yields available at the measurement date on an index of long-term, AA-rated corporate bonds. The Company’s inflation assumption is based on an evaluation of external market indicators. The expected rate of return on plan assets reflects asset allocations, The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of investment strategy and the views of various investment professionals. Retirement and mortality rates are based primarily on actual plan experience. its consolidated financial statements.These policies and the other sections of the Company’s Management’s Discussion and Analysis of Results of In accordance with SFAS 87, actual results that differ from these assumptions are accumulated and amortized over future periods and, therefore, Operations and Financial Condition have been reviewed with the Company’s Audit Committee of the Board of Directors. generally affect recognized expense and the recorded obligation in future periods. While the Company believes the assumptions used are Revenue Recognition — The Company generally recognizes revenue once the following four criteria are met: (i) persuasive evidence of an appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. arrangement exists, (ii) delivery of the equipment has occurred or services have been rendered, (iii) the price of the equipment or service is fixed and A significant reason for the increase in pension expense since 2002 is the difference between the actual and assumed rates of return on plan determinable and (iv) collectibility is reasonably assured. For certain engineering, procurement and construction-type contracts, which typically include assets in prior years. During 2001 and 2002, the Company’s pension assets earned substantially less than the assumed rates of return in those the Company’s subsea systems and processing equipment contracts, revenue is recognized in accordance with Statement of Position 81-1,Accounting years. In accordance with SFAS 87, the difference between the actual and assumed rate of return is being amortized over the estimated average for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1). Under SOP 81-1, the Company recognizes revenue on period to retirement of the individuals in the plans. In 2003, 2004 and again in 2005, the Company lowered the assumed rate of return for the these contracts using a units-of-completion method. Under the units-of-completion method, revenue is recognized once the manufacturing process is assets in these plans. The plans earned significantly more than the assumed rates of return in 2005 and 2003 and slightly less than the assumed complete for each piece of equipment specified in the contract with the customer, including customer inspection and acceptance, if required by the rate of return in 2004. contract. Approximately 13% and 15% of the Company’s revenue for the years ended December 31, 2005 and 2004, respectively, was recognized The following table illustrates the sensitivity to a change in certain assumptions used in (i) the calculation of pension expense for the year ending under SOP 81-1. December 31, 2006, and (ii) the calculation of the projected benefit obligation (PBO) at December 31, 2005 for the Company’s pension plans: Allowance for Doubtful Accounts — The Company maintains allowances for doubtful accounts for estimated losses that may result from the inability of its customers to make required payments. Such allowances are based upon several factors including, but not limited to, historical Increase (decrease) Increase (decrease) experience and the current and projected financial condition of specific customers. Were the financial condition of a customer to deteriorate, in 2006 Pre-tax in PBO at resulting in an impairment of its ability to make payments, additional allowances may be required. (dollars in millions) Pension Expense December 31, 2005 Inventories — The Company’s aggregate inventories are carried at cost or, if lower, net realizable value. Inventories located in the United States and Canada are carried on the last-in, first-out (LIFO) method. Inventories located outside of the United States and Canada are carried on the Change in Assumption: 25 basis point decrease in discount rate $ 1.0 $ 13.8 first-in, first-out (FIFO) method. During 2005, 2004 and 2003, the Company reduced its LIFO inventory levels. These reductions resulted in a 25 basis point increase in discount rate $ (0.9) $ (13.8) liquidation of certain low-cost inventory layers. As a result, the Company recorded non-cash LIFO income of $4.0 million, $9.7 million and $15.9 25 basis point decrease in expected return on assets $ 1.0 — million for the years ended December 31, 2005, 2004 and 2003, respectively. The Company provides a reserve for estimated obsolescence or excess 25 basis point increase in expected return on assets $ (1.0) — quantities on hand equal to the difference between the cost of the inventory and its estimated realizable value. During 2005 and 2004, the Company revised its estimates of realizable value on certain of its excess inventory. The impact of these revisions was to increase the required reserve as of December 31, 2005 and 2004 by $9.9 million and $6.6 million, respectively. If future conditions cause a reduction in the Company’s current estimate Financial Summary of realizable value, additional provisions may be required. The following table sets forth the consolidated percentage relationship to revenues of certain income statement items for the periods Goodwill — The Company reviews the carrying value of goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill presented: and Other Intangible Assets (SFAS 142), which requires that the Company estimate the fair value of each of its reporting units annually and compare such Year Ended December 31, amounts to their respective book values to determine if an impairment of goodwill is required. For the 2005, 2004 and 2003 evaluations, the fair value was 2005 2004 2003 determined using discounted cash flows and other market-related valuation models. Certain estimates and judgments are required in the application of the fair value models. Based upon each of the Company’s annual evaluations, no impairment of goodwill was required. However, should the Company’s Revenues 100.0% 100.0% 100.0% estimate of the fair value of any of its reporting units decline dramatically in future periods, an impairment of goodwill could be required. Costs and expenses: Product Warranty — The Company provides for the estimated cost of product warranties at the time of sale based upon historical experience, Cost of sales (exclusive of depreciation and amortization shown separately below) 71.3 74.5 72.3 or, in some cases, when specific warranty problems are encountered. Should actual product failure rates or repair costs differ from the Company’s Selling and administrative expenses 15.2 14.3 17.7 current estimates, revisions to the estimated warranty liability would be required. See Note 7 of the Notes to Consolidated Financial Statements Depreciation and amortization 3.1 3.9 5.1 for additional details surrounding the Company’s warranty accruals. Non-cash write-down of technology investment — 0.2 — Contingencies — The Company accrues for costs relating to litigation, including litigation defense costs, claims and other contingent matters, Interest income (0.5) (0.2) (0.3) including tax contingencies and liquidated damage liabilities, when such liabilities become probable and reasonably estimable. Such estimates may be Interest expense 0.5 0.9 0.5 based on advice from third parties or on management’s judgment, as appropriate. Revisions to contingent liability reserves are reflected in income Total costs and expenses 89.6 93.6 95.3 in the period in which different facts or information become known or circumstances change that affect our previous assumptions with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of contingent liabilities may be materially different from previous Income before income taxes and cumulative effect of accounting change 10.4 6.4 4.7 estimates and could require adjustments to the estimated reserves to be recognized in the period such new information becomes known. Income tax provision (3.6) (1.9) (1.2) Deferred Tax Assets — The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than Income before cumulative effect of accounting change 6.8 4.5 3.5 not to be realized, considering future taxable income and ongoing prudent and feasible tax planning strategies. As of December 31, 2005, the Cumulative effect of accounting change — — 0.7 Company had a net operating loss carryforward for U.S. tax purposes of approximately $289.0 million, which does not begin to expire until 2020. Net income 6.8% 4.5% 4.2% Currently, the Company believes it is more likely than not that it will generate sufficient future taxable income to fully utilize this net operating loss carryforward. Accordingly, the Company has not recorded a valuation allowance against this net operating loss carryforward. In the event the oil and gas exploration activity in the United States deteriorates over an extended period of time, the Company may determine that it would Results of Operations not be able to fully realize this deferred tax asset in the future. Should this occur, a valuation allowance against this deferred tax asset would be charged to income in the period such determination was made. Consolidated Results — 2005 Compared to 2004 Pension Accounting — The Company accounts for its defined benefit pension plans in accordance with Statement of Financial Accounting The Company had net income of $171.1 million, or $1.52 per share, for the year ended December 31, 2005 compared to $94.4 Standards No. 87, Employers’ Accounting for Pensions (SFAS 87), which requires that amounts recognized in the financial statements be million, or $0.88 per share for the year ended December 31, 2004, an increase in earnings per share of 72.7%. The results for 2004 determined on an actuarial basis. See Note 8 of the Notes to Consolidated Financial Statements for the amounts of pension expense included include pre-tax charges of (i) $3.8 million related to the non-cash write-down of a technology investment, (ii) $6.8 million related to in the Company’s Results of Operations and the Company’s contributions to the pension plans for the years ended December 31, 2005, 2004 the non-cash write-off of debt issuance costs associated with retired debt and (iii) $6.1 million of severance costs, primarily related to and 2003, as well as the unrecognized net loss at December 31, 2005 and 2004. a workforce reduction program at the Cameron division. The assumptions used in calculating the pension amounts recognized in the Company’s financial statements include discount rates, interest costs, expected return on plan assets, retirement and mortality rates, inflation rates, salary growth and other factors. The Company bases the discount 26 27
  • 16. Revenues Income before income taxes totaled $178.9 million for 2005, an increase of 50.6% from $118.8 million in 2004. The majority of this increase Revenues for 2005 totaled $2.518 billion, an increase of 20.3% from 2004 revenues of $2.093 billion. Revenues increased in each of the Company’s resulted from the increase in revenue and a decline in cost of sales as a percentage of revenue. Cost of sales as a percentage of revenue decreased segments and across all product lines, except subsea, due to increased drilling and production activity in the Company’s markets primarily resulting from to 72.7% in 2005 from 76.6% in 2004. This reduction was primarily due to (i) favorable pricing, (ii) a movement in mix towards higher-margin high oil and gas prices. Entities acquired during 2004 and 2005 accounted for approximately $262.9 million, or 61.9%, of the growth in revenues in 2005. drilling and surface sales from lower-margin subsea systems sales and (iii) the application of relatively fixed overhead to a larger revenue base. A discussion of revenue by segment may be found below. Partially offsetting these factors were higher raw material and labor costs, a $2.5 million non-cash write-down of an investment and a $12.8 million increase resulting from a change in the estimated recovery value of certain slow-moving inventory and higher warranty costs on a subsea systems Cost and Expenses project. Costs of sales (exclusive of depreciation and amortization) for 2005 totaled $1.796 billion, an increase of 15.1% from 2004’s $1.560 billion. As a Selling and administrative costs in Cameron increased $30.2 million or 19.0% in 2005 as compared to 2004. The majority of the increase was percentage of revenue, cost of sales (exclusive of depreciation and amortization) for 2005 decreased to 71.3% from 74.6% in 2004. The decrease due to higher headcount and related costs necessitated by the higher activity levels, higher incentive accruals resulting from the improved financial in cost of sales as a percentage of revenue is due to (i) improved pricing in the Cameron and CCV businesses, (ii) a shift towards higher-margin performance of the segment and the full-year effect of businesses acquired during 2004. Partially offsetting these increases was a reduction in products (primarily surface and drilling equipment) and (iii) the application of relatively fixed overhead to a larger revenue base in Cameron and severance costs, as 2004 included $4.1 million related to a workforce reduction program at Cameron. CCV. The declines were partially offset by (i) rising material costs in the Cooper Compression segment that the Company was not able to pass Cameron’s depreciation and amortization expense declined by $7.6 million in 2005 as an increasing number of assets became fully depreciated through to its customers, (ii) $11.2 million of higher warranty expense and provisions for excess inventory, primarily in Cameron, and (iii) a decrease during the latter part of 2004 and during 2005. of approximately $5.7 million in non-cash LIFO income recognized during 2005 in the Cooper Compression segment. Selling and administrative expenses for 2005 were $381.3 million, an increase of $81.2 million, or 27.0%, from $300.1 million for 2004. Businesses CCV Segment acquired during 2004 and 2005 contributed $32.7 million, or 40.3%, of the increase. The remaining increase in selling and administrative expense Year Ended December 31, Increase for 2005 was primarily due to (i) higher headcount resulting from increased activity levels within the segments, (ii) $2.8 million related to non- (dollars in millions) 2005 2004 $ % cash stock compensation expense, (iii) an increase in bonus and sales incentive accruals based on the Company’s improved financial performance for the year and (iv) a $7.2 million increase in legal and environmental costs. These increases were partially offset by a $6.1 million reduction in Revenues $ 625.1 $ 350.1 $ 275.0 78.6% severance costs, primarily associated with a workforce reduction program at the Cameron division, which were recorded in 2004. Income before income taxes $ 101.5 $ 37.8 $ 63.7 168.4% Depreciation and amortization expense for 2005 was $78.4 million, a decrease of $4.4 million from $82.8 million for 2004. The decrease in CCV’s revenues for 2005 totaled $625.1 million, an increase of 78.6% from $350.1 million in 2004. The acquisition of NuFlo Technologies, Inc. depreciation and amortization was primarily attributable to assets becoming fully depreciated, partially offset by approximately $5.7 million of (the quot;NuFlo Acquisitionquot;) and the Dresser Flow Control Acquisition, both occurring in 2005, accounted for approximately $96.7 million, or 35.2% additional depreciation and amortization relating to businesses acquired during 2004 and 2005. The Company’s capital spending for the three of the increase. Excluding these acquisitions, sales in the distributed product line increased 54.1% during 2005 due to strong market conditions, as years in the period ended December 31, 2005 has been lower than its annual depreciation and amortization expense for those same periods, evidenced by higher North American rig counts. In addition, the full-year impact of the PCC Acquisition in late 2004 added approximately $37.4 which has contributed to the decline in depreciation expense for 2005. million to 2005 distributed product revenues. Sales in the engineered product line were up 45.9% compared to 2004. A significant portion of Interest income for 2005 was $13.1 million as compared to $4.9 million in 2004. The increase in interest income was attributable to higher excess the increase, totaling approximately $65.0 million, was attributable to the full-year impact in 2005 of the late 2004 PCC Acquisition. cash balances available for investment during 2005 and higher short-term interest rates the Company has received on its invested cash balances. Income before income taxes for 2005 totaled $101.5 million, an increase of 168.4% from $37.8 million in 2004. The majority of this increase Interest expense for 2005 totaled $12.0 million compared to $17.8 million in 2004. The decrease in interest expense is primarily attributable resulted from the increase in revenue and a decline in cost of sales as a percentage of revenue. Cost of sales as a percentage of revenue decreased to $6.8 million of accelerated amortization of debt issuance costs recorded in 2004 associated with the early retirement of the Company’s zero- to 67.3% in 2005 from 69.9% in 2004. This reduction was primarily due to (i) favorable pricing, (ii) a shift in mix to higher-margin distributed and coupon convertible debentures due 2021 (the Zero-Coupon Convertible Debentures) and $184.3 million of the Company’s 1.75% convertible NuFlo products and (iii) the application of relatively fixed overhead to a larger revenue base. debentures due 2021 (the 1.75% Convertible Debentures). Partially offsetting this decline was the full-year impact in 2005 of the $200.0 million Selling and administrative costs in CCV increased $30.5 million, or 54.9% in 2005 compared to 2004. Approximately $23.9 million of the of senior notes due 2007 (the Senior Notes), which were issued in March 2004, partially offset by lower-rate convertible debentures outstanding dollar increase was attributable to businesses acquired in 2005 and 2004. The remaining increase relates to higher headcount and related costs during the first four months of 2004. necessitated by the higher activity level, and higher incentive accruals resulting from the improved financial performance of the segment. The income tax provision was $91.9 million in 2005 as compared to $38.5 million in 2004. The effective tax rate for 2005 was 34.9% compared Depreciation and amortization for 2005 increased $4.6 million compared to 2004, most of which was attributable to businesses acquired to 29.0% in 2004. The increase in the effective tax rate primarily reflects a shift in income during 2005 to higher tax rate jurisdictions, primarily the during 2005 and 2004. U.S. and Canada. Cooper Compression Segment Segment Results — 2005 Compared to 2004 Year Ended December 31, Increase Information relating to results by segment may be found in Note 14 of the Notes to Consolidated Financial Statements. (dollars in millions) 2005 2004 $ % Cameron Segment Revenues $ 384.9 $ 340.0 $ 44.9 13.2% Year Ended December 31, Increase Income before income taxes $ 26.7 $ 24.6 $ 2.1 8.3% (dollars in millions) 2005 2004 $ % Cooper Compression’s revenues were $384.9 million in 2005, up 13.2% from $340.0 million in 2004. The increase in revenues was attributable Revenues $ 1,507.8 $ 1,402.8 $ 105.0 7.5% to an 18.6% increase in sales of air compression equipment, primarily due to higher worldwide demand for engineered units and aftermarket Income before income taxes $ 178.9 $ 118.8 $ 60.1 50.6% parts and repair services. Sales of gas compression equipment increased 7.6% compared to 2004 due to strong order demand, particularly in the Ajax product line during the first half of 2005. Cameron’s revenues for 2005 totaled $1.508 billion, an increase of 7.5% from $1.403 billion in 2004. Changes in foreign currency exchange rates Income before income taxes was $26.7 million in 2005, up 8.3% from $24.6 million in 2004. The increase in revenue was partially offset by caused approximately 9.2% of the 2005 revenue increase. Drilling sales were up 2.4%, surface sales increased 18.8%, subsea sales declined 10.5% higher cost of sales as a percentage of revenue, which increased to 72.5% in 2005 from 71.0% in 2004. The increase in cost of sales as a percentage and sales in the oil, gas and water separation market increased 56.0%. Surface sales increased due to higher activity levels in each of the Company’s of revenue was primarily due to higher raw material costs, which Cooper Compression was unable to pass to its customers in the form of price major operating regions. In addition, the full-year effect of the November 2004 acquisition of the PCC Flow Technologies segment of Precision increases, and a $5.7 million reduction in non-cash LIFO income. Castparts Corp. (the quot;PCC Acquisitionquot;) contributed approximately 23.8% of the increase in surface sales. Sales declined in the subsea market, Selling and administrative expenses increased by $6.5 million in 2005 as compared to 2004. The increase was primarily due to the higher activity primarily due to the decline in activity on several large projects offshore West Africa.The increase in the oil, gas and water separation market was level and the cost to settle a legal matter and higher environmental costs associated with a closed facility. also reflective of the strong overall market conditions that existed in 2005. Revenues associated with this product line, which was acquired in Cooper Compression’s depreciation and amortization expense in 2005 declined $1.5 million from 2004, mainly due to assets which became February 2004, also benefited from a full 12 months of activity in 2005 compared to 10 months in 2004. fully depreciated in 2005. 28 29
  • 17. The $12.2 million cumulative effect of an accounting change recognized during 2003 reflects the impact of adopting SFAS 150 (see Note 1 of the Notes to Consolidated Financial Statements). There was no tax expense associated with this item as the gain is not taxable. Corporate Segment The income tax provision was $38.5 million in 2004 as compared to $20.4 million in 2003. The effective tax rate for 2004 was 29.0% as compared to 26.2% in 2003. The increase in the effective tax rate reflects a shift in 2004 earnings to higher tax rate jurisdictions as compared to 2003. The Corporate segment’s loss before income taxes decreased to $44.1 million in 2005 from $48.4 million in 2004. Higher interest income total- ing $8.2 million, lower interest expense of $5.8 million and the absence in 2005 of a one-time writedown in 2004 of a technology asset totaling $3.8 Segment Results — 2004 Compared to 2003 million more than offset higher selling and administrative expenses and other costs of $13.5 million. Selling and administrative expenses increased Information relating to results by segment may be found in Note 14 of the Notes to Consolidated Financial Statements. primarily due to (i) higher accruals for bonus programs tied to the Company’s financial performance, (ii) $2.8 million of non-cash stock compensation costs and (iii) higher legal costs related primarily to the defense of certain patents and a case related to a former manufacturing site. Cameron Segment Year Ended December 31, Increase Consolidated Results — 2004 Compared to 2003 (dollars in millions) 2004 2003 $ % The Company had net income of $94.4 million, or $0.88 per diluted share, for the twelve months ended December 31, 2004 compared with Revenues $ 1,402.8 $ 1,018.5 $ 384.3 37.7% $69.4 million, or $0.62 per diluted share in 2003 (per share amounts have been revised to reflect the 2-for-1 stock split effective December 15, Income before income taxes $ 118.8 $ 63.4 $ 55.4 87.4% 2005). The results for 2004 include pre-tax charges of (i) $3.8 million related to the non-cash write-down of a technology investment, (ii) $6.8 million related to the non-cash write-off of debt issuance costs associated with retired debt and (iii) $6.1 million of severance costs, primarily Cameron’s revenues for 2004 totaled $1.403 billion, an increase of 37.7% from 2003 revenues of $1.019 billion. The acquisition of Petreco during related to a workforce reduction program at the Cameron division. The results for 2003 included pre-tax charges aggregating $14.6 million related the first quarter of 2004 and movement in foreign currencies accounted for $114.5 million and $39.8 million, respectively, of the increase in Cameron’s to plant closing, business realignment and other related costs (see Note 2 of the Notes to Consolidated Financial Statements for a discussion revenues. Revenues in the drilling market increased 26.0%, revenues in the subsea market increased 53.4% and revenues in the surface market increased of these charges). The results for 2003 also include a $12.2 million after-tax gain resulting from the cumulative effect of adopting Statement of 7.4%. The increase in drilling revenues was primarily attributable to two large project deliveries in the Asia Pacific/Middle East Region and one large Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS project delivery in the Gulf of Mexico. The increase in subsea revenues was primarily attributable to the completion of units associated with the large 150). See Note 1 of the Notes to Consolidated Financial Statements for further discussion. subsea orders awarded during 2003 and 2002, primarily related to projects located offshore Africa and Eastern Canada. The increase in surface revenues was primarily the result of increased activity levels in the U.S., Canada and Latin America, as well as movements in foreign currencies. Revenues Income before income taxes totaled $118.8 million for 2005, up 87.4% from $63.4 million in 2004. The majority of the increase was due to Revenues for 2004 totaled $2.093 billion, an increase of 28.1% from 2003 revenues of $1.634 billion. Revenues increased in each of the the increase in revenues partially offset by an increase in cost of sales as a percentage of revenues to 76.6% in 2004 from 74.5% in 2003. The Company’s segments. A discussion of revenue by segment may be found below. increase in cost of sales as a percentage of revenues was attributable to (i) the delivery of lower-margin large project work in the drilling product line, (ii) lower margins in the subsea product line primarily resulting from increased deliveries of lower-margin third-party supplied equipment, Cost and Expenses (iii) increased subsea systems project revenues, which typically carry a higher cost of sales percentage relationship to revenues as compared to Cost of sales (exclusive of depreciation and amortization) totaled $1.560 billion for 2004, an increase of 32.0% from 2003's $1.182 billion. As a Cameron’s traditional surface business and (iv) the impact of including sales from the 2004 acquisition of Petreco, which typically carry a higher percent of revenues, cost of sales increased from 72.3% in 2003 to 74.6% in 2004. The increase in cost of sales as a percent of revenues was primarily cost of sales to revenue relationship compared to Cameron’s traditional surface business. These increases were partially offset by the application attributable to (i) several large lower-margin drilling projects recognized in 2004, (ii) a shift in mix towards large subsea systems projects in 2004, which of relatively fixed manufacturing overhead costs to a larger revenue base. typically carry lower margins than the drilling and surface product lines, (iii) the impact of the 2004 acquisition of Petreco, which typically has lower Selling and administrative expenses for Cameron for 2004 increased by $13.8 million, or 9.6%, as compared to 2003. The increase in selling and margins than Cameron’s traditional surface business and (iv) lower LIFO income recognized by Cooper Compression in 2004 as compared to 2003. administrative expenses resulted primarily from the PCC and Petreco Acquisitions and $5.0 million associated with movements in foreign currencies. These increases were partially offset by the application of relatively fixed manufacturing overhead costs to a larger revenue base. Depreciation and amortization expense remained relatively flat in 2004 compared to 2003. Selling and administrative expenses for 2004 were $300.1 million, an increase of $11.5 million from $288.6 million for 2003. The increase in selling and administrative expenses resulted primarily from (i) $13.2 million resulting from the PCC and Petreco Acquisitions, (ii) $6.1 million CCV Segment of severance discussed below, (iii) a $13.8 million increase in incentive compensation costs and (iv) $6.0 million associated with movements in Year Ended December 31, Increase foreign currencies, partially offset by (i) the absence of the $14.6 million of charges, discussed below, which were recorded during 2003, (ii) an (dollars in millions) 2004 2003 $ % $8.1 million reduction in selling and administrative expenses in the Compression segment resulting from the various restructuring activities over Revenues $ 350.1 $ 307.1 $ 43.0 14.0% the past two years and (iii) various other decreases. Income before income taxes $ 37.8 $ 33.7 $ 4.1 12.2% Included within selling and administrative expenses for 2004 were charges of $6.1 million of severance costs primarily related to a workforce reduction program at the Cameron division. Included in selling and administrative expenses for 2003 were charges of $14.6 million comprised of (i) CCV’s revenues for 2004 totaled $350.1 million, an increase of 14.0% from 2003 revenues of $307.1 million. The increase in revenues was $6.2 million for employee severance at Cameron and Cooper Compression, (ii) $1.2 million of costs at Cooper Compression related to the closure attributable to a 7.0% increase in the distributed products line, primarily as a result of increased activity levels in the U.S. and Canada as well as of 13 facilities announced in the fourth quarter of 2002, (iii) $4.7 million related to the Company’s unsuccessful efforts to acquire a certain oil service movements in foreign currencies. Sales in the engineered products line increased 23.7%, primarily reflecting increased pipeline ball valve shipments, business, (iv) $1.0 million related to the Company’s international tax restructuring activities, which were begun in 2002, and (v) $1.5 million related to both domestically and internationally, principally to the Far East. a litigation award associated with the use of certain intellectual property obtained in connection with a previous acquisition. Income before income taxes totaled $37.8 million, up 12.2% from $33.7 million for 2003. Cost of sales as a percentage of revenues increased Depreciation and amortization expense for 2004 was $82.8 million, a decrease of $0.8 million from $83.6 million for 2003. The decrease to 69.9% in 2004 from 69.4% in 2003. The increase was primarily due to higher manufacturing costs as a result of raw material price increases in depreciation and amortization expense was primarily attributable to assets becoming fully depreciated, which lowered depreciation and and higher commission costs on international sales of engineered products. amortization expense by $7.4 million, partially offset by (i) depreciation associated with capital additions, which increased depreciation expense Selling and administrative expenses for 2004 for CCV increased $7.9 million, or 16.6%, as compared to 2003. The increase in selling and by $2.5 million, (ii) depreciation and amortization on assets added as a result of the PCC and Petreco Acquisitions, which increased depreciation administrative expenses resulted primarily from (i) $1.1 million relating to the PCC Acquisition, (ii) $1.4 million of severance during 2004, (iii) $1.0 and amortization expense by approximately $2.3 million and (iii) movement in foreign currencies, which increased depreciation and amortization million associated with movements in foreign currencies and (iv) higher incentive compensation and workers compensation costs. expense by approximately $1.9 million. Depreciation and amortization expense declined by $0.5 million in 2004 compared to 2003 due primarily to the impact of assets becoming Interest income for 2004 was $4.9 million as compared to $5.2 million in 2003. The decline in interest income was attributable to lower cash fully depreciated during 2004. balances resulting primarily from treasury stock purchases and acquisitions. Interest expense for 2004 was $17.7 million, an increase of $9.6 million from $8.2 million in 2003. The increase in interest expense primarily Cooper Compression Segment results from (i) $6.8 million of accelerated amortization of debt issuance costs associated with the early retirement of the Company’s zero-coupon Year Ended December 31, Increase convertible debentures due 2021 (the Zero-Coupon Convertible Debentures) and $184.3 million of the Company’s 1.75% convertible debentures (dollars in millions) 2004 2003 $ % due 2021 (the 1.75% Convertible Debentures) and (ii) incremental interest associated with the $200.0 million of senior notes due 2007 (the Senior Notes), which were issued in March 2004. Revenues $ 340.0 $ 308.8 $ 31.2 10.1% 30 31
  • 18. Income before income taxes $ 24.6 $ 10.3 $ 14.3 138.8% Superior compressors, particularly in the Far East. Cooper Compression’s revenues for 2004 totaled $340.0 million, an increase of 10.1% from 2003 revenues of $308.8 million. The increase in Backlog was as follows (in millions): December 31, revenues was attributable to a 26.2% increase in sales in the air compression market, primarily as a result of increased demand from international markets, principally the Far East. Sales in the gas compression market increased 2.0%, primarily reflecting increased aftermarket shipments partially 2005 2004 Increase offset by weakness in new unit shipments as a result of a slow-down in project work in the Latin American market. Cameron $ 1,503.6 $ 752.9 $ 750.7 Income before income taxes was $24.6 million in 2004, up 138.8% from $10.3 million in 2003. Cost of sales as a percentage of revenues CCV 469.0 122.9 346.1 increased to 71.0% in 2004 from 67.8% in 2003 for the Compression segment. The increase in cost of sales is primarily due to (i) a reduction Cooper Compression 183.2 124.2 59.0 in the amount of non-cash LIFO income recorded, which accounted for 2.3 percentage points of the increase in the relationship between cost $ 2,155.8 $ 1,000.0 $ 1,155.8 of sales and revenues and (ii) increased warranty costs attributable to higher sales of engineered air compression units, which accounted for 0.8 percentage points of the increase. Selling and administrative expenses for 2004 for Cooper Compression were down $14.6 million, or 20.4%, as compared to 2003. The decrease CCV’s backlog at December 31, 2005 included $265.1 million attributable to the Dresser Flow Control Acquisition in late 2005 and the NuFlo in selling and administrative expense resulted primarily from (i) an $8.1 million reduction in costs during 2004 resulting from various restructuring Acquisition in May 2005. activities over the past two years, (ii) the absence in 2004 of $3.1 million of severance and facility closure and restructuring costs recognized in 2003 relating to the closure of 13 facilities described above and (iii) various other cost reductions, partially offset by $0.6 million of severance Recent Pronouncements costs recognized in 2004. In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, Inventory Costs (SFAS 151). SFAS 151 is effective Depreciation and amortization expense declined by approximately $0.3 million in 2004 due mainly to an additional charge taken in 2003 for for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company believes there will be no material effect on its legacy software upon the conversion by Cooper Compression to SAP. consolidated financial position, results of operations or cash flows upon adoption of this statement. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments (SFAS Corporate Segment 123R), which requires that all share-based payments to employees, including grants of employee stock options, be recognized over their The loss before taxes in the Corporate segment totaled $48.4 million in 2004, up from $29.7 million in 2003. This increase is primarily due to (i) a vesting periods in the income statement based on their estimated fair values. SFAS 123R is effective at the beginning of the first fiscal year $9.6 million increase in interest expense described above, (ii) a $3.8 million charge recorded in connection with the write-down of a technology asset beginning after June 15, 2005. and (iii) a $4.9 million increase in selling and administrative and other expenses due primarily to higher incentive compensation and additional costs Although the Company has not completed its analysis of the impact of SFAS 123R, the Company currently estimates that it will recognize incurred related to compliance with the Sarbanes-Oxley Act of 2002 that were partially offset by the year-over-year impact of (i) a $4.7 million charge in approximately $0.10 per diluted share of equity- and option-based compensation expense for 2006, assuming the Company elects the 2003 related to the Company’s unsuccessful efforts to acquire a certain oil service business and (ii) $1.0 million related to the Company’s international modified prospective transition alternative. However, this estimate may increase or decrease materially once the Company completes its tax restructuring activities, which were begun in 2002. Depreciation and amortization expense was flat in 2004 when compared to 2003. analysis of the impact of SFAS 123R. Orders and Backlog Liquidity and Capital Resources Orders were as follows (in millions): The Company’s cash balances increased to $362.0 million at December 31, 2005 from $227.0 million at December 31, 2004, due primarily to Year Ended December 31, $352.1 million of cash flow from operating activities and $192.5 million of cash flow from financing activities, partially offset by the consumption 2005 2004 Increase of $400.6 million of cash flow in investing activities. Cameron $ 2,301.1 $ 1,274.4 $ 1,026.7 During 2005, the Company’s operating activities generated $352.1 million of cash as compared to $195.2 million in 2004. Cash flow from CCV 710.8 365.7 345.1 operations during 2005 was comprised primarily of net income of $171.1 million, adjusted for depreciation and amortization of $78.4 million, Cooper Compression 449.8 369.3 80.5 $34.0 million of tax benefit from employee stock option exercises, deferred taxes and other non-cash charges and $63.2 million of working capital decreases. The changes in working capital comprised an $80.7 million increase in accounts receivable, a $137.4 million increase in inventories, a $ 3,461.7 $ 2,009.4 $ 1,452.3 $255.2 million increase in accounts payable and accrued liabilities and a $26.1 million decrease in other assets and liabilities, net. The increase in accounts receivable was primarily related to higher sales across all segments. The increase in inventories was primarily caused by the additional Orders for 2005 were $3.462 billion, an increase of 72.3% from $2.009 billion in 2004. Cameron’s orders for 2004 were $2.301 billion, an materials received to support the increased production requirements associated with the growth in Cameron and CCV’s backlog during 2005. increase of 80.6% from 2004 orders of $1.274 billion. Drilling orders increased 108.9%, subsea orders increased 121.9%, surface orders increased The increase in accounts payable and accrued liabilities is primarily attributable to a $152.7 million increase in progress payments and cash 45.9% and orders in the oil and gas separation market increased 44.0% for the year ended December 31, 2005. The increase in drilling orders advances from customers. The decrease in other assets and liabilities, net, is largely attributable to an increase in the Company’s accrual for current was across all geographic regions and included a $53.1 million order from a customer in the Eastern Hemisphere for a subsea drilling package as income taxes due, particularly in the United Kingdom and Canada. well as other large orders in this region and in the Asia Pacific/Middle East region. Additionally, strong demand in the Gulf of Mexico and higher rig During 2005, the Company’s investing activities consumed $400.6 million of cash as compared to $192.3 million during 2004. The most counts positively impacted orders in the Western Hemisphere. Subsea orders were primarily impacted by a $364.4 million order for equipment significant components of cash flow consumed in investing activities for 2005 were the NuFlo Acquisition and the Dresser Flow Control to be used for Total's AKPO project offshore West Africa as well as a number of other smaller orders. Surface orders were up in all regions Acquisition, which consumed $317.4 million, and the purchase of capital equipment, which consumed $77.5 million. primarily due to strong worldwide demand caused by higher commodity prices. In addition, the full-year impact of businesses acquired as part of During 2005, the Company’s financing activities generated $192.5 million of cash, as compared to the consumption of $70.8 million of cash in the PCC Acquisition in late 2004 added approximately $21.9 million to the growth in surface orders during 2005. The increase in orders for oil 2004. Cash flow from financing activities primarily reflects $219.0 million in proceeds from option exercises and other items, partially offset by and gas separation applications primarily reflects a $55.8 million order for equipment to be used on a floating storage vessel offshore Brazil. the retirement of $14.8 million of the Company’s existing 1.75% convertible debentures due 2021 and the repurchase of 164,500 pre-split shares CCV’s orders for 2005 were $710.8 million, an increase of 94.4% from 2004 orders of $365.7 million. The increase in orders was attributable to of the Company’s common stock at an average price of $57.11 per share. a 69.4% increase in the distributed products line and a 73.5% increase in the engineered products line. The increase in distributed orders is due During the fourth quarter of 2005 and January 2006, the Company acquired certain businesses of the Flow Control segment of Dresser, Inc. mainly to growth in legacy operations in the United States and Canada resulting from higher rig activity and spending levels resulting from higher for a total of approximately $217.5 million in cash, subject to final adjustment and other matters. This acquisition is the largest in the Company’s commodity prices. The PCC Acquisition in late 2004 also contributed approximately $39.2 million to the increase. The increase in engineered history and will require a substantial amount of integration into CCV’s operations. The Company expects to recognize approximately $55.0 million product line orders reflects $57.0 million of additional orders resulting from the full-year impact of the PCC Acquisition in late 2004 as well as of integration costs in its income statement in 2006 related to these activities, of which approximately $36.0 million will be cash. strength in both the project and day-to-day businesses, particularly in Asia and Latin America. Orders from the Dresser Flow Control Acquisition On a short-term basis, the Company expects to fund expenditures for new capital requirements (estimated to total approximately $130.0 million in late 2005, and the NuFlo Acquisition in May 2005, accounted for approximately $89.1 million of the increase in total orders. to $150.0 million for 2006), integration costs associated with the Dresser Flow Control Acquisition and general liquidity needs from available cash Cooper Compression’s orders for 2005 were $449.8 million, an increase of 21.8% from 2004 orders of $369.3 million. The increase was balances, cash generated from current operating activities and amounts available under its $350.0 million multicurrency revolving credit facility. attributable to a 20.1% increase in orders for the air compression market due primarily to increased demand for engineered machines in Europe On a longer-term basis, the Company has Senior Notes outstanding at December 31, 2005 with a face value of $200.0 million. These notes and the Middle East. Orders in the gas compression market increased 23.1% due to several large orders for Ajax units and higher demand for 32 33
  • 19. are due in April 2007. In addition, at December 31, 2005, the Company has outstanding $238.0 million of 1.5% convertible debentures. Holders of these debentures could require the Company to redeem them beginning in May 2009. The Company believes, based on its current financial Factors That May Affect Financial Condition and Future Results condition, existing backlog levels and current expectations for future market conditions, that it will be able to refinance these debt instruments prior to maturity or will be able to meet the liquidity needs upon maturity with cash generated from operating activities up to that time, existing The acquisition of certain businesses of the Flow Control segment of Dresser, Inc. exposes the Company to integration risk. cash balances on hand and amounts available under its $350.0 million multicurrency revolving credit facility, which expires in 2010. The acquisition of certain businesses from Dresser is the largest acquisition the Company has made and will require a substantial amount of On October 12, 2005, the Company entered into a new $350.0 million five-year multicurrency revolving credit facility, expiring October 12, integration into CCV's operations. To the extent this integration takes longer than expected, costs more than expected or does not result in the 2010, subject to certain extension provisions. The credit facility also allows for the issuance of letters of credit up to the full amount of the operational improvement expected, the Company’s financial performance and liquidity may be negatively impacted. facility. The Company has the right to request an increase in the amount of the facility up to $700 million and may request three one-year The inability of the Company to deliver its backlog on time could affect the Company’s future sales and profitability and its relationships with its customers. extensions of the maturity date of the facility, all subject to lender approval. The facility provides for variable-rate borrowings based on the London At December 31, 2005, backlog reached $2.156 billion, a record level for the Company. The ability to meet customer delivery schedules Interbank Offered Rate (LIBOR) plus a margin (based on the Company’s then-current credit rating) or an alternate base rate. The agreement for this backlog is dependent on a number of factors including, but not limited to, access to the raw materials required for production, an provides for certain fees and requires that the Company maintain a total debt-to-total capitalization ratio of less than 60% during the term of adequately trained and capable workforce, project engineering expertise for certain large projects, sufficient manufacturing plant capacity and the agreement. appropriate planning and scheduling of manufacturing resources. Many of the contracts the Company enters into with its customers require The following summarizes the Company’s significant cash contractual obligations and other commercial commitments for the next five years long manufacturing lead times and contain penalty or incentive clauses relating to on-time delivery. A failure by the Company to deliver in as of December 31, 2005. accordance with customer expectations could subject the Company to financial penalties or loss of financial incentives and may result in damage (in millions) Payments Due by Period to existing customer relationships. Additionally, the Company bases its earnings guidance to the financial markets on expectations regarding the timing of delivery of product currently in backlog. Failure to deliver backlog in accordance with expectations could negatively impact the Less Than 1-3 4-5 After 5 Contractual Obligations Total 1 Year Years Years Years Company’s financial performance and thus cause adverse changes in the market price of the Company’s outstanding common stock and other publicly traded financial instruments. Debt (a) $ 441.6 $ 3.1 $ 200.5 $ 238.0 $ — The Company is embarking on a significant capital expansion program. Capital lease obligations (b) 9.7 3.4 5.4 0.9 — In 2006, the Company expects capital expenditures of approximately $130.0 to $150.0 million to upgrade its machine tools, manufacturing Operating leases 167.2 25.2 30.0 22.7 89.3 technologies, processes and facilities in order to improve its efficiency and address current and expected market demand for the Company’s Purchase obligations (c) 479.2 462.5 16.7 — — products. To the extent this program causes disruptions in the Company’s plants, the Company’s ability to deliver existing or future backlog may Defined benefit pension plan funding 2.0 2.0 — — — be negatively impacted. In addition, if the program does not result in the expected efficiencies, future profitability may be negatively impacted. Total contractual cash obligations $1,099.7 $ 496.2 $ 252.6 $ 261.6 $ 89.3 Execution of subsea systems projects exposes the Company to risks not present in its surface business. This market is significantly different from the Company’s other markets since subsea systems projects are significantly larger in scope and (a) See Note 10 of the Notes to Consolidated Financial Statements for information on redemption rights by the Company, and by holders complexity, in terms of both technical and logistical requirements. Subsea projects (i) typically involve long lead times, (ii) typically are larger in of the Company’s debentures, that would allow for early redemption of the remaining 1.75% Convertible Debentures in 2006 and the 1.5% financial scope, (iii) typically require substantial engineering resources to meet the technical requirements of the project and (iv) often involve the Convertible Debentures in 2009. application of existing technology to new environments and in some cases, new technology. These projects accounted for approximately 7% of (b) Payments shown include interest. total revenues in 2005. During the fourth quarter of 2003, the Company experienced numerous delivery delays on its subsea systems contracts (c) Represents outstanding purchase orders entered into in the ordinary course of business. which negatively impacted 2003’s financial results. To the extent the Company experiences difficulties in meeting the technical and/or delivery requirements of the projects, the Company’s earnings or liquidity could be negatively impacted. As of December 31, 2005, the Company has a (in millions) Amount of Commitment Expiration By Period subsea systems backlog of approximately $583.6 million. Other Unrecorded Commercial Obligations and Off-Balance Total Less Than 1-3 4-5 After 5 Increases in the cost of and the availability of metals used in the Company’s manufacturing processes could negatively impact the Company’s profitability. Sheet Arrangements Commitment 1 Year Years Years Years Beginning in the latter part of 2003 and continuing through 2005, commodity prices for items such as nickel, molybdenum and heavy metal scrap that are used to make the steel alloys required for the Company’s products increased significantly. Certain of the Company’s suppliers have passed Committed lines of credit $ 350.0 $ — $ — $ 350.0 $ — these increases on to the Company. The Company has implemented price increases intended to offset the impact of the increase in commodity Standby letters of credit and bank guarantees 265.6 116.2 76.6 64.9 7.9 prices. However, if customers do not accept these price increases, future profitability will be negatively impacted. In addition, the Company’s Financial letters of credit 1.2 1.2 — — — vendors have informed the Company that lead times for certain raw materials are being extended. To the extent such change negatively impacts Other financial guarantees 5.0 4.6 0.3 0.1 — the Company’s ability to meet delivery requirements of its customers, the financial performance of the Company may suffer. Total commercial commitments $ 621.8 $ 122.0 $ 76.9 $ 415.0 $ 7.9 Changes in the U.S. rig count have historically impacted the Company’s orders. Historically, the Company’s surface and distributed valve products businesses in the U.S. market have tracked changes in the U.S. rig count. The Company secures certain contractual obligations under various agreements with its customers or other parties through the issuance of However, this correlation did not exist in 2003. The average U.S. rig count increased approximately 24% during 2003 while the Company’s U.S. letters of credit or bank guarantees. The Company has various agreements with financial institutions to issue such instruments. As of December surface and U.S. distributed valve orders were essentially flat. The Company believes its surface and distributed valve products businesses were 31, 2005, the Company had $265.6 million of letters of credit and bank guarantees outstanding in connection with the delivery, installation and negatively impacted by the lack of drilling activity in the Gulf of Mexico, fewer completions of onshore high-temperature/high-pressure wells and performance of the Company's products. Additional letters of credit and guarantees are outstanding at December 31, 2005 in connection with a lower level of infrastructure development in the U.S. Such activity typically generates higher orders for the Company as compared to onshore certain financial obligations of the Company. Should these facilities become unavailable to the Company, the Company’s operations and liquidity shallow well activity. The relationship between the Company’s orders in its surface and distributed valve products businesses and changes in the could be negatively impacted. Circumstances which could result in the withdrawal of such facilities include, but are not limited to, deteriorating U.S. rig count returned to a more normal relationship in 2004 and 2005. financial performance of the Company, deteriorating financial condition of the financial institutions providing such facilities, overall constriction in Downturns in the oil and gas industry have had, and may in the future have, a negative effect on the Company’s sales and profitability. the credit markets or rating downgrades of the Company. Demand for most of the Company’s products and services, and therefore its revenues, depend to a large extent upon the level of capital In connection with the Dresser Flow Control Acquisition, the Company is obligated to replace all outstanding standby and financial letters of expenditures related to oil and gas exploration, production, development, processing and transmission. Declines, as well as anticipated declines, in oil credit and other bank guarantees and indemnities of the acquired businesses and Dresser, Inc. (the Dresser Guarantees) within 120 days of closing. and gas prices could negatively affect the level of these activities. Factors that contribute to the volatility of oil and gas prices include the following: The Dresser Guarantees amounted to $77.7 million at closing. In the event the Company is unsuccessful in replacing the Dresser Guarantees, • demand for oil and gas, which is impacted by economic and political conditions and weather; the Company will provide a standby letter of credit to Dresser, Inc. for the full amount of the Dresser Guarantees it was unable to replace and • the ability of the Organization of Petroleum Exporting Countries (quot;OPECquot;) to set and maintain production levels and pricing; will indemnify Dresser Inc. against any losses for any amounts paid under the Dresser Guarantees, including costs and expenses. The amount of • level of production from non-OPEC countries; the Dresser Guarantees has not been included in the table above. • policies regarding exploration and development of oil and gas reserves; 34 35
  • 20. the pension plans. On November 10, 2005, the FASB added a project to its technical agenda to reconsider the present accounting for pensions and other • the political environments of oil and gas producing regions, including the Middle East; postretirement benefits. The Board decided to address the project in two phases. The first phase is an initial improvement phase that is expected • the depletion rates of gas wells in North America; and to be completed by the end of 2006. The second phase is a comprehensive reconsideration of most, if not all, aspects of the existing accounting • advances in exploration and development technology. standards and may take years to complete. As part of the first phase, the Board has tentatively decided that the funded status of defined benefit Fluctuations in worldwide currency markets can impact the Company’s profitability. plans should be recognized in the balance sheet of the plan sponsor effective for years ending after December 15, 2006 and that existing disclosure The Company has established multiple “Centers of Excellence” facilities for manufacturing such products as subsea trees, subsea chokes, subsea requirements should be modified. An exposure draft of the FASB's proposals is expected to be issued in March 2006. At December 31, 2005, production controls and BOPs. These production facilities are located in the United Kingdom and other European and Asian countries. To the the Company had a long-term prepaid pension asset recognized in its financial statements of $133.9 million determined in accordance with FAS 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 87. However, the net funded status of all plans at December 31, 2005 was a liability of approximately $19.0 million. If the FASB's proposal were to pound, the euro and certain Asian currencies, including the Singapore dollar. be adopted in its current form, it could have a significant impact on the Company's net assets as of December 31, 2006. Cancellation of orders could affect the Company’s future sales and profitability. The Company is subject to environmental, health and safety laws and regulations that expose the Company to potential liability. Cooper Cameron accepts purchase orders that may be subject to cancellation, modification or rescheduling. Changes in the economic The Company’s operations are subject to a variety of national and state, provisional and local laws and regulations, including laws and regulations environment and the financial condition of the oil and gas industry could result in customer requests for modification, rescheduling or cancellation relating to the protection of the environment. The Company is required to invest financial and managerial resources to comply with these laws and of contractual orders. The Company is typically protected against financial losses related to products and services it has provided prior to any 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 cancellation. However, if the Company’s customers cancel existing purchase orders, future profitability may be negatively impacted. 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 The Company's international operations expose it to instability and changes in economic and political conditions, foreign currency fluctuations, trade and stringent environmental restrictions could adversely affect the Company. investment regulations and other risks inherent to international business. The risks of international business include the following: Environmental Remediation • volatility in general economic, social and political conditions; The Company has been identified as a potentially responsible party (PRP) with respect to four sites designated for cleanup under the • differing tax rates, tariffs, exchange controls or other similar restrictions; Comprehensive Environmental Response Compensation and Liability Act (CERCLA) or similar state laws. The Company’s involvement at two • changes in currency rates; of the sites has been resolved with de minimus payment. A third is believed to also be at a de minimus level. The fourth site is in Osborne, • inability to repatriate income or capital; Pennsylvania where remediation is complete and remaining costs relate to ongoing ground water treatment and monitoring. • compliance with, and changes in, domestic and foreign laws and regulations that impose a range of restrictions on operations, trade The Company is also engaged in site cleanup under the Voluntary Cleanup Program of the Texas Commission on Environmental Quality at practices, trade partners and investment decisions. From time to time, the Company receives inquiries regarding its compliance former manufacturing locations in Houston and Missouri City,Texas. Additionally, the Company has discontinued operations at a number of other with such laws and regulations. The Company received a voluntary request for information dated September 2, 2005 from the U.S. sites which had previously been in existence for many years. The Company does not believe, based upon information currently available, that Securities and Exchange Commission regarding certain of the Company’s West African activities and has responded to this request. there are any material environmental liabilities existing at these locations. The Company believes it has complied with all applicable laws and regulations with respect to its activities in this region. Additionally, The Company has estimated its liability for environmental exposures, and the Company’s consolidated financial statements included a liability the U.S. Department of Treasury’s Office of Foreign Assets Control made an inquiry regarding U.S. involvement in a United Kingdom balance of $8.8 million for these matters at December 31, 2005. Cash expenditures for the Company’s known environmental exposures are subsidiary’s commercial and financial activity relating to Iran in September 2004 and the U.S. Department of Commerce made an inquiry expected to be incurred over the next twenty years, depending on the site. For the known exposures, the accrual reflects the Company’s best regarding sales by another United Kingdom subsidiary to Iran in February 2005. The Company responded to these two inquiries and estimate of the amount it will incur under the agreed-upon or proposed work plans. The Company’s cost estimates were determined based upon has not received any additional requests related to these matters; the monitoring or remediation plans set forth in these work plans and have not been reduced by possible recoveries from third parties nor are they • reductions in the number or capacity of qualified personnel; and discounted. These cost estimates are reviewed on an annual basis or more frequently if circumstances occur that indicate a review is warranted. The • seizure of equipment. Company’s estimates include equipment and operating costs for remediation and long-term monitoring of the sites. The Company does not believe Cooper Cameron has manufacturing and service operations that are essential parts of its business in developing countries and economically and that the losses for the known exposures will exceed the current accruals by material amounts, but there can be no assurances to this effect. politically volatile areas in Africa, Latin America, Russia and other countries that were part of the Former Soviet Union, the Middle East, and Central and South East Asia. The Company also purchases a large portion of its raw materials and components from a relatively small number of foreign suppliers Environmental Sustainability in developing countries. The ability of these suppliers to meet the Company’s demand could be adversely affected by the factors described above. The Company has pursued environmental sustainability in a number of ways. Processes are monitored in an attempt to produce the least amount Cooper Compression’s aftermarket revenues associated with legacy equipment are declining. of waste. None of the Company’s facilities are rated above Small Quantity Generated status. All of the waste disposal firms used by the Company are During 2005, approximately 35% of Cooper Compression’s revenues came from the sale of replacement parts for equipment that the carefully selected in an attempt to prevent any future Superfund involvements. Actions are taken in an attempt to minimize the generation of hazardous Company no longer manufactures. Many of these units have been in service for long periods of time, and are gradually being replaced. As this wastes and to minimize air emissions. None of the Company’s facilities are classified as sites that generate more than minimal air emissions. Recycling installed base of legacy equipment declines, the Company’s potential market for parts orders is also reduced. In recent years, the Company’s 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 revenues from replacement parts associated with legacy equipment have declined nominally. Company’s sites. The Company has an active health, safety and environmental audit program in place throughout the world. Changes in the equity and debt markets impact pension expense and funding requirements for the Company's defined benefit plans. Market Risk Information The Company accounts for its defined benefit pension plans in accordance with Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions, (SFAS 87), which requires that amounts recognized in the financial statements be determined on an actuarial basis. A The Company is currently exposed to market risk from changes in foreign currency rates and changes in interest rates. A discussion of the significant element in determining the Company’s pension income or expense in accordance with SFAS 87 is the expected return on plan assets. Company’s market risk exposure in financial instruments follows. The assumed long-term rate of return on assets is applied to a calculated value of plan assets which results in an estimated return on plan assets that is included in current year pension income or expense. The difference between this expected return and the actual return on plan assets Foreign Currency Exchange Rates is deferred and amortized against future pension income or expense. Due to the weakness in the overall equity markets from 2000 through A large portion of the Company’s operations consist of manufacturing and sales activities in foreign jurisdictions, principally in Europe, Canada,West 2002, the plan assets earned a rate of return substantially less than the assumed long-term rate of return during this period. As a result, expense Africa, the Middle East, Latin America and the Pacific Rim. As a result, the Company’s financial performance may be affected by changes in foreign associated with the Company’s pension plans has increased significantly from the level recognized historically. currency exchange rates or weak economic conditions in these markets. Overall, the Company generally is a net receiver of Pounds Sterling and Additionally, SFAS 87 requires the recognition of a minimum pension liability to the extent the assets of the plans are below the accumulated Canadian dollars and, therefore, benefits from a weaker U.S. dollar with respect to these currencies. Typically, the Company is a net payer of euros and benefit obligation of the plans. In order to avoid recognizing this minimum pension liability, the Company contributed approximately $13.7 million Norwegian krone as well as other currencies such as the Singapore dollar and the Brazilian real. A weaker U.S. dollar with respect to these currencies to its pension plans during 2005, $18.2 million in 2004 and $18.7 million in 2003. If the Company’s pension assets perform poorly in the future may have an adverse effect on the Company. For each of the last three years, the Company’s gain or loss from foreign currency-denominated or interest rates decrease, the Company may be required to recognize a minimum pension liability in the future or fund additional amounts to 36 37
  • 21. transactions has not been material. Management’s Report on Internal Control Over Financial Reporting In order to mitigate the effect of exchange rate changes, the Company will often attempt to structure sales contracts to provide for collections from The Company maintains a system of internal controls that is designed to provide reasonable but not absolute assurance as to the customers in the currency in which the Company incurs its manufacturing costs. In certain instances, the Company will enter into forward foreign currency reliable preparation of the consolidated financial statements. The Company’s management, including its Chief Executive Officer and exchange contracts to hedge specific large anticipated receipts in currencies for which the Company does not traditionally have fully offsetting local Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls will currency expenditures. While there were no material outstanding foreign currency forward contracts at December 31, 2004, the Company was party to prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, a number of long-term foreign currency forward contracts at December 31, 2005. The purpose of the majority of these contracts was to hedge large but not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the anticipated non-functional currency cash flows on a major subsea contract involving the Company's wholly-owned subsidiary in the United Kingdom. fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent Information relating to the contracts and the fair value recorded in the Company's Consolidated Balance Sheet at December 31, 2005 follows: limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of errors Year of Contract Expiration or fraud, if any, within Cooper Cameron have been detected. (amounts in thousands except exchange rates) 2006 2007 2008 2009 Total The control environment of Cooper Cameron is the foundation for its system of internal controls over financial reporting and is Sell USD/Buy GBP: embodied in the Company’s Standards of Conduct. It sets the tone of the Company’s organization and includes factors such as integrity Notional amount to sell (in U.S. dollars) $ 141.4 $ 65.4 $ 11.0 $ 2.6 $ 220.4 and ethical values. The Company’s internal controls over financial reporting are supported by formal policies and procedures that are Average GBP to USD contract rate 1.8148 1.8091 1.8039 1.7989 1.8124 reviewed, modified and improved as changes occur in the Company’s business or as otherwise required by applicable rule-making bodies. Average GBP to USD forward rate at December 31, 2005 1.7248 1.7311 1.7358 1.7383 1.7274 The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets periodically with members of management, the internal audit department and the independent registered public accountants to review and discuss internal controls Fair value at December 31, 2005 in U.S. dollars $ (10.3) over financial reporting and accounting and financial reporting matters. The independent registered public accountants and internal audit Buy Euro/Sell GBP: report to the Audit Committee and accordingly have full and free access to the Audit Committee at any time. Notional amount to buy (in euros) 28.9 16.0 0.9 — 45.8 Average GBP to EUR contract rate 1.4137 1.3902 1.3693 1.3450 1.4045 Assessment of Internal Control Over Financial Reporting Average GBP to EUR forward rate at December 31, 2005 1.4399 1.4232 1.4068 1.3854 1.4333 Cooper Cameron’s management is responsible for establishing and maintaining adequate internal control (as defined in Rule 13a-15(f) Fair value at December 31, 2005 in U.S. dollars $ (1.1) under the Securities Exchange Act of 1934) over financial reporting. Buy NOK/Sell GBP: Management conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework Notional amount to buy (in Norwegian krone) 37.2 20.7 0.6 — 58.5 established in quot;Internal Control – Integrated Frameworkquot; issued by the Committee of Sponsoring Organizations of the Treadway Average GBP to NOK contract rate 11.4303 11.2999 11.2173 — 11.3817 Commission. This evaluation included a review of the documentation surrounding the Company’s financial controls, an evaluation of the Average GBP to NOK forward rate at December 31, 2005 11.5135 11.4447 11.3542 — 11.4874 design effectiveness of these controls, testing of the operating effectiveness of these controls and a conclusion on this evaluation. Although Fair value at December 31, 2005 in U.S. dollars $ (0.1) there are inherent limitations in the effectiveness of any system of internal controls over financial reporting – including the possibility of the circumvention or overriding of controls – based on management’s evaluation, management has concluded that the Company’s Interest Rates internal controls over financial reporting were effective as of December 31, 2005, based on the framework established in quot;Internal Control The Company is subject to interest rate risk on its long-term fixed interest rate debt and, to a lesser extent, variable interest rate borrowings. Changes – Integrated Frameworkquot;. However, because of changes in conditions, it is important to note that internal control system effectiveness in market interest rates expose the Company's cash flows to risk with regard to its variable-rate debt. Changes in market interest rates expose the fair may vary over time. value of the Company's fixed-rate debt to risk which could result in a gain or loss in the event the Company was required to refinance such debt prior In conducting management’s evaluation of the effectiveness of the Company’s internal controls over financial reporting, the to maturity at a different rate. operations of the Flow Control segment of Dresser, Inc. and of NuFlo Technologies, Inc., both acquired during 2005, were excluded. The Company has performed a sensitivity analysis to determine how market rate changes might affect the fair value of its debt.This analysis is inherently These businesses constituted $407.4 million and $259.5 million of total and net assets, respectively, as of December 31, 2005 and $96.7 limited because it represents a singular, hypothetical set of assumptions.Actual market movements may vary significantly from the assumptions.The effects million and $11.9 million of revenues and pre-tax income, respectively, for the year ended December 31, 2005. of market movements may also directly or indirectly affect the Company’s assumptions and its rights and obligations not covered by the sensitivity analysis. Ernst & Young LLP, an independent registered public accounting firm that has audited the Company's financial statements as of and for Fair value sensitivity is not necessarily indicative of the ultimate cash flow or the earnings effect from the assumed market rate movements. the three-year period ended December 31, 2005, has issued an attestation report on management’s assessment of internal control over An instantaneous one-percentage-point decrease in interest rates across all maturities and applicable yield curves would have increased the fair financial reporting, which is included herein. value of the Company’s fixed-rate debt positions by approximately $15.8 million ($8.7 million at December 31, 2004), whereas a one-percent- age-point increase in interest rates would have decreased the fair value of the Company's fixed rate debt by $14.7 million at December 31, 2005. This analysis does not reflect the effect that increasing or decreasing interest rates would have on other items, such as new borrowings, nor the impact they would have on interest expense and cash payments for interest. The Company manages its debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps as a tool to achieve that goal. The major risks from interest rate derivatives include changes in the interest rates affecting the fair value of such instruments,potential increases in interest expense due to market increases in floating interest rates and the creditworthiness of the counterparties in such transactions. Sheldon R. Erikson In May 2004, the Company entered into interest rate swap agreements on a notional amount of $150.0 million of its senior notes due April Chairman of the Board, 15, 2007 (Senior Notes) to take advantage of short-term interest rates available. Under these agreements, the Company received interest from President and Chief Executive Officer the counterparties at a fixed rate of 2.65% and paid a variable interest rate based on the published six-month LIBOR rate less 82.5 to 86.0 basis points. On June 7, 2005, the Company terminated these interest rate swaps and paid the counterparties approximately $1.1 million, which represented the fair market value of the agreements at the time of termination and was recorded as an adjustment to the carrying value of the related debt. This amount is being amortized as an increase to interest expense over the remaining term of the debt. The company's interest expense was increased by $0.3 million for the year ended December 31, 2005 as a result of the amortization of the termination payment. Franklin Myers The fair value of the Company’s Senior Notes is principally dependent on changes in prevailing interest rates. The fair values of the 1.5% Senior Vice President and Convertible Debentures and the 1.75% Convertible Debentures are principally dependent on both prevailing interest rates and the Company’s Chief Financial Officer current share price as it relates to the initial conversion prices of $34.52 and $47.55 per share, respectively (the conversion prices have been revised to reflect the 2-for-1 stock split effective December 15, 2005). The Company has various other long-term debt instruments of $3.7 million ($4.5 million at December 31, 2004), but believes that the impact 38 39
  • 22. Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Report of Independent Registered Public Accounting Firm Reporting The Board of Directors and Stockholders of The Board of Directors and Stockholders of Cooper Cameron Corporation Cooper Cameron Corporation We have audited the accompanying consolidated balance sheets of Cooper Cameron Corporation (the Company) as of December 31, We have audited management’s assessment, included in the Assessment of Internal Control Over Financial Reporting in the 2005 and 2004, and the related statements of consolidated results of operations, changes in stockholders’ equity, and cash flows for each of accompanying Management’s Report on Internal Control Over Financial Reporting, that Cooper Cameron Corporation maintained the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. effective internal control over financial reporting as of December 31, 2005, based on criteria established in “Internal Control – Integrated Our responsibility is to express an opinion on these financial statements based on our audits. Framework” issued by the Committee of Sponsoring Organizations of theTreadway Commission (the COSO criteria). Cooper Cameron We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit. financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control financial position of Cooper Cameron Corporation at December 31, 2005 and 2004, and the consolidated results of its operations and over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a accepted in the United States. reasonable basis for our opinion. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on criteria established in of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission and principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance our report dated February 24, 2006 expressed an unqualified opinion thereon. of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of Houston,Texas any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in February 24, 2006 conditions, or that the degree of compliance with the policies or procedures may deteriorate. As indicated in the accompanying Assessment of Internal Control Over Financial Reporting included in Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the Flow Control segment of Dresser, Inc. (the Acquired Dresser Businesses) and NuFlo Technologies, Inc. (NuFlo) which are included in the 2005 consolidated financial statements of Cooper Cameron Corporation and constituted $407.4 million and $259.5 million of total and net assets, respectively, as of December 31, 2005 and $96.7 million and $11.9 million of revenues and pre-tax income, respectively, for the year then ended. Both NuFlo and the Acquired Dresser Businesses were acquired by Cooper Cameron Corporation during 2005. Our audit of internal control over financial reporting of Cooper Cameron Corporation also did not include an evaluation of the internal control over financial reporting of NuFlo and the Acquired Dresser Businesses. In our opinion, management’s assessment that Cooper Cameron Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Cooper Cameron Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cooper Cameron Corporation as of December 31, 2005 and 2004, and the related statements of consolidated results of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005 and our report dated February 24, 2006 expressed an unqualified opinion thereon. Houston,Texas February 24, 2006 40 41
  • 23. Consolidated Results of Operations Consolidated Balance Sheets (dollars in thousands, except per share data) (dollars in thousands, except shares and per share data) Year Ended December 31, December 31, 2005 2004 2003 2005 2004 Revenues $ 2,517,847 $ 2,092,845 $ 1,634,346 Assets Cash and cash equivalents $ 361,971 $ 226,998 Costs and expenses: Receivables, net 574,099 424,767 Cost of sales (exclusive of depreciation and amortization shown separately below) 1,796,277 1,560,268 1,181,650 Inventories, net 705,809 454,713 Selling and administrative expenses 381,267 300,124 288,569 Other 86,177 98,846 Depreciation and amortization 78,398 82,841 83,565 Total current assets 1,728,056 1,205,324 Non-cash write-down of technology investment — 3,814 — Interest income (13,060) (4,874) (5,198) Plant and equipment, at cost less accumulated depreciation 525,715 478,651 Interest expense 11,953 17,753 8,157 Goodwill 577,042 415,102 Total costs and expenses 2,254,835 1,959,926 1,556,743 Other assets 267,749 257,353 Income before income taxes and cumulative effect of accounting change 263,012 132,919 77,603 Total assets $ 3,098,562 $ 2,356,430 Income tax provision (91,882) (38,504) (20,362) Income before cumulative effect of accounting change 171,130 94,415 57,241 Liabilities and stockholders’ equity Cumulative effect of accounting change — — 12,209 Current portion of long-term debt $ 6,471 $ 7,319 Accounts payable and accrued liabilities 891,519 516,872 Net income $ 171,130 $ 94,415 $ 69,450 Accrued income taxes 23,871 4,069 Total current liabilities 921,861 528,260 Basic earnings per share:1 Long-term debt 444,435 458,355 Before cumulative effect of accounting change $ 1.55 $ 0.89 $ 0.53 Postretirement benefits other than pensions 40,104 42,575 Cumulative effect of accounting change — — 0.11 Deferred income taxes 39,089 40,388 Net income per share $ 1.55 $ 0.89 $ 0.64 Other long-term liabilities 58,310 58,605 Total liabilities 1,503,799 1,128,183 Diluted earnings per share:1 Commitments and contingencies — — Before cumulative effect of accounting change $ 1.52 $ 0.88 $ 0.52 Cumulative effect of accounting change — — 0.10 Stockholders’ equity: Common stock, par value $.01 per share, 150,000,000 shares Net income per share $ 1.52 $ 0.88 $ 0.62 authorized, 115,629,117 shares issued and outstanding at December 31, 2005 (54,933,658 pre 2-for-1 split shares issued at December 31, 2004) 1,156 549 Prior year earnings per share amounts have been revised to reflect the 2-for-1 stock split effective December 15, 2005. See Note 13 of the Notes Preferred stock, par value $.01 per share, 10,000,000 1 to Consolidated Financial Statements. shares authorized, no shares issued or outstanding — — Capital in excess of par value 1,113,001 948,740 Retained earnings 443,142 272,012 The Notes to Consolidated Financial Statements are an integral part of these statements. Accumulated other elements of comprehensive income 37,464 94,974 Less: Treasury stock at cost, 1,795,843 pre 2-for-1 split shares at December 31, 2004 — (88,028) Total stockholders’ equity 1,594,763 1,228,247 Total liabilities and stockholders’ equity $ 3,098,562 $ 2,356,430 The Notes to Consolidated Financial Statements are an integral part of these statements. 42 43
  • 24. Consolidated Cash Flows Consolidated Changes in Stockholders’ Equity (dollars in thousands) (dollars in thousands) Accumulated Year Ended December 31, other Capital in elements of 2005 2004 2003 Common excess of Retained comprehensive Treasury stock par value earnings income stock Total Cash flows from operating activities: Net income $ 171,130 $ 94,415 $ 69,450 Balance – December 31, 2002 $ 546 $ 949,188 $ 108,147 $ (14,789) $ (1,789) $ 1,041,303 Adjustments to reconcile net income to net cash provided by operating activities: Net income 69,450 69,450 Depreciation 64,018 70,157 68,242 Foreign currency translation 70,908 70,908 Amortization 14,380 12,684 15,323 Minimum pension liability, net of Write-off of unamortized debt issuance costs associated with retired debt — 6,844 — $433 in taxes (699) (699) Non-cash stock compensation expense 2,790 — — Change in fair value of short-term Non-cash write-down of investments 2,458 3,814 — investments, net of $56 in taxes (91) (91) Cumulative effect of accounting change — — (12,209) Comprehensive income 139,568 Tax benefit of employee benefit plan transactions, deferred income taxes and other 34,049 (14,704) (979) Changes in assets and liabilities, net of translation, acquisitions and non-cash items: Purchase of treasury stock (60,694) (60,694) Receivables (80,659) (44,387) 3,212 Common stock issued under stock option Inventories (137,384) 76,207 (59,843) and other employee benefit plans 3 4,447 7,819 12,269 Accounts payable and accrued liabilities 255,213 (9,063) 44,620 Tax benefit of employee stock benefit Other assets and liabilities, net 26,094 (736) (26,199) plan transactions 4,831 4,831 Costs related to forward stock purchase Net cash provided by operating activities 352,089 195,231 101,617 agreements and other (554) (554) Cash flows from investing activities: Balance – December 31, 2003 549 957,912 177,597 55,329 (54,664) 1,136,723 Capital expenditures (77,508) (53,481) (64,665) Net income 94,415 94,415 Acquisitions, net of cash acquired (328,570) (171,032) — Foreign currency translation 40,332 40,332 Purchases of short-term investments — — (154,523) Minimum pension liability, net of Sales of short-term investments — 22,033 157,910 $352 in taxes (568) (568) Other 5,474 10,133 9,172 Change in fair value of short-term Net cash used for investing activities (400,604) (192,347) (52,106) investments and other, net of $0 in taxes (119) (119) Comprehensive income 134,060 Cash flows from financing activities: Loan repayments, net (2,243) (4,919) (496) Purchase of treasury stock (95,325) (95,325) Issuance of long-term senior and convertible debt — 437,862 — Common stock issued under stock option Redemption of convertible debt (14,821) (443,903) — and other employee benefit plans (15,817) 61,961 46,144 Debenture issuance costs — (6,538) — Tax benefit of employee stock benefit Purchase of treasury stock (9,395) (95,325) (48,652) plan transactions 6,645 6,645 Activity under stock option plans and other 218,987 41,979 1,280 Net cash provided by (used for) financing activities 192,528 (70,844) (47,868) Balance – December 31, 2004 549 948,740 272,012 94,974 (88,028) 1,228,247 171,130 171,130 Net income Effect of translation on cash (9,040) 2,842 16,673 Foreign currency translation (49,110) (49,110) Change in fair value of derivatives accounted Increase (decrease) in cash and cash equivalents 134,973 (65,118) 18,316 for as cash flow hedges, net of $3,873 in taxes (8,441) (8,441) Cash and cash equivalents, beginning of year 226,998 292,116 273,800 Other comprehensive income recognized in current year earnings, net of $18 in taxes 41 41 Cash and cash equivalents, end of year $ 361,971 $ 226,998 $ 292,116 Comprehensive income 113,620 Non-cash stock compensation expense 2,790 2,790 The Notes to Consolidated Financial Statements are an integral part of these statements. Purchase of treasury stock (9,395) (9,395) Common stock issued under stock option and other employee benefit plans 31 124,230 97,423 221,684 Tax benefit of employee stock benefit plan transactions 37,817 37,817 Stock split 576 (576) — Balance – December 31, 2005 $ 1,156 $ 1,113,001 $ 443,142 $ 37,464 $ — $ 1,594,763 The Notes to Consolidated Financial Statements are an integral part of these statements. 44 45
  • 25. Notes to Consolidated Financial Statements during the preliminary project stage and post-implementation stage of new software systems projects, including data conversion and training costs, are expensed as incurred. Depreciation and amortization is provided over the estimated useful lives of the related assets, or in the case of assets under capital leases, over the related lease term, if less, using the straight-line method. Depreciation expense for the years ended Note 1: Summary of Major Accounting Policies December 31, 2005, 2004 and 2003 was $64,018,000, $70,157,000 and $68,242,000, respectively. The estimated useful lives of the major classes Company Operations — Cooper Cameron Corporation (the Company or Cooper Cameron) is engaged primarily in the manufacture of oil of property, plant and equipment are as follows: and gas pressure control and separation equipment, including valves, wellheads, controls, chokes, blowout preventers and assembled systems Estimated for oil and gas drilling, production and transmission processes used in onshore, offshore and subsea applications. Cooper Cameron also Useful Lives manufactures and services air and gas compressors and turbochargers. Buildings and leasehold improvements 10 - 40 years Principles of Consolidation — The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. Machinery and equipment 3 - 18 years Investments from 20% to 50% in affiliated companies are accounted for using the equity method. The Company’s operations are organized Office furniture, software and other 3 - 10 years into three separate business segments. These segments are Cameron, Cooper Cameron Valves (CCV) and Cooper Compression. Additional information regarding each segment may be found in Note 14 of the Notes to Consolidated Financial Statements. Goodwill — In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), the Estimates in Financial Statements — The preparation of the financial statements in conformity with generally accepted accounting principles Company reviews goodwill at least annually for impairment at the reporting unit level, or more frequently if indicators of impairment are present. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent The Company conducts its annual review by comparing the estimated fair value of each reporting unit to its respective book value. The estimated assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. fair value for the 2005, 2004 and 2003 annual evaluations was determined using discounted cash flows and other market-related valuation models. Such estimates include, but are not limited to, estimated losses on accounts receivable, estimated warranty costs, estimated realizable value on Certain estimates and judgments are required in the application of the fair value models. Each of the annual evaluations indicated that no impairment excess inventory, contingencies, estimated liabilities for liquidated damages, estimates related to pension accounting, estimated proceeds from of goodwill was required. The Company’s reporting units for SFAS 142 purposes are Cameron, Petreco, CCV, Cooper Energy Services and assets held for sale and estimates related to deferred tax assets. Actual results could differ materially from these estimates. CooperTurbocompressor. Petreco is included in the Cameron segment and Cooper Energy Services and CooperTurbocompressor are combined in the Cooper Compression segment for segment reporting purposes (see Note 14 of the Notes to Consolidated Financial Statements for further Revenue Recognition — The Company generally recognizes revenue once the following four criteria are met: (i) persuasive evidence of an discussion of the Company’s business segments). arrangement exists, (ii) delivery of the equipment has occurred or services have been rendered, (iii) the price of the equipment or service is fixed and determinable and (iv) collectibility is reasonably assured. For certain engineering, procurement and construction-type contracts, Intangible Assets — The Company’s intangible assets, excluding goodwill and unrecognized prior service costs related to its pension plan, which typically include the Company’s subsea systems and processing equipment contracts, revenue is recognized in accordance with Statement represent purchased patents, trademarks, customer lists and other identifiable intangible assets. The majority of other identifiable intangible of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1). Under SOP 81-1, assets are amortized on a straight-line basis over the years expected to be benefited, generally ranging from 5 to 20 years. Such intangibles the Company recognizes revenue on these contracts using a units-of-completion method. Under the units-of-completion method, revenue is are tested for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable. As many recognized once the manufacturing process is complete for each piece of equipment specified in the contract with the customer. This would areas of the Company’s business rely on patents and proprietary technology, it has followed a policy of seeking patent protection both inside include customer inspection and acceptance, if required by the contract. Approximately 13% and 15% of the Company’s revenues for the and outside the United States for products and methods that appear to have commercial significance. The costs of internally developing any years ended December 31, 2005 and 2004, respectively, was recognized under SOP 81-1. intangibles, as well as costs of defending such intangibles, are expensed as incurred. Shipping and Handling Costs — Shipping and handling costs are reflected in the caption entitled “Cost of sales (exclusive of depreciation and Long-Lived Assets — In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal amortization shown separately below)” in the accompanying Consolidated Results of Operations statement. of Long-Lived Assets (SFAS 144), long-lived assets, excluding goodwill and indefinite-lived intangibles, to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be Cash Equivalents — For purposes of the Consolidated Cash Flows statement, the Company considers all investments purchased with original recoverable. For long-lived assets to be held and used, the Company bases its evaluation on impairment indicators such as the nature of the maturities of three months or less to be cash equivalents. assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or Short-term Investments — Investments in available for sale marketable debt and equity securities are carried at fair value, based on quoted factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the market prices. Differences between cost and fair value are reflected as a component of accumulated other elements of comprehensive income asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash flow until such time as those differences are realized. The basis for computing realized gains or losses is the specific identification method. The analysis of the asset at the lowest level for which identifiable cash flows exist. If an impairment has occurred, the Company recognizes a loss realized gains on short-term investments included in the Consolidated Results of Operations were $0, $0 and $278,000 for the years ended for the difference between the carrying amount and the fair value of the asset. Assets are classified as held for sale when the Company has December 31, 2005, 2004 and 2003, respectively. If the Company determines that a loss is other than temporary, such loss will be charged a plan for disposal of such assets and those assets meet the held for sale criteria contained in SFAS 144 and are stated at estimated fair value to earnings. less estimated costs to sell. Allowance for Doubtful Accounts — The Company maintains allowances for doubtful accounts for estimated losses that may result from the Product Warranty — Estimated warranty expense is accrued either at the time of sale based upon historical experience or, in some cases, when inability of its customers to make required payments. Such allowances are based upon several factors including, but not limited to, historical specific warranty problems are encountered. Adjustments to the recorded liability are made periodically to reflect actual experience. experience and the current and projected financial condition of specific customers. Contingencies — The Company accrues for costs relating to litigation, including litigation defense costs, claims and other contingent matters, Inventories — Aggregate inventories are carried at cost or, if lower, net realizable value. On the basis of current costs, 42% of inventories including tax contingencies and liquidated damage liabilities, when such liabilities become probable and reasonably estimable. Such estimates may be at December 31, 2005 and 53% at December 31, 2004 are carried on the last-in, first-out (LIFO) method. The remaining inventories, which based on advice from third parties or on management’s judgment, as appropriate. Revisions to contingent liability reserves are reflected in income are located outside the United States and Canada, are carried on the first-in, first-out (FIFO) method. The Company provides a reserve for its in the period in which different facts or information become known or circumstances change that affect our previous assumptions with respect inventory for estimated obsolescence or excess quantities on hand equal to the difference between the cost of the inventory and its estimated to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of contingent liabilities may be materially different from previous realizable value. During 2005 and 2004, the Company revised its estimates of realizable value on certain of its excess inventory. The impact of estimates and could require adjustments to the estimated reserves to be recognized in the period such new information becomes known. these revisions was to increase the required reserve as of December 31, 2005 and 2004 by $9,900,000 and $6,551,000, respectively. During Income Taxes — The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the 2005, 2004 and 2003, the Company reduced its LIFO inventory levels. These reductions resulted in a liquidation of certain low-cost inventory expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Income layers. As a result, the Company recorded non-cash LIFO income of $4,033,000, $9,684,000 and $15,932,000 for the years ended December 31, tax expense includes U.S. and foreign income taxes, including U.S. federal taxes on undistributed earnings of foreign subsidiaries to the extent 2005, 2004 and 2003, respectively. such earnings are planned to be remitted. Taxes are not provided on the translation component of comprehensive income since the effect Plant and Equipment — Property, plant and equipment, both owned and under capital lease, is carried at cost. Maintenance and repairs are of translation is not considered to modify the amount of the earnings that are planned to be remitted. The Company records a valuation expensed as incurred. The cost of renewals, replacements and betterments is capitalized. The Company capitalizes software developed or allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized considering future taxable income and obtained for internal use. Accordingly, the cost of third-party software, as well as the cost of third-party and internal personnel that are directly ongoing prudent and feasible tax planning strategies. involved in application development activities, are capitalized during the application development phase of new software systems projects. Costs 46 47
  • 26. Environmental Remediation and Compliance — Environmental remediation and postremediation monitoring costs are accrued when such Foreign Currency — For most subsidiaries and branches outside the U.S., the local currency is the functional currency. In accordance with obligations become probable and reasonably estimable. Such future expenditures are not discounted to their present value. Statement of Financial Accounting Standards No. 52, Foreign Currency Translation, the financial statements of these subsidiaries and branches are translated into U.S. dollars as follows: (i) assets and liabilities at year-end exchange rates; (ii) income, expenses and cash flows at average Pension and Postretirement Benefits Accounting — The Company accounts for its defined benefit pension plans in accordance with Statement of exchange rates; and (iii) stockholders’ equity at historical exchange rates. For those subsidiaries for which the local currency is the functional Financial Accounting Standards No. 87, Employers' Accounting for Pensions (SFAS 87) and its postretirement health and life insurance benefits in currency, the resulting translation adjustment is recorded as a component of accumulated other elements of comprehensive income in the accordance with Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions accompanying Consolidated Balance Sheets. (SFAS 106), both of which require that amounts recognized in the financial statements be determined on an actuarial basis. The Company makes For certain other subsidiaries and branches, operations are conducted primarily in currencies other than the local currencies, which are certain assumptions in calculating the amounts recognized in the Company's financial statements taking into account current investment yields therefore the functional currency. Non-functional currency monetary assets and liabilities are remeasured at year-end exchange rates. Revenue, on high-grade corporate bonds (discount rate), external market indicators (inflation rate, expected rate of return on plan assets, health care cost expense and gain and loss accounts of these foreign subsidiaries and branches are remeasured at average exchange rates. Non-functional trend rate and rate of compensation increase), the Company's compensation strategy (rate of compensation increase), asset allocation strategies currency non-monetary assets and liabilities, and the related revenue, expense, gain and loss accounts are remeasured at historical rates. (expected rate of return on plan assets) and actual plan experience (expected rate of return on plan assets, retirement and mortality rates). Such Foreign currency gains and losses arising from transactions denominated in a currency other than the functional currency of the entity assumptions are reviewed at least annually. involved are included in income. The effects of foreign currency transactions were gains (losses) of $2,717,000, $(1,982,000) and $5,716,000 Stock-Based Compensation — At December 31, 2005, the Company had four stock-based employee compensation plans, which are described for the years ended December 31, 2005, 2004 and 2003, respectively. in further detail in Note 9 of the Notes to Consolidated Financial Statements. Through December 31, 2005, the Company has measured Reclassifications and Revisions — Certain prior year amounts have been reclassified to conform to the current year presentation. Prior period compensation expense for its stock-based compensation plans using the intrinsic value method. Beginning January 1, 2006, compensation earnings per share amounts, shares utilized in the calculation of prior period earnings per share and activity during the three-year period ended expense for the Company's stock-based compensation plans will be measured using the fair value method required by Statement of Financial December 31, 2005 relating to employee stock options outstanding have been revised to reflect the 2-for-1 split of the Company's common Accounting Standards No. 123 (revised 2004), Share-Based Payments (SFAS 123R), which is described in further detail below. The following stock effective December 15, 2005. table illustrates the effect on net income and earnings per share if the Company had used the alternative fair value method required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to recognize stock-based employee compensation Cumulative Effect of Accounting Change — In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Accounting expense based on the number of shares that vest in each period. Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150), which became effective for the Company as of the beginning of the third quarter of 2003. SFAS 150 affected the Company’s accounting for its two forward Year Ended December 31, purchase agreements, then outstanding, covering 1,006,500 pre-split shares of the Company’s common stock. Prior to the adoption of SFAS 150, (dollars in thousands, except per share data) 2005 2004 2003 these agreements were treated as permanent equity and changes in the fair value of these agreements were not recognized. Upon the adoption of SFAS 150, the Company recorded these agreements as an asset at their estimated fair value of $12,209,000. This amount has been reflected Net income, as reported $171,130 $ 94,415 $ 69,450 as the cumulative effect of an accounting change in the Company’s consolidated results of operations. There was no tax expense associated Add: Stock compensation expense included in net income 1,816 — — with this item as the gain is not taxable. The Company terminated these forward contracts effective August 14, 2003 by paying the counterparty Deduct: Total stock-based employee compensation expense approximately $37,992,000 to purchase the shares covered by these agreements. These shares were reflected as treasury stock in the Company’s determined under the fair value method for all awards, net of tax (11,913) (24,818) (23,093) consolidated balance sheet at December 31, 2003 at an amount equal to the cash paid to purchase the shares plus the estimated fair value of the agreements. This amount aggregated $50,034,000. The change in the fair value of the forward purchase agreements from July 1, 2003 to Pro forma net income $ 161,033 $ 69,597 $ 46,357 August 14, 2003, which was a loss of $167,000, was recognized in the Company’s consolidated results of operations. Earnings per share:1 Recently Issued Accounting Pronouncements — In November 2004,the FASB issued Statement of Financial Accounting Standards No.151,Inventory Basic - as reported $1.55 $0.89 $0.64 Costs (SFAS 151). SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company believes there Basic - pro forma $1.45 $0.65 $0.43 will be no material effect on its consolidated financial position, results of operations or cash flows upon adoption of this statement. In December 2004, the FASB issued SFAS 123R, which requires that all share-based payments to employees, including grants of employee Diluted - as reported $1.52 $0.88 $0.62 stock options, be recognized over their vesting periods in the income statement based on their estimated fair values. SFAS 123R is effective Diluted - pro forma $1.41 $0.64 $0.42 at the beginning of the first fiscal year beginning after June 15, 2005. Prior year amounts have been revised to reflect the 2-for-1 stock split effective December 15, 2005. 1 Although the Company has not completed its analysis of the impact of SFAS 123R, the Company currently estimates that it will recognize approximately $0.10 per diluted share of equity- and option-based compensation expense for 2006 (unaudited), assuming the Company During the second quarter of 2004, the Company’s Board of Directors accelerated the vesting on 622,262 pre-split option shares previously elects the modified prospective transition alternative. However, this estimate may increase or decrease materially once the Company granted to employees of the Company in an effort to minimize the impact of the Financial Accounting Standards Board’s Exposure Draft completes its analysis of the impact of SFAS 123R. entitled “Share-Based Payments” (see “Recently Issued Accounting Pronouncements” below relating to the final issued standard). Although this action established a new measurement date for these options under the intrinsic value method, there was no compensation expense Note 2: Plant Closing, Business Realignment and Other Related Costs associated with this action since the exercise price related to the accelerated options was above the fair market value of the Company’s Plant closing, business realignment and other related costs by segment during the years ended December 31, 2004 and 2003 were as follows: common stock on the day the acceleration was effective. However, approximately $10,365,000 of compensation expense under the fair Year Ended December 31, value method was accelerated as a result of this action and has been reflected in the above pro forma table as additional compensation expense for the year ended December 31, 2004. (dollars in thousands) 2004 2003 Derivative Financial Instruments — The Company recognizes all derivative financial instruments as assets and liabilities and measures them Amounts included in selling and administrative expenses: at fair value. Under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities Cameron $ 4,100 $ 5,784 (SFAS 133), hedge accounting is only applied when the derivative is deemed highly effective at offsetting changes in anticipated cash flows of CCV 1,426 — Cooper Compression 570 3,137 the hedged item or transaction. Changes in fair value of derivatives that are designated as cash flow hedges are deferred in accumulated other Corporate — 5,652 comprehensive income until the underlying transactions are recognized in earnings, at which time any deferred hedging gains or losses are also recorded in earnings on the same line as the hedged item. Any ineffective portion of the change in the fair value of a derivative used Total costs $ 6,096 $ 14,573 as a cash flow hedge is recorded in earnings as incurred. The Company may at times also use forward contracts to hedge foreign currency assets and liabilities. These contracts are not designated as hedges under SFAS 133. Therefore, the change in fair value of these contracts are recognized in earnings as they occur and offset gains or losses on the related asset or liability. 48 49
  • 27. During 2004, the Company’s selling and administrative expenses included $6,096,000 of severance costs, primarily related to a workforce approximately $6,700,000 in cash and a note payable for $500,000. The Unicel acquisition expanded the product offering of Petreco. reduction program at Cameron, which was completed as of December 31, 2004. Unicel's results are included in the Company's consolidated financial statements for the period subsequent to the acquisition date. Goodwill During 2003, the Company’s selling and administrative expenses included plant closing, business realignment and other related costs totaling recorded from the Unicel acquisition totaled approximately $4,330,000 at December 31, 2005, most of which will be deductible for income $14,573,000. This amount was comprised of (i) $6,181,000 for employee severance at Cameron and at Cooper Compression , (ii) $1,240,000 tax purposes. of other plant closure costs at Cooper Compression related to the closure of 13 facilities announced in the fourth quarter of 2002, (iii) On February 27, 2004, the Company acquired one hundred percent of the outstanding stock of Petreco International Inc. (Petreco), a $4,646,000 related to the Company’s unsuccessful efforts to acquire a certain oil service business, (iv) $1,006,000 related to the Company’s Houston-based supplier of oil and gas separation products, for approximately $89,922,000, net of cash acquired and debt assumed. Petreco international tax restructuring activities, which were begun in 2002 and (v) $1,500,000 related to a litigation award associated with the use of provides highly engineered, custom processing products to the oil and gas industry worldwide and provides the Company with additional certain intellectual property obtained in connection with a previous acquisition. product offerings that are complementary to its existing products. Petreco's results are included in the Company's consolidated financial The number of employees terminated as a result of the above actions were approximately 406 and 266 in 2004 and 2003, respectively. statements for the period subsequent to the acquisition date. Total goodwill recorded as a result of the Petreco acquisition was approximately A summary of the impact during 2005 on various liability accounts associated with the aforementioned actions taken follows: $74,325,000 at December 31, 2005, most of which will not be deductible for income tax purposes. Adjustments Note 4: Receivables Balance at to Accruals Translation Beginning Through Cash and Balance at Receivables consisted of the following: (dollars in thousands) of Year Earnings Disbursements Other End of Year December 31, Severance $ 238 $ (5) $ (233) $ — $ — (dollars in thousands) 2005 2004 Facility closure 3,524 2,580 (2,688) 375 3,791 Trade receivables $ 560,638 $ 414,150 Retained liabilities from sale of Rotating business 1,469 — (307) (150) 1,012 Other receivables 23,236 15,130 Environmental 3,537 1,010 (191) (606) 3,750 Allowance for doubtful accounts (9,775) (4,513) Total $ 8,768 $ 3,585 $ (3,419) $ (381) $ 8,553 Total receivables $ 574,099 $ 424,767 Note 3: Acquisitions Note 5: Inventories On September 1, 2005, the Company announced it had agreed to acquire substantially all of the businesses included within the Flow Control Inventories consisted of the following: segment of Dresser, Inc. (the Dresser Flow Control Acquisition). On November 30, 2005, the Company completed the acquisition of all of December 31, these businesses other than a portion of the business which was acquired on January 10, 2006. Total acquisition cost for the businesses, which will expand the Company's valves product line, was approximately $217,483,000 in cash and assumed debt. The acquired operations serve (dollars in thousands) 2005 2004 customers in the worldwide oil and gas production, pipeline and process markets and have been included in the Company's consolidated Raw materials $ 97,035 $ 63,674 financial statements for the period subsequent to the acquisition in the CCV segment. Work-in-process 214,730 119,073 A preliminary purchase price allocation for the Dresser Flow Control Acquisition resulted in goodwill of approximately $83,673,000 at Finished goods, including parts and subassemblies 498,938 346,247 December 31, 2005, less than one-half of which is currently estimated to be deductible for income tax purposes. The purchase price allocation Other 3,408 2,984 is subject to adjustment as the Company is awaiting a significant amount of additional information relating to the fair value of Dresser's assets 814,111 531,978 and liabilities. Additionally, the Company expects to finalize a working capital settlement with Dresser during 2006. In connection with Excess of current standard costs over LIFO costs (37,829) (29,487) the integration of the businesses into CCV, the Company anticipates closing certain facilities, relocating other operations and involuntarily Allowance for obsolete and excess inventory (70,473) (47,778) terminating or relocating employees of the acquired businesses, most of which will occur in 2006. Such costs will be accrued or expensed as incurred. Total inventories $ 705,809 $ 454,713 On May 11, 2005, the Company acquired one hundred percent of the outstanding stock of NuFlo Technologies, Inc. (NuFlo), a Houston- based supplier of metering and related flow measurement equipment, for approximately $121,294,000 in cash and assumed debt, including Note 6: Plant and Equipment, Goodwill and Other Assets an additional payment during the third quarter of 2005 reflecting additional working capital acquired. NuFlo’s results are included in the Company’s consolidated financial statements for the period subsequent to the acquisition date in the CCV segment. A preliminary purchase Plant and equipment consisted of the following: price allocation for the NuFlo acquisition resulted in the addition of approximately $75,402,000 of goodwill for the period ended December 31, December 31, 2005, most of which will not be deductible for income tax purposes. The purchase price allocation is subject to adjustment, as the Company (dollars in thousands) 2005 2004 is awaiting additional information related to the fair value of NuFlo’s assets and liabilities. Land and land improvements $ 36,229 $ 36,832 Also, during 2005, the Company made three small product line acquisitions.Two of the acquisitions, totaling $10,118,000, were complementary Buildings 220,315 219,764 to the current product offerings in the Cameron segment. One acquisition in the amount of $1,022,000, plus certain additional amounts that Machinery and equipment 587,967 563,824 have been deferred for annual payout over a three-year period ending January 5, 2008, was incorporated into the CCV segment. The results Tooling, dies, patterns, etc. 55,383 55,182 of the acquired entities have been included in the Company's consolidated financial statements for the period subsequent to the respective Office furniture & equipment 93,919 86,861 acquisition dates. Total goodwill recorded as a result of these acquisitions amounted to $6,648,000, the majority of which will be deductible Capitalized software 83,221 76,903 for income tax purposes. Assets under capital leases 20,754 18,917 On November 29, 2004, the Company acquired certain businesses of the PCC Flow Technologies segment of Precision Castparts Corp. All other 14,555 14,830 (PCC), for approximately $79,668,000, net of cash acquired and debt assumed, subject to adjustment based upon the actual net assets of Construction in progress 35,079 21,960 the businesses at the acquisition date. The operations acquired serve customers in the surface oil and gas production, pipeline and process 1,147,422 1,095,073 markets. The results of the PCC entities acquired are included in the Company’s consolidated financial statements for the period subsequent Accumulated depreciation (621,707) (616,422) to the acquisition date. Goodwill recorded at December 31, 2005 for the PCC acquisition totaled approximately $17,313,000, most of which Total plant and equipment $ 525,715 $ 478,651 will not be deductible for income tax purposes. On July 2, 2004, the Company acquired the assets of Unicel, Inc. (Unicel), a Louisiana-based supplier of oil separation products, for 50 51
  • 28. Changes in goodwill during 2005 were as follows: Activity during the year associated with the Company’s product warranty accruals was as follows (dollars in thousands): Cooper (dollars in thousands) Cameron CCV Compression Total Warranty Charges Balance Effects of Provisions During Against Translation Balance Balance at December 31, 2004 $ 223,558 $ 129,322 $ 62,222 $ 415,102 December 31, 2004 Acquisitions the Year Accrual and Other December 31, 2005 Acquisitions: Flow Control segment of Dresser, Inc. — 83,673 — 83,673 $16,481 $5,173 $21,789 $(17,977) $(436) $25,030 NuFlo Technologies, Inc. — 75,402 — 75,402 Other acquisitions 5,926 722 — 6,648 Note 8: Employee Benefit Plans Finalization of prior year acquisition adjustments: PCC Flow Technologies 8,465 (1,384) — 7,081 Total net benefit plan expense associated with the Company’s defined benefit pension and postretirement benefit plans consisted of the following: Unicel (1,372) — — (1,372) Postretirement Petreco 7,540 — — 7,540 Pension Benefits Benefits Translation and other (14,185) (2,847) — (17,032) (dollars in thousands) 2005 2004 2003 2005 2004 2003 Balance at December 31, 2005 $ 229,932 $ 284,888 $ 62,222 $ 577,042 Service cost $ 7,574 $ 7,036 $ 6,597 $ 7 $ 12 $ 11 Interest cost 22,215 21,255 19,842 1,502 2,601 3,118 Other assets consisted of the following: Expected return on plan assets (28,807) (27,795) (23,440) — — — Amortization of prior service cost (526) (526) (467) (388) (463) (80) December 31, Amortization of losses (gains) and other 9,925 7,988 7,838 (956) 747 — (dollars in thousands) 2005 2004 Total net benefit plan expense $ 10,381 $ 7,958 $ 10,370 $ 165 $ 2,897 $ 3,049 Long-term prepaid benefit costs of defined benefit pension plans $ 133,875 $ 137,086 Deferred income taxes 53,767 61,487 Net benefit plan expense: Intangible assets related to pension plans 101 101 U.S. plans $ 3,155 $ 2,819 $ 5,957 $ 165 $ 2,897 $ 3,049 Other intangibles: Foreign plans 7,226 5,139 4,413 — — — Nonamortizable 8,509 9,565 Gross amortizable 53,316 30,106 Total net benefit plan expense $ 10,381 $ 7,958 $ 10,370 $ 165 $ 2,897 $ 3,049 Accumulated amortization (9,972) (6,833) Other 28,153 25,841 The change in the benefit obligations associated with the Company’s defined benefit pension and postretirement benefit plans consisted of the following: Total other assets $ 267,749 $ 257,353 Postretirement Pension Benefits Benefits Amortization associated with the Company’s capitalized software and other amortizable intangibles (primarily patents, trademarks, customer lists (dollars in thousands) 2005 2004 2005 2004 and other) recorded as of December 31, 2005 is expected to approximate $12,703,000, $12,122,000, $10,686,000, $9,507,000 and $8,530,000 for Benefit obligation at beginning of year $ 414,569 $ 359,521 $ 26,672 $ 42,624 the years ending December 31, 2006, 2007, 2008, 2009 and 2010, respectively. Service cost 7,574 7,036 7 12 Interest cost 22,215 21,255 1,502 2,601 Plan participants’ contributions 910 549 — — Note 7: Accounts Payable and Accrued Liabilities Curtailments — (250) — — Accounts payable and accrued liabilities consisted of the following: Actuarial losses (gains) 22,924 32,462 (998) (14,798) December 31, Exchange rate changes (25,384) 14,943 — — (dollars in thousands) 2005 2004 Benefits paid directly or from plan assets (19,181) (20,947) (2,271) (3,767) Expenses paid from plan assets (730) — — — Trade accounts payable and accruals $ 409,385 $ 252,049 Salaries, wages and related fringe benefits 128,144 89,654 Benefit obligation at end of year $ 422,897 $ 414,569 $ 24,912 $ 26,672 Advances from customers 240,980 88,269 Benefit obligations at end of year: Payroll and other taxes 25,858 22,456 U.S. plans $ 203,017 $ 198,689 $ 24,912 $ 26,672 Product warranty 25,030 16,481 Foreign plans 219,880 215,880 — — Fair value of derivatives 7,688 — Deferred income taxes 6,846 13,505 Benefit obligation at end of year $ 422,897 $ 414,569 $ 24,912 $ 26,672 Product liability 5,552 5,603 Accruals for plant closing, business realignment and other related costs 1,068 5,670 Other 40,968 23,185 The total accumulated benefit obligation for the Company’s defined benefit pension plans was $393,149,000 and $389,762,000 at December 31, 2005 and 2004, respectively. Total accounts payable and accrued liabilities $ 891,519 $ 516,872 52 53
  • 29. Postretirement The change in the plan assets associated with the Company’s defined benefit pension and postretirement benefit plans consisted of the following: Pension Benefits Benefits Postretirement Pension Benefits Benefits (dollars in thousands) 2005 2004 2005 2004 (dollars in thousands) 2005 2004 2005 2004 Balance sheet classification at end of year: Assets recognized: Fair value of plan assets at beginning of year $ 384,788 $ 342,296 $ — $ — U.S. plans $ 74,488 $ 71,021 $ — $ — Actual return on plan assets 37,543 25,853 — — Actuarial gains 9,475 5,010 — — Foreign plans 59,488 66,166 — — Company contributions 13,652 18,210 2,271 3,767 Liabilities recognized: Plan participants’ contributions 910 549 — — U.S. plans (4,224) (3,893) (40,104) (42,575) Exchange rate changes (22,798) 13,250 — — Foreign plans (3,715) (4,256) — — Benefits paid from plan assets (18,898) (20,380) (2,271) (3,767) Accumulated other comprehensive income, net of tax: Expenses paid from plan assets (730) — — — U.S. plans 331 331 — — Foreign plans 1,176 1,176 — — Fair value of plan assets at end of year $ 403,942 $ 384,788 $ — $ — Total recognized $ 127,544 $ 130,545 $ (40,104) $ (42,575) Fair value of plan assets at end of year: U.S. plans $ 201,867 $ 193,790 $ — $ — The weighted-average assumptions associated with the Company’s defined benefit pension and postretirement benefit plans were as follows: Foreign plans 202,075 190,998 — — Postretirement Fair value of plan assets at end of year $ 403,942 $ 384,788 $ — $ — Pension Benefits Benefits 2005 2004 2005 2004 Asset investment allocations for the Company’s main defined benefit pension and postretirement benefit plans in the United States and the Assumptions related to net benefit costs: United Kingdom, which account for approximately 99% of total plan assets, are as follows: Domestic plans: Postretirement Discount rate 5.75% 6.25% 5.75% 6.25% Pension Benefits Benefits Expected return on plan assets 8.5% 8.75% — — 2005 2004 2005 2004 Rate of compensation increase 4.5% 4.5% — — Health care cost trend rate — — 10.0% 11.0% U.S. plan: Measurement date 1/1/2005 1/1/2004 10/1/2004 10/1/2003 Equity securities 65% 62% — — Fixed income debt securities and cash 35% 38% — — International plans: Discount rate 5.0 - 5.5% 5.0 - 5.5% — — U.K. plan: Expected return on plan assets 5.0 - 6.75% 5.5 - 7.5% — — Equity securities 51% 48% — — Rate of compensation increase 2.75 - 4.0% 2.75 - 4.0% — — Fixed income debt securities and cash 49% 52% — — Measurement date 1/1/2005 1/1/2004 — — Assumptions related to end of period benefit obligations: In each jurisdiction, the investment of plan assets is overseen by a plan asset committee whose members act as trustees of the plan and set investment Domestic plans: policy. For the years ended December 31, 2005 and 2004, the investment strategy has been designed to approximate the performance of market indexes. Discount rate 5.75% 5.75% 5.5% 5.75% The actual asset allocations at December 31, 2005 were weighted slightly heavier toward equity securities than the stated targeted allocations. Rate of compensation increase 4.5% 4.5% — — During 2005, the Company made contributions totaling $13,652,000 to the assets of its various defined benefit plans. Minimum contributions for Health care cost trend rate — — 9.0% 10.0% 2006 are currently expected to approximate $2,042,000, assuming no change in the current discount rate or expected investment earnings. Measurement date 12/31/2005 12/31/2004 10/1/2005 10/1/2004 The net assets (liabilities) associated with the Company’s defined benefit pension and postretirement benefit plans recognized on the balance sheet consisted of the following: International plans: Postretirement Discount rate 4.25 - 5.0% 5.0 - 5.5% — — Pension Benefits Benefits Rate of compensation increase 2.75 - 4.0% 2.75 - 4.0% — — (dollars in thousands) 2005 2004 2005 2004 Measurement date 12/31/2005 12/31/2004 — — Plan assets less than benefit obligations at end of year $ (18,955) $ (29,781) $ (24,912) $ (26,672) The expected long-term rates of return on assets used to compute expense for the year ended December 31, 2005 were lowered from Unrecognized net loss (gain) 150,045 164,770 (12,132) (12,455) rates used in 2004 to reflect estimated future investment returns and anticipated asset allocations and investment strategies. Unrecognized prior service cost (2,988) (3,510) (3,060) (3,448) The rate of compensation increase for the domestic plans is based on an age-grade scale ranging from 3.0% to 7.5% with a weighted-aver- Prepaid (accrued) pension cost 128,102 131,479 (40,104) (42,575) age rate of approximately 4.5%. Underfunded plan adjustments recognized: The health care cost trend rate is assumed to decrease gradually from 9.0% to 5.0% by 2010 and remain at that level thereafter. A one- Accrued minimum liability (2,166) (2,542) — — percentage-point change in the assumed health care cost trend rate would have the following effects: Intangible asset 101 101 — — Accumulated other comprehensive income, net of tax 1,507 1,507 — — One-percentage- One-percentage- Net assets (liabilities) recognized on balance sheet at end of year $ 127,544 $ 130,545 $ (40,104) $ (42,575) 54 55
  • 30. (dollars in thousands) point Increase point Decrease and therefore, the Company is eligible for the applicable Federal subsidies. Accordingly, the Company recorded a reduction of $3,668,000 in its postretirement benefit obligation at December 31, 2004 and a reduction in its 2005 postretirement benefit expense of $609,000. Effect on total of service and interest cost components in 2005 $ 78 $ (70) Effect on postretirement benefit obligation as of December 31, 2005 $ 1,419 $ (1,273) Year-end amounts applicable to the Company’s pension plans with projected benefit obligations in excess of plan assets and accumulated benefit obligations in excess of plan assets were as follows: Note 9: Equity Compensation Plans Equity Award Plans Projected Benefit Accumulated Benefit The Company has grants outstanding under four equity compensation plans, only one of which, the 2005 Equity Incentive Plan (2005 Obligation in Excess Obligation in Excess EQIP), is currently available for grants of equity compensation awards to employees and non-employee directors. The number of shares of Plan Assets of Plan Assets authorized by shareholders for use under the 2005 EQIP was the number of authorized shares remaining available under the Company's Long- (dollars in thousands) 2005 2004 2005 2004 term Incentive Plan, as Amended and Restated as of November 2002 (the Long-term Incentive Plan), which expired under its own terms in May Fair value of applicable plan assets $ 202,509 $ 384,788 $ 4,881 $ 4,750 2005, and the Second Amended and Restated 1995 Stock Option Plan for Non-employee Directors (the Non-employee Director Plan), which Projected benefit obligation of applicable plans $ (224,692) $ (414,569) — — was merged into the EQIP at the time of shareholder approval in May 2005. The fourth plan under which there remain grants outstanding is Accumulated benefit obligation of applicable plans — — $ (12,802) $ (12,898) the Broad Based 2000 Incentive Plan (The Broad Based Incentive Plan), which has been terminated. The plans other than the 2005 EQIP are known as the quot;historical plansquot;. Options remain outstanding under the historical plans but no further grants will be made from those plans. The Company sponsors the Cooper Cameron Corporation Retirement Plan (Retirement Plan) covering the majority of salaried U.S. Shareholder approval will be required for any future increases in the amount of shares authorized for use under the 2005 EQIP. employees and certain domestic hourly employees, as well as separate defined benefit pension plans for employees of its U.K. and German The following table summarizes stock option activity for each of the three years ended December 31 (all amounts have been revised to subsidiaries, and several unfunded defined benefit arrangements for various other employee groups. The U.K. defined benefit pension plan reflect the 2-for-1 stock split effective December 15, 2005): was frozen with respect to new entrants effective June 14, 1996, and the Retirement Plan was frozen with respect to most new entrants Number of Shares effective May 1, 2003. Additionally, with respect to the Retirement Plan, the basic credits to participant account balances decreased from 4% of 2005 Equity Broad Based Long-term Non-employee Weighted- compensation below the Social Security Wage Base plus 8% of compensation in excess of the Social Security Wage Base to 3% and 6%, respectively, Incentive Incentive Incentive Director Average and vesting for participants who had not completed three full years of vesting service as of May 1, 2003 changed from a three-year graded vesting Plan Plan Plan Plan Exercise Prices with 33% vested after three years and 100% vested after five years to five-year cliff vesting. Stock options outstanding at December 31, 2002 — 5,602,438 10,205,730 626,940 $22.96 In addition, the Company’s domestic employees who are not covered by a bargaining unit and certain others are also eligible to participate Options granted — 548,092 2,795,472 72,000 $22.13 in the Cooper Cameron Corporation Retirement Savings Plan. Under this plan, employees’ savings deferrals are partially matched in cash Options cancelled — (329,450) (604,312) (131,032) $26.62 and invested at the employees' discretion. Additionally, the Company makes cash contributions for hourly employees who are not covered Options exercised — (195,776) (1,200,074) (12,000) $15.68 under collective bargaining agreements and will make contributions equal to 2% of earnings of new employees hired on or after May 1, 2003, Stock options outstanding at December 31, 2003 — 5,625,304 11,196,816 555,908 $23.16 who are not eligible for participation in the Retirement Plan, based upon the achievement of certain financial objectives by the Company. Options granted — 74,800 1,202,124 72,000 $25.28 The Company’s expense under this plan for the years ended December 31, 2005, 2004 and 2003 amounted to $9,573,000, $8,026,000 and Options cancelled — (182,402) (506,042) (75,480) $27.54 $8,050,000, respectively. In addition, the Company provides savings plans for employees under collective bargaining agreements and, in the case Options exercised — (958,992) (1,819,510) (96,060) $19.10 of certain international employees, as required by government mandate, which provide for, among other things, Company matching contributions Stock options outstanding at December 31, 2004 — 4,558,710 10,073,388 456,368 $23.88 in cash based on specified formulas. Expense with respect to these various defined contribution and government mandated plans for the years ended December 31, 2005, 2004 and 2003 amounted to $15,760,000, $16,213,000 and $12,810,000, respectively. Options granted 1,641,433 — 914,226 12,000 $32.60 Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows: Options cancelled (24,000) (21,196) (229,890) (60,000) $30.03 Options exercised (98,294) (3,432,528) (7,001,928) (132,214) $23.53 Postretirement Stock options outstanding at December 31, 2005 1,519,139 1,104,986 3,755,796 276,154 $27.49 Pension Benefits Benefits (dollars in thousands) U.S. Plans Foreign Plans Weighted-average exercise price of Year ended December 31: options outstanding at December 31, 2005 $35.75 $22.85 $25.55 $26.95 $27.49 2006 $ 13,469 $ 4,121 $ 2,668 2007 $ 14,388 $ 4,306 $ 2,618 Information relating to selected ranges of exercise prices for outstanding and exercisable options at December 31, 2005 was as follows: 2008 $ 13,634 $ 4,478 $ 2,558 Options Outstanding Options Exercisable 2009 $ 16,268 $ 4,653 $ 2,448 2010 $ 15,521 $ 4,676 $ 2,328 Weighted- 2011 - 2015 $ 88,008 $ 25,375 $ 9,928 Number Average Years Weighted- Number Weighted- Range of Outstanding as Remaining on Average Exercisable as Average Exercise Prices of 12/31/2005 Contractual Life Exercise Price of 12/31/2005 Exercise Price Certain of the Company’s employees participate in various domestic employee welfare benefit plans, including medical, dental and prescriptions. Certain employees will receive retiree medical, prescription and life insurance benefits. All of the welfare benefit plans, including $12.09 — $21.38 609,580 3.70 $17.24 593,852 $17.16 those providing postretirement benefits, are unfunded. $21.47 — $21.47 1,302,768 7.87 $21.47 508,404 $21.47 Effective January 1, 2004, various postretirement benefit plans were consolidated to standardize the provisions across all plans and update $21.83 — $25.16 1,161,742 6.02 $24.22 740,019 $23.81 $25.47 — $27.56 944,346 5.15 $27.10 490,346 $26.71 the plan design to control rising costs, which resulted in an actuarial gain of $3,825,000 that is being amortized over ten years. $27.70 — $31.97 773,574 5.39 $29.43 746,774 $29.47 In May 2004, the FASB issued FASB Staff Position 106-2, Accounting and Disclosure Requirements related to the Medicare Prescription $32.35 — $36.50 370,764 2.12 $33.94 370,764 $33.94 Drug, Improvement and Modernization Act of 2003 (FSP 106-2). FSP 106-2 provides accounting and reporting guidance relating to subsidies $36.56 — $36.56 1,105,000 6.86 $36.56 — — available under the Act to companies who have plans providing prescription drug benefits that are considered to be actuarially equivalent to $36.75 — $39.47 324,940 3.83 $38.41 298,940 $38.38 Medicare Part D. During 2004, the Company's actuaries concluded that the Company's plan does provide an actuarially equivalent benefit 56 57
  • 31. $39.97 — $39.97 58,510 2.47 $39.97 58,510 $39.97 discontinued the Cooper Cameron Employee Stock Purchase Plan, effective July 31, 2004, the end of the 2003/2004 plan year. Additionally, $41.21 — $41.21 4,851 5.37 $41.21 4,851 $41.21 the Plan expired under its existing terms on May 1, 2005. Prior to discontinuance and expiration of the Plan, employees had the ability to elect each year to have up to 10% of their annual compensation withheld to purchase the Company’s common stock at a price equal to 85% $12.09 — $41.21 6,656,075 5.76 $27.49 3,812,460 $26.34 of the lower of the beginning-of-plan year or end-of-plan year market price of the stock. Following is the activity under the Employee Stock Purchase Plan prior to discontinuance and expiration (amounts are revised to reflect the 2-for-1 stock split effective December 15, 2005): 2003 / 2004 2002 / 2003 Options with terms of seven years are granted to officers of the Company under the 2005 EQIP with exercise prices equal to the fair value Plan Plan of the Company's common stock at the date of grant and provide for vesting on the first anniversary date following the date of grant in one- Shares purchased by employees 293,700 324,880 third increments each year. Grants made in prior years to officers and other key employees under the Long-term and Broad Based Incentive Average price per share $20.355 $17.925 Plans provided similar terms, except that the options terminated after ten years rather than seven. Additionally, the Company has certain options outstanding that were granted to certain key executives in lieu of salary for years prior to 2003. These options became exercisable at the end of the respective salary period and expire five years after the beginning of the salary period. The Options in Lieu of Salary Program Note 10: Long-term Debt was discontinued effective January 1, 2003. The Company’s debt obligations were as follows: Under a Compensation Program for Non-Employee Directors approved by the Board of Directors in July 2005, non-employee directors December 31, are entitled to receive an initial grant of 6,000 deferred stock units from the 2005 EQIP plan upon first being elected to the Board and a (dollars in thousands) 2005 2004 grant of 4,000 deferred stock units annually thereafter (post-split basis). These units, which have no exercise price and no expiration date, vest in one-fourth increments quarterly over the following year but cannot be converted into common stock until the earlier of termination of Senior notes, net of $805 of unamortized original issue discount and deferred Board service or three years, although Board members have the ability to voluntarily defer conversion for a longer period of time. Additionally, loss on termination of interest rate swaps ($103 at December 31, 2004) $ 199,195 $ 200,473 Board members receive (i) an annual cash retainer of $50,000, (ii) an annual retainer for the Chair of the Audit Committee of $15,000 and Convertible debentures 238,750 253,750 Other debt 3,705 4,475 (iii) an annual retainer for other Committee Chairs of $10,000. These cash retainers may be voluntarily converted into deferred stock units Obligations under capital leases 9,256 6,976 or deferred in cash accounts with the same investment options as those available to employees under the Cooper Cameron Corporation 450,906 465,674 Retirement Savings Plan. Directors are also required to maintain stock ownership in the Company equal to five times the annual retainer, a Current maturities (6,471) (7,319) level to be attained within three years of the program's initiation or upon first being elected to the Board. This program replaced a similar program under the Company's Non-employee Director Plan which provided in prior years for an initial option grant of 12,000 shares upon Long-term portion $ 444,435 $ 458,355 first joining the Board of Directors and an annual option grant of 12,000 shares thereafter (post-split basis). Such options, which had exercise prices equal to the fair value of the Company's common stock at the date of grant, became exercisable one year following the date of grant and generally expire five years following the date of grant. On October 12, 2005, the Company entered into a new $350,000,000 five-year multicurrency revolving credit facility, expiring October 12, During 2005, the Company began issuing restricted stock units to key employees other than officers in place of stock options. The initial 2010, subject to certain extension provisions. The credit facility (all of which was available at December 31, 2005) also allows for the issuance grant to employees at the beginning of the year provided for time-based vesting of one-fourth of the grant on the first and second anniversaries of letters of credit up to the full amount of the facility. The Company has the right to request an increase in the amount of the facility up to of the date of grant with the remaining one-half of the original award vesting on the third anniversary of the date of grant. Unvested portions $700,000,000 and may request three one-year extensions of the maturity date of the facility, all subject to lender approval. The facility provides of the award are cancelled in the event of termination of employment. Subsequent grants of restricted stock after June 30, 2005 provided for for variable-rate borrowings based on the London Interbank Offered Rate (LIBOR) plus a margin (based on the Company's then-current 100% cliff vesting on the third anniversary of the date of grant. A total of 343,400 restricted stock units were granted during 2005 at a fair credit rating) or an alternate base rate. The agreement provides for facility and utilization fees and requires that the Company maintain a total value of $27.69 per share, of which 329,700 remain outstanding at December 31, 2005 after cancellations during the year. The fair value of debt-to-total capitalization ratio of less than 60% during the term of the agreement. The Company was in compliance with all loan covenants restricted stock unit grants is being amortized to income on a straight-line basis over the expected vesting term of the awards. During 2005, as of December 31, 2005. $2,790,000 was recognized as additional compensation expense attributable to the issuance of deferred and restricted stock units. On March 12, 2004, the Company issued senior notes due April 15, 2007 (the Senior Notes) in the aggregate amount of $200,000,000, As of December 31, 2005, 2,336,617 shares were reserved for future grants of options, deferred stock units, restricted stock units and with an interest rate of 2.65%, payable semi-annually on April 15 and October 15. In May 2004, the Company entered into interest rate swap other awards. agreements on a notional amount of $150,000,000 of its Senior Notes to take advantage of short-term interest rates available. Under these Had the Company followed the alternative fair value method of accounting for stock-based compensation, the weighted-average fair value agreements, the Company received interest from the counterparties at a fixed rate of 2.65% and paid a variable interest rate based on the per share of options granted during 2005, 2004 and 2003 would have been $7.88, $6.57 and $7.34, respectively (revised to reflect the 2-for-1 published six-month LIBOR rate less 82.5 to 86.0 basis points. On June 7, 2005, the Company terminated these interest rate swaps and paid stock split effective December 15, 2005). The weighted-average fair value per share of stock purchases under the Employee Stock Purchase the counterparties approximately $1,074,000, which represented the fair market value of the agreements at the time of termination and was Plan during 2003 would have been $7.73 (post-split). The fair values were estimated using the Black-Scholes model with the following recorded as an adjustment to the carrying value of the related debt. This amount is being amortized as an increase to interest expense over weighted-average assumptions: the remaining term of the debt. The company's interest expense was increased by $327,000 for the year ended December 31, 2005 as a Year Ended December 31, result of the amortization of the termination payment. On May 11 and June 10, 2004, the Company issued an aggregate amount of $230,000,000 and $8,000,000, respectively, of twenty-year 2005 2004 2003 convertible debentures due 2024 with an interest rate of 1.5%, payable semi-annually on May 15 and November 15 (the 1.5% Convertible Expected life (in years) 3.0 3.5 3.4 Debentures). The Company has the right to redeem the 1.5% Convertible Debentures anytime after five years at the principal amount plus Risk-free interest rate 4.4% 3.1% 2.6% accrued and unpaid interest, and the debenture holders have the right to require the Company to repurchase the debentures on the fifth, Volatility 27.0% 29.0% 41.8% tenth and fifteenth anniversaries of the issue. The 1.5% Convertible Debentures are convertible into the Company’s common stock at a rate of Dividend yield 0.0% 0.0% 0.0% 28.9714 shares per debenture, or $34.52 per share (on a post-stock split basis). The holders can convert the debentures into the Company’s common stock only under the following circumstances: Further information on the impact on net income and earnings per share of using the alternative fair value method to recognize stock-based • during any quarter in which the sales price of the Company’s common stock exceeds 120% of the conversion price for at least 20 employee compensation expense may be found in Note 1 of the Notes to Consolidated Financial Statements. consecutive trading days in the 30 consecutive trading-day period ending on the last trading day of the immediately preceding quarter; • during any five consecutive trading-day period immediately following any five consecutive trading-day period in which the average Employee Stock Purchase Plan As a result of the issuance of SFAS 123R by the FASB (see Note 1 of the Notes to Consolidated Financial Statements) the Company 58 59
  • 32. trading price for the debentures is less than 97% of the average conversion value of the debentures; (dollars in thousands) 2005 2004 2003 • upon fundamental changes in the ownership of the Company’s common stock, which would include a change of control as defined Income before income taxes: in the debenture agreement. U.S. operations $ 90,930 $ 23,814 $ 21,590 The Company has elected to use the “cash pay” provision with respect to its 1.5% Convertible Debentures for any debentures tendered Foreign operations 172,082 109,105 56,013 for conversion or designated for redemption. Under this provision, the Company will satisfy in cash its conversion obligation for 100% of Income before income taxes $ 263,012 $ 132,919 $ 77,603 the principal amount of any debentures submitted for conversion, with any remaining amount to be satisfied in shares of the Company's common stock. On May 16, 2001, the Company issued two series of convertible debentures with aggregate gross proceeds to the Company of $450,000,000. The first series consisted of twenty-year zero-coupon convertible debentures (the Zero-Coupon Convertible Debentures) The provisions (benefits) for income taxes were as follows: with an aggregate principal amount at maturity of approximately $320,756,000, and was repurchased in May 2004 for $259,524,000, net of Year Ended December 31, unamortized discounts of $61,200,000. The second series consisted of twenty-year convertible debentures in an aggregate amount of $200,000,000, with an interest rate of 1.75%, (dollars in thousands) 2005 2004 2003 payable semi-annually on May 15 and November 15 (the 1.75% Convertible Debentures). The Company has the right to redeem the 1.75% Current: Convertible Debentures anytime after five years at the principal amount plus accrued and unpaid interest, and the debenture holders have the U.S. federal $ 32,906 $ 8,831 $ 4,574 right to require the Company to repurchase the debentures on the fifth, tenth and fifteenth anniversaries of the issue. The 1.75% Convertible U.S. state and local 5,243 1,119 1,032 Debentures are convertible into the Company’s common stock at a rate of 21.0316 shares per debenture, or $47.55 per share (on a post- Foreign 49,118 18,835 20,288 stock split basis). In May 2004, the Company redeemed $184,250,000 of the 1.75% Convertible Debentures. During February 2005, the 87,267 28,785 25,894 Company retired an additional $15,000,000 of the remaining 1.75% Convertible Debentures. The net proceeds from the Senior Notes and the 1.5% Convertible Debentures were used to retire the Company’s Zero-Coupon Deferred: Convertible Debentures and a large portion of the 1.75% Convertible Debentures, as well as for other purposes, including share repurchases. U.S. federal 465 6,046 (293) In connection with the early retirement of the Zero-Coupon Convertible Debentures and the 1.75% Convertible Debentures, the U.S. state and local 70 909 (44) Foreign 4,080 2,764 (5,195) Company recorded a $6,844,000 pre-tax charge to write off the unamortized debt issuance costs associated with these debentures during the second quarter of 2004. This charge has been reflected in the caption entitled “Interest Expense” in the accompanying Consolidated 4,615 9,719 (5,532) Results of Operations. Income tax provision $ 91,882 $ 38,504 $ 20,362 In addition to the above, the Company also has other unsecured and uncommitted credit facilities available to its foreign subsidiaries to fund ongoing operating activities. Certain of these facilities also include annual facility fees. Other debt has a weighted-average interest rate of 2.2% at December 31, 2005 (2.0% at December 31, 2004). The reasons for the differences between the provision for income taxes and income taxes using the U.S. federal income tax rate were as follows: Future maturities of the Company’s debt (excluding capital leases) are approximately $3,126,000 in 2006, $200,524,000 in 2007 and Year Ended December 31, $238,000,000 in 2009. Maturities in 2006 include $750,000 related to the 1.75% Convertible Debentures, which the holders have the right (dollars in thousands) 2005 2004 2003 to require the Company to repurchase on May 18, 2006, and maturities in 2009 include $238,000,000 related to the 1.5% Convertible U.S. federal statutory rate 35.00% 35.00% 35.00% Debentures, which the holders have the right to require the Company to repurchase on May 15, 2009. State and local income taxes 1.36 0.85 1.26 Interest paid during the years ended December 31, 2005, 2004 and 2003 approximated $10,908,000, $16,619,000 and $4,143,000, respectively. Tax exempt income (1.00) (2.13) (5.76) Foreign statutory rate differential (6.04) (8.77) (14.84) Note 11: Leases Change in valuation allowance on deferred tax assets 0.06 0.21 7.08 Nondeductible expenses 1.49 1.77 2.30 The Company leases certain facilities, office space, vehicles and office, data processing and other equipment under capital and operating Foreign income currently taxable in U.S. 1.46 2.11 1.29 leases. Rental expenses for the years ended December 31, 2005, 2004 and 2003 were $20,653,000, $23,157,000 and $21,226,000, respectively. All other 2.60 (0.07) (0.09) Future minimum lease payments with respect to capital leases and operating leases with terms in excess of one year were as follows: Capital Operating Total 34.93% 28.97% 26.24% (dollars in thousands) Lease Payments Lease Payments Total income taxes paid $ 34,941 $ 38,853 $ 16,132 Year ended December 31: 2006 $ 3,420 $ 25,218 2007 3,328 16,747 Components of deferred tax assets (liabilities) were as follows: 2008 2,057 13,267 December 31, 2009 849 11,781 2010 11 10,887 (dollars in thousands) 2005 2004 Thereafter — 89,322 Deferred tax liabilities: Future minimum lease payments 9,665 167,222 Plant and equipment $ (33,289) $ (30,544) Less: amount representing interest (409) — Inventory (46,208) (50,813) Pensions (47,327) (38,884) Lease obligations at December 31, 2005 $ 9,256 $ 167,222 Other (22,752) (23,777) Total deferred tax liabilities (149,576) (144,018) Note 12: Income Taxes Deferred tax assets: The components of income before income taxes were as follows: Postretirement benefits other than pensions 14,387 16,544 Year Ended December 31, 60 61
  • 33. Reserves and accruals 45,135 33,154 employee benefit plans — 1,300,557 1,300,557 Net operating losses and related deferred tax assets 143,739 135,095 Balance - December 31, 2004 54,933,658 (1,795,843) 53,137,815 Other 4,978 49 Purchase of treasury stock — (164,500) (164,500) Total deferred tax assets 208,239 184,842 Stock issued under stock option and other employee benefit plans 3,130,345 1,960,343 5,090,688 Valuation allowance (35,531) (23,860) Effect of stock split on shares outstanding 57,565,114 — 57,565,114 Net deferred tax assets $ 23,132 $ 16,964 Balance - December 31, 2005 115,629,117 — 115,629,117 At December 31, 2005, 10,160,736 shares of unissued Common stock were reserved for future issuance under various employee benefit plans. Preferred Stock During the last three years, certain of the Company’s international operations have incurred losses that have not been tax benefited, while others utilized part of the previously reserved prior year losses. As a result of the foregoing, the valuation allowances established in prior years The Company is authorized to issue up to 10,000,000 shares of preferred stock, par value $.01 per share. At December 31, 2005, no were increased in 2005, 2004 and 2003, respectively, by $150,000, $247,000 and $5,492,000, with a corresponding increase in the Company’s preferred shares were issued or outstanding. Shares of preferred stock may be issued in one or more series of classes, each of which series or income tax expense. In addition, valuation allowances were established to offset the tax benefit of net operating losses and other deferred class shall have such distinctive designation or title as shall be fixed by the Board of Directors of the Company prior to issuance of any shares. tax assets recorded as part of an international acquisition. Further, certain valuation allowances are recorded in the non-U.S. dollar functional Each such series or class shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, currency of the operation and the U.S. dollar equivalent has been adjusted for the effect of translation. The valuation reserves were increased optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions in 2005 by $11,521,000 for these adjustments. providing for the issuance of such series or class of preferred stock as may be adopted by the Board of Directors prior to the issuance of any At December 31, 2005, the Company had U.S. net operating loss carryforwards of approximately $289,000,000 that will expire in 2020 - shares thereof. A total of 1,500,000 shares of Series A Junior Participating Preferred Stock has been reserved for issuance upon exercise of 2023 if not utilized. At December 31, 2005, the Company had net operating loss carryforwards of approximately $35,000,000 and $7,000,000 the Stockholder Rights described below. in Brazil and Germany, respectively, that had no expiration periods. The Company had net operating loss carryforwards of approximately Stockholder Rights Plan $6,000,000 in Romania that will expire in 2007 - 2010 if not utilized and approximately $23,000,000 in Italy, most of which will expire in 2006 - 2010. The Company had a valuation allowance of $35,531,000 as of December 31, 2005 against the net operating loss and other On May 23, 1995, the Company’s Board of Directors declared a dividend distribution of one Right for each then-current and future outstanding carryforwards. Approximately $9,000,000 of this amount will be allocated to reduce goodwill upon any subsequent recognition of the related share of Common stock. Each Right entitles the registered holder to purchase one one-hundredth of a share of Series A Junior Participating tax benefit. The Company has considered all available evidence in assessing the need for the valuation allowance, including future taxable Preferred Stock of the Company, par value $.01 per share, for an exercise price of $300. Unless earlier redeemed by the Company at a price income and ongoing prudent and feasible tax planning strategies. In the event the Company were to determine that it would not be able to of $.01 each, the Rights become exercisable only in certain circumstances constituting a potential change in control of the Company, described realize all or part of its net deferred tax asset in the future, an adjustment to the net deferred tax asset would be charged to income in the below, and will expire on October 31, 2007. period such determination was made. Each share of Series A Junior Participating Preferred Stock purchased upon exercise of the Rights will be entitled to certain minimum preferential The tax benefit that the Company receives with respect to certain stock benefit plan transactions is credited to capital in excess of par value and quarterly dividend payments as well as a specified minimum preferential liquidation payment in the event of a merger, consolidation or other similar does not reduce income tax expense. This benefit amounted to $37,817,000, $6,645,000 and $4,831,000 in 2005, 2004 and 2003, respectively. transaction. Each share will also be entitled to 100 votes to be voted together with the Common stockholders and will be junior to any other The Company considers that all unremitted earnings of its foreign subsidiaries, except certain amounts primarily earned before 2003, to series of Preferred Stock authorized or issued by the Company, unless the terms of such other series provides otherwise. essentially be permanently reinvested. An estimate of these amounts considered permanently reinvested is $473,000,000. It is not practical for Except as otherwise provided in the Plan, in the event any person or group of persons acquire beneficial ownership of 20% or more of the the Company to compute the amount of additional U.S. tax that would be due on this amount. The Company has provided deferred income outstanding shares of Common stock, each holder of a Right, other than Rights beneficially owned by the acquiring person or group (which will taxes on the earnings that the Company anticipates to be remitted. have become void), will have the right to receive upon exercise of a Right that number of shares of Common stock of the Company, or, in certain instances, Common stock of the acquiring person or group, having a market value equal to two times the current exercise price of the Right. Note 13: Stockholders’ Equity Retained Earnings Common Stock Delaware law, under which the Company is incorporated, provides that dividends may be declared by the Company’s Board of Directors from a current year’s earnings as well as from the total of capital in excess of par value plus the retained earnings, which amounted to approximately Under its Amended and Restated Certificate of Incorporation, the Company is authorized to issue up to 150,000,000 shares of Common $1,556,143,000 at December 31, 2005. stock, par value $.01 per share. Effective December 15, 2005, the Company implemented a 2-for-1 split of its common stock in the form of a stock dividend issued to all shareholders at that date. In August 2004, the Company’s Board of Directors approved the repurchase of up to 5,000,000 shares of the Company’s Common stock through the open market or structured purchases, replacing all previous share Note 14: Business Segments repurchase authorizations. The Company’s operations are organized into three separate business segments — Cameron, CCV and Cooper Compression. Changes in the number of shares of the Company’s outstanding stock for the last three years were as follows: Based upon the amount of equipment installed worldwide and available industry data, Cameron is one of the world’s leading providers of Common Treasury Shares systems and equipment used to control pressures and direct flows of oil and gas wells. Cameron’s products include surface and subsea production Stock Stock Outstanding systems, blowout preventers, drilling and production control systems, oil and gas separation equipment, gate valves, actuators, chokes, wellheads, drilling risers and aftermarket parts and services. Based upon the amount of equipment installed worldwide and available industry data, CCV Balance - December 31, 2002 54,566,054 (54,954) 54,511,100 is a leading provider of valves and related systems primarily used to control pressures and direct the flow of oil and gas as they are moved Purchase of treasury stock — (1,251,900) (1,251,900) from individual wellheads through flow lines, gathering lines and transmission systems to refineries, petrochemical plants and industrial centers Stock issued under stock option and other for processing. CCV’s products include gate valves, ball valves, butterfly valves, Orbit valves, rotary process valves, block and bleed valves, employee benefit plans 367,604 176,254 543,858 plug valves, globe valves, check valves, actuators, chokes and aftermarket parts and service. Cooper Compression provides reciprocating and Balance - December 31, 2003 54,933,658 (1,130,600) 53,803,058 centrifugal compression equipment and related aftermarket parts and services for the energy industry and for manufacturing companies and chemical process industries worldwide. Purchase of treasury stock — (1,965,800) (1,965,800) The Company’s primary customers are major and independent oil and gas exploration and production companies, foreign national oil and Stock issued under stock option and other gas companies, engineering and construction companies, drilling contractors, pipeline operators, refiners and other industrial and petrochemical 62 63
  • 34. processing companies. Cooper Compression’s customers also include manufacturers and companies in the air separation, power production change $ 63,364 $ 33,694 $ 10,268 $ (29,723) $ 77,603 and chemical process industries. Capital expenditures $ 40,153 $ 9,664 $ 7,152 $ 7,696 $ 64,665 The Company markets its equipment through a worldwide network of sales and marketing employees supported by agents and distributors Total assets $ 1,233,172 $ 320,982 $ 298,020 $ 288,511 $ 2,140,685 in selected international locations. Due to the extremely technical nature of many of the products, the marketing effort is further supported by a staff of engineering employees. The Company expenses all research and product development and enhancement costs as incurred, or if incurred in connection with a For internal management reporting, and therefore the above segment information, consolidated interest income and expense are treated product ordered by a customer, when the revenue associated with the product is recognized. For the years ended December 31, 2005, 2004 as a Corporate item because short-term investments and debt, including location, type, currency, etc., are managed on a worldwide basis by the and 2003, the Company incurred research and product development costs, including costs incurred on projects designed to enhance or add CorporateTreasury Department. In addition, income taxes are managed on a worldwide basis by the CorporateTax Department and are therefore to its existing product offerings, totaling approximately $34,394,000, $31,849,000 and $28,703,000, respectively. Cameron accounted for 80%, treated as a corporate item. Spending for the Company’s enterprise-wide software upgrade has been reflected as a Corporate capital expenditure 84% and 85% of each respective year’s total costs. since 2001. In connection with the initial implementation of this system in 2002, amortization expense, as well as the associated asset, is being reflected in each segment’s information above for 2005, 2004 and 2003. Summary financial data by segment follows: Geographic revenue by shipping location and long-lived assets related to operations as of and for the years ended December 31 were as follows: For the Year Ended December 31, 2005 Cooper Corporate (dollars in thousands) 2005 2004 2003 (dollars in thousands) Cameron CCV Compression & Other Consolidated Revenues: Revenues $ 1,507,823 $ 625,124 $ 384,900 $ — $ 2,517,847 United States $ 1,365,770 $ 1,016,125 $ 833,935 United Kingdom 326,231 444,134 288,693 Depreciation and amortization $ 43,736 $ 16,787 $ 15,387 $ 2,488 $ 78,398 Other foreign countries 825,846 632,586 511,718 Interest income $ — $ — $ — $ (13,060) $ (13,060) Interest expense $ — $ — $ — $ 11,953 $ 11,953 Total revenues $ 2,517,847 $ 2,092,845 $ 1,634,346 Income (loss) before income taxes and Long-lived assets: cumulative effect of accounting United States $ 655,922 $ 560,088 $ 468,717 change $ 178,939 $ 101,539 $ 26,675 $ (44,141) $ 263,012 United Kingdom 125,763 130,057 126,758 Capital expenditures $ 49,789 $ 13,807 $ 7,269 $ 6,643 $ 77,508 Other foreign countries 373,026 236,547 195,586 Total assets $ 1,575,363 $ 936,443 $ 280,057 $ 306,699 $ 3,098,562 Total long-lived assets $ 1,154,711 $ 926,692 $ 791,061 Note 15: Off-Balance Sheet Risk and Guarantees, Concentrations of Credit Risk and Fair Value of Financial Instruments For the Year Ended December 31, 2004 Cooper Corporate Off-Balance Sheet Risk and Guarantees (dollars in thousands) Cameron CCV Compression & Other Consolidated At December 31, 2005, the Company was contingently liable with respect to $265,568,000 of bank guarantees and standby letters of credit Revenues $ 1,402,796 $ 350,095 $ 339,954 $ — $ 2,092,845 issued on its behalf by major domestic and international financial institutions in connection with the delivery, installation and performance of the Depreciation and amortization $ 51,330 $ 12,197 $ 16,896 $ 2,418 $ 82,841 Company's products under contract with customers throughout the world. The Company was also liable to these financial institutions for financial Interest income $ — $ — $ — $ (4,874) $ (4,874) letters of credit and other guarantees issued on its behalf totaling $6,248,000, which provide security to third parties relating to the Company's Interest expense $ — $ — $ — $ 17,753 $ 17,753 ability to meet specified financial obligations, including payment of leases, customs duties, insurance and other matters. In connection with the Dresser Flow Control Acquisition, the Company is obligated to replace all outstanding standby and financial letters of Income (loss) before income taxes and credit and other bank guarantees and indemnitees of the acquired businesses and Dresser, Inc. (the Dresser Guarantees) within 120 days of closing. cumulative effect of accounting The Dresser Guarantees amounted to $77,673,000 at closing. In the event the Company is unsuccessful in replacing the Dresser Guarantees, the change $ 118,828 $ 37,836 $ 24,627 $ (48,372) $ 132,919 Company will provide a standby letter of credit to Dresser, Inc. for the full amount of the Dresser Guarantees it was unable to replace and will Capital expenditures $ 28,929 $ 13,717 $ 6,853 $ 3,982 $ 53,481 indemnify Dresser Inc. against any losses for any amounts paid under the Dresser Guarantees, including costs and expenses. Total assets $ 1,430,256 $ 404,360 $ 294,624 $ 227,190 $ 2,356,430 The Company's other off-balance sheet risks were not material at December 31, 2005. Concentrations of Credit Risk For the Year Ended December 31, 2003 Apart from its normal exposure to its customers, who are predominantly in the energy industry, the Company had no significant Cooper Corporate concentrations of credit risk at December 31, 2005. The Company typically does not require collateral for its customer trade receivables. (dollars in thousands) Cameron CCV Compression & Other Consolidated Fair Value of Financial Instruments Revenues $ 1,018,517 $ 307,054 $ 308,775 $ — $ 1,634,346 The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, derivative instruments Depreciation and amortization $ 51,211 $ 12,724 $ 17,210 $ 2,420 $ 83,565 and debt instruments. The book values of cash and cash equivalents, trade receivables and trade payables and floating-rate debt instruments Interest income $ — $ — $ — $ (5,198) $ (5,198) are considered to be representative of their respective fair values. Interest expense $ — $ — $ — $ 8,157 $ 8,157 At December 31, 2005, the Company was party to a number of long-term foreign currency forward contracts. The purpose of the majority of the contracts was to hedge large anticipated non-functional currency cash flows on a major subsea contract involving the Company's wholly- Income (loss) before income taxes and cumulative effect of accounting owned subsidiary in the United Kingdom. Information relating to the contracts and the fair value recorded in the Company's Consolidated Balance Sheet (determined based on quoted forward rates) at December 31, 2005 follows: 64 65
  • 35. Note 17: Earnings Per Share Year of Contract Expiration The calculation of basic and diluted earnings per share for each period presented was as follows (prior year amounts have been revised to (amounts in thousands except exchange rates) 2006 2007 2008 2009 Total reflect the 2-for-1 stock split effective December 15, 2005): Sell USD/Buy GBP: Year Ended December 31, Notional amount to sell (in U.S. dollars) $ 141,443 $ 65,406 $ 10,966 $ 2,621 $ 220,436 (amounts in thousands) 2005 2004 2003 Average GBP to USD contract rate 1.8148 1.8091 1.8039 1.7989 1.8124 Income before cumulative effect of accounting change $ 171,130 $ 94,415 $ 57,241 Average GBP to USD forward rate at December 31, 2005 1.7248 1.7311 1.7358 1.7383 1.7274 Cumulative effect of accounting change — — 12,209 Fair value at December 31, 2005 in U.S. dollars $ (10,313) Buy Euro/Sell GBP: Net income 171,130 94,415 69,450 Notional amount to buy (in euros) 28,931 15,965 899 12 45,807 Add back interest on convertible debentures, net of tax — — 5,248 Average GBP to EUR contract rate 1.4137 1.3902 1.3693 1.3450 1.4045 Net income (assuming conversion of convertible debentures) $ 171,130 $ 94,415 $ 74,698 Average GBP to EUR forward rate at December 31, 2005 1.4399 1.4232 1.4068 1.3854 1.4333 Fair value at December 31, 2005 in U.S. dollars $ (1,128) Average shares outstanding (basic) 110,732 106,545 108,806 Buy NOK/Sell GBP: Common stock equivalents 1,475 1,163 1,331 Notional amount to buy (in Norwegian krone) 37,208 20,671 600 — 58,479 Incremental shares from assumed conversion of convertible debentures 401 — 9,464 Average GBP to NOK contract rate 11.4303 11.2999 11.2173 — 11.3817 Average GBP to NOK forward rate at December 31, 2005 11.5135 11.4447 11.3542 — 11.4874 Shares utilized in diluted earnings per share calculation 112,608 107,708 119,601 Fair value at December 31, 2005 in U.S. dollars $ (82) Year Ended December 31, Approximately $7,688,000 of the fair value of these contracts is reflected as a current liability at December 31, 2005 based on the scheduled 2005 2004 2003 expiration of the foreign currency forward contracts. The remainder is included in other long-term liabilities in the Company's Consolidated Balance Sheet at December 31, 2005. The Company has recognized a pre-tax loss in 2005 of approximately $701,000, primarily through Basic earnings per share: reduced revenues, in connection with the ineffectiveness of certain of the hedges in offsetting the foreign currency impact on the related Before cumulative effect of accounting change $1.55 $0.89 $0.53 anticipated foreign currency cash flows. The Company anticipates that approximately $4,371,000 of the fair value loss on these hedges Cumulative effect of accounting change — — 0.11 reported in accumulated other comprehensive income at December 31, 2005 will be reclassified into earnings during 2006 as additional revenues are recognized on the underlying subsea contract. Net income per share $1.55 $0.89 $0.64 The primary portion of the Company’s debt consists of fixed-rate senior notes and convertible debentures. Based on quoted market prices, the book value for this debt at December 31, 2005 was $67,834,000 lower than the fair value. The difference between book value and fair Year Ended December 31, value on the Company’s other fixed-rate debt was not material. Additional information on the Company’s debt may be found in Note 10 of 2005 2004 2003 the Notes to Consolidated Financial Statements. Diluted earnings per share: Note 16: Summary of Noncash Operating, Investing and Financing Activities Before cumulative effect of accounting change $1.52 $0.88 $0.52 Cumulative effect of accounting change — — 0.10 The effect on net assets of noncash operating, investing and financing activities was as follows: Year Ended December 31, Net income per share $1.52 $0.88 $0.62 (dollars in thousands) 2005 2004 Diluted shares and net income used in computing diluted earnings per common share have been calculated using the if-converted method Change in receivables from employees relating to equity issuances from for the Company’s Zero-Coupon Convertible Debentures and the 1.75% Convertible Debentures for the year ended December 31, 2003. stock option plan exercises $ (1,400) $ (189) Tax benefit recognized for certain employee stock benefit plan transactions $ 37,817 $ 6,645 For the years ended December 31, 2005 and 2004, these debentures were anti-dilutive. The Company’s 1.5% Convertible Debentures have Change in fair value of derivatives accounted for as cash flow hedges, net of tax $ (8,441) $ — been included in the calculation of diluted earnings per share for the year ended December 31, 2005, since the market price of the Company's Other $ — $ (69) common stock exceeded the conversion value of the debentures at year-end. See Note 10 of the Notes to Consolidated Financial Statements for further information regarding conversion of theses debentures. Note 18: Accumulated Other Elements of Comprehensive Income 66 67
  • 36. many years. The Company does not believe, based upon information currently available, that there are any material environmental liabilities Accumulated other elements of comprehensive income comprised the following: existing at these locations. At December 31, 2005, the Company’s consolidated balance sheet included a noncurrent liability of $8,780,000 for December 31, environmental matters. (dollars in thousands) 2005 2004 Legal Matters Accumulated foreign currency translation gain $ 47,489 $ 96,600 As discussed in Environmental Matters above, the Company is engaged in site cleanup at a former manufacturing site in Houston, Texas. Accumulated adjustments to record minimum pension liabilities, net of tax (1,507) (1,507) In 2001, the Company discovered that contaminated underground water at this site had migrated to an adjacent residential area. Pursuant Change in fair value of derivatives accounted for as cash flow hedges, net of tax (8,518) (119) to applicable state regulations, the Company notified the affected homeowners. The Company has entered into 21 written agreements with $ 37,464 $ 94,974 residents over the past four years that obligated the Company to either reimburse sellers in the area for the estimated decline in value due to a potential buyer’s concerns that related to the contamination or, in the case of some of these agreements, to purchase the property after an agreed marketing period. Four of these agreements have had no claims made under them as yet. To date, the Company has one property it has purchased that remains unsold, with an appraised value of $1,850,000. In addition, the Company has settled six other property claims by homeowners. The Company has had expenses and losses of approximately $7,600,000 since 2002 related to the various agreements with homeowners. The Company has filed for reimbursement under an insurance policy purchased specifically for this exposure but has not recognized any potential reimbursement in its consolidated financial statements. The Company entered into these agreements for the purpose Note 19: Unaudited Quarterly Operating Results of mitigating the potential impact of the disclosure of the environmental issue. It was the Company's intention to stabilize property values in the affected area to avoid or mitigate future claims. The Company believes it has been successful in these efforts as the number and magnitude Unaudited quarterly operating results were as follows (prior period earnings per share amounts have been revised to reflect the 2-for-1 of claims have declined over time and, while the Company has continued to negotiate with homeowners on a case by case basis, the Company stock split effective December 15, 2005): no longer offers these agreements in advance of sale. There are approximately 150 homes in the affected area with an estimated aggregate 2005 (by quarter) appraised value of $150,000,000. The homeowners that have settled with the Company have no further claims on these properties. An (dollars in thousands, except per share data) 1 2 3 4 unknown number of these properties have sold with no Company support, but with disclosure of the contamination and, therefore, likely Revenues $ 547,888 $ 594,784 $ 636,613 $ 738,562 have no further claims. The Company's financial statements reflect a liability for its estimated exposure under the outstanding agreements Revenues less cost of sales (exclusive of depreciation with homeowners. The Company has not reflected a liability in its financial statements for any other potential damages, if any, related to this and amortization) $ 140,622 $ 171,853 $ 186,785 $ 222,310 matter since the Company is no longer entering into property protection agreements with homeowners in advance of sale. The Company Income from liquidation of LIFO inventory layers has not received any additional significant claims other than the lawsuits discussed below and the Company's remediation efforts are resulting at Cooper Compression $ — $ — $ — $ 4,033 in a lower level of contamination than when originally disclosed to the homeowners. Additionally, the Company is unable to predict future Net income $ 28,591 $ 38,630 $ 49,218 $ 54,691 market values of homes in the affected areas and how potential buyers of such homes may view the underground contamination in making a Earnings per share: purchase decision. Basic $ 0.27 $ 0.35 $ 0.44 $ 0.48 The Company is a named defendant in two lawsuits regarding this contamination. In Valice v. Cooper Cameron Corporation (80th Jud. Dist. Diluted $ 0.26 $ 0.35 $ 0.43 $ 0.47 Ct., Harris County, filed June 21, 2002), the plaintiffs claim that the contaminated underground water has reduced property values and threatens the health of the area residents. The case is filed as a class action. The complaint filed seeks an analysis of the contamination, reclamation and 2004 (by quarter) recovery of actual damages for the loss of property value. The Company is of the opinion that there is no health risk to area residents and (dollars in thousands, except per share data) 1 2 3 4 that the lawsuit essentially reflects concerns over possible declines in property value. Counsel for each of the Company, its insurer and the Valice plaintiffs are currently negotiating a possible settlement alternative under which homeowners in the affected area would be indemnified Revenues $ 462,497 $ 544,633 $ 538,467 $ 547,248 for a loss of property value, if any, due to the contamination upon any sale within a limited timeframe. However, there are still significant Revenues less cost of sales (exclusive of depreciation and amortization) $ 116,758 $ 128,211 $ 143,182 $ 144,426 unresolved issues related to a settlement of this matter including the methodology of quantifying and allocating damages, attorneys’ fees for Plant closing, business realignment and other related costs $ 3,494 $ 562 $ 95 $ 1,945 plaintiffs’ attorneys, agreement on a settlement by all interested parties, a fairness opinion rendered by the Court and the ability of the plaintiffs Income from liquidation of LIFO inventory layers, to obtain approval of the members of the putative class. Absent a settlement with the plaintiffs, the Company does not believe a class would be primarily at Cooper Compression $ — $ — $ 4,319 $ 5,365 certified and thus the Company believes it has no liability to the putative class at this point in time. Therefore, the Company has not recorded Net income $ 17,250 $ 18,683 $ 29,484 $ 28,998 a liability for this possible settlement in its financial statements. Earnings per share: In Kramer v. Cameron Iron Works, Inc., Cooper Industries, Inc., Cooper Cameron Corporation, and Tzunming Hsu and Shan Shan Hsu (190th Basic $ 0.16 $ 0.18 $ 0.28 $ 0.27 Judicial District, Harris County, filed May 29, 2003), the plaintiff purchased one of the homes in the area and alleges a failure by the defendants Diluted $ 0.16 $ 0.17 $ 0.27 $ 0.27 to disclose the presence of contamination and seeks to recover unspecified monetary damages. The Company believes any potential exposure from existing agreements and any settlement of the class action, or, based on its review of the Note 20: Contingencies facts and law, any potential exposure from these, or similar, suits will not have a material adverse effect on its financial condition or liquidity. The Company is subject to a number of contingencies which include environmental matters, litigation and tax contingencies. The Company had been named as a defendant in a suit brought by a purchaser of an option to purchase a parcel of the same former manufacturing site, Silber/I-10 Venture Ltd., f/k/a Rocksprings Ltd. v. Falcon Interests Realty Corp., Cooper Industries Inc. and Cooper Cameron Environmental Matters Corporation (212th Judicial District Court, Galveston County, filed August 15, 2002) that alleged fraud and breach of contract regarding the The Company’s worldwide operations are subject to domestic and international regulations with regard to air, soil and water quality as well environmental condition of the parcel under option. The parties have settled this matter and the case has been dismissed. as other environmental matters. The Company, through its environmental management system and active third party audit program, believes The Company has been named as a defendant in a number of multi-defendant, multi-plaintiff tort lawsuits since 1995, 215 of which have it is in substantial compliance with these regulations. been closed and 236 of which remained open as of December 31, 2005. Of the 215 cases closed, 57 have been by a settlement at a cost The Company has been identified as a potentially responsible party (PRP) with respect to four sites designated for cleanup under the of approximately $22,207 per case. The Company made no settlement payments in the remaining 158 cases. At December 31, 2005, the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) or similar state laws. The Company’s involvement at Company’s consolidated balance sheet included a liability of $3,465,000 for the 236 cases which remain open, which includes legal costs. two of the sites has been resolved with de minimis payment. A third is believed to also be at a de minimis level. The fourth site is Osborne, The Company believes, based on its review of the facts and law, that the potential exposure from the remaining suits will not have a material Pennsylvania (a landfill into which the Cooper Compression operation in Grove City, Pennsylvania deposited waste), where remediation is adverse effect on its financial condition or liquidity. complete and remaining costs relate to ongoing ground water treatment and monitoring.The Company is also engaged in site cleanup under the Voluntary Cleanup Plan of the Texas Commission on Environmental Quality at former manufacturing locations in Houston and Missouri Tax Contingencies City, Texas. Additionally, the Company has discontinued operations at a number of other sites which had previously been in existence for The Company has operations in over 35 countries. As a result, the Company is subject to various tax filing requirements in these countries. 68 69
  • 37. of changes in interest rates in the near term will notData of Cooper Cameron Corporation Selected Consolidated Historical Financial be material to these instruments. Reconciliation of GAAP to Non-GAAP Financial Information The following table sets forth selected historical financial data for the Company for each of the five years in the period ended December Year ended December 31, 2005 31, 2005. This information should be read in conjunction with the consolidated financial statements of the Company and notes thereto included elsewhere in this Annual Report. Cooper Cameron Cooper Corporate (dollars in thousands) Cameron Valves Compression and other Total Year Ended December 31, Income (loss) before (dollars in thousands, except per share data) 2005 2004 2003 2002 2001 income taxes and cumulative effect Income Statement Data: Revenues $ 2,517,847 $ 2,092,845 $ 1,634,346 $ 1,538,100 $ 1,562,899 of accounting change $ 178,939 $ 101,539 $ 26,675 $ (44,141) $ 263,012 Depreciation and amortization 43,736 16,787 15,387 2,488 78,398 Costs and expenses: Interest income — — — (13,060) (13,060) Cost of sales (exclusive of depreciation and Interest expense — — — 11,953 11,953 amortization shown separately below) 1,796,277 1,560,268 1,181,650 1,102,504 1,081,078 Selling and administrative expenses 381,267 300,124 288,569 273,105 251,303 EBITDA $ 222,675 $ 118,326 $ 42,062 $ (42,760) $ 340,303 Depreciation and amortization 78,398 82,841 83,565 77,907 83,095 Non-cash write-down of technology investment — 3,814 — — — EBITDA (as a percent of revenues) 14.8% 18.9% 10.9% N/A 13.5% Interest income (13,060) (4,874) (5,198) (8,542) (8,640) Interest expense 11,953 17,753 8,157 7,981 13,481 Year ended December 31, 2004 Total costs and expenses 2,254,835 1,959,926 1,556,743 1,452,955 1,420,317 Cooper Income before income taxes and cumulative Cameron Cooper Corporate (dollars in thousands) Cameron Valves Compression and other Total effect of accounting change 263,012 132,919 77,603 85,145 142,582 Income tax provision (91,882) (38,504) (20,362) (24,676) (44,237) Income (loss) before income taxes and Income before cumulative effect of cumulative effect accounting change 171,130 94,415 57,241 60,469 98,345 of accounting change $ 118,828 $ 37,836 $ 24,627 $ (48,372) $ 132,919 Cumulative effect of accounting change — — 12,209 — — Depreciation and amortization 51,330 12,197 16,896 2,418 82,841 Net income $ 171,130 $ 94,415 $ 69,450 $ 60,469 $ 98,345 Interest income — — — (4,874) (4,874) Interest expense — — — 17,753 17,753 Basic earnings per share:1 EBITDA $ 170,158 $ 50,033 $ 41,523 $ (33,075) $ 228,639 Before cumulative effect of accounting change $ 1.55 $ 0.89 $ 0.53 $ 0.56 $ 0.91 Cumulative effect of accounting change — — 0.11 — — EBITDA (as a percent of revenues) 12.1% 14.3% 12.2% N/A 10.9% Net income per share $ 1.55 $ 0.89 $ 0.64 $ 0.56 $ 0.91 Year ended December 31, 2003 Diluted earnings per share:1 Before cumulative effect of accounting change $ 1.52 $ 0.88 $ 0.52 $ 0.55 $ 0.87 Cooper Cameron Cooper Corporate Cumulative effect of accounting change — — 0.10 — — (dollars in thousands) Cameron Valves Compression and other Total Net income per share $ 1.52 $ 0.88 $ 0.62 $ 0.55 $ 0.87 Income (loss) before income taxes and cumulative effect Balance Sheet Data (at the end of period): of accounting change $ 63,364 $ 33,694 $ 10,268 $ (29,723) $ 77,603 Total assets $ 3,098,562 $ 2,356,430 $ 2,140,685 $ 1,997,670 $ 1,875,052 Stockholders’ equity $ 1,594,763 $ 1,228,247 $ 1,136,723 $ 1,041,303 $ 923,281 Depreciation and amortization 51,211 12,724 17,210 2,420 83,565 Long-term debt $ 444,435 $ 458,355 $ 204,061 $ 462,942 $ 459,142 Interest income — — — (5,198) (5,198) Other long-term obligations $ 137,503 $ 141,568 $ 119,982 $ 118,615 $ 114,858 Interest expense — — — 8,157 8,157 EBITDA $ 114,575 $ 46,418 $ 27,478 $ (24,344) $ 164,127 Prior year earnings per share amounts have been revised to reflect the 2-for-1 stock split effective December 15, 2005. 1 EBITDA (as a percent of revenues) 11.2% 15.1% 8.9% N/A 10.0% Earnings before interest, taxes, depreciation and amortization expense (EBITDA) is a non-GAAP financial measure. Accordingly, this schedule provides a reconciliation of EBITDA to income (loss) before income taxes and cumulative effect of accounting change, the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles in the United States (GAAP). The Company believes the presentation of EBITDA is useful to the Company's investors because EBITDA is viewed as an appropriate measure for evaluating the Company's performance and liquidity and reflects the resources available for strategic opportunities including, among others, investing in the business, strengthening the balance sheet, repurchasing the Company's securities and making strategic acquisitions. In addition, EBITDA is a widely used benchmark in the investment community. The presentation of EBITDA, however, is not meant to be considered in isolation or as a substitute for the Company's financial results prepared in accordance with GAAP. 70 71
  • 38. Stockholder Information Stockholders of Record The approximate number of record holders of Cooper Cameron Transfer Agent and Registrar common stock was 1,305 as of February 16, 2006. Computershare Trust Company, N.A. Common Stock Prices General correspondence about your shares should be addressed to: Cooper Cameron common stock is listed on the New York Computershare Trust Company, N.A. Stock Exchange under the symbol CAM. The trading activity Shareholder Services during 2005 and 2004 was as follows (revised to reflect the P.O. Box 43069 2-for-1 stock split effective December 15, 2005): Providence, RI 02940-3069 High Low Last Website: www.equiserve.com 2005 E-mail: equiserve@equiserve.com First Quarter $29.805 $25.52 $28.605 Second Quarter 31.99 26.76 31.025 Telephone inquiries can be made to the Telephone Response Third Quarter 37.695 30.86 36.965 Center at (781) 575-2725, Monday through Friday, 8:30 a.m. to Fourth Quarter 43.10 32.21 41.40 7:00 p.m., Eastern Time. High Low Last Additional Stockholder Assistance 2004 For additional assistance regarding your holdings, write to: First Quarter $24.745 $20.025 $22.025 Second Quarter 25.405 21.465 24.35 Corporate Secretary Third Quarter 27.65 23.48 27.42 Cooper Cameron Corporation Fourth Quarter 28.37 23.62 26.905 1333 West Loop South, Suite 1700 Houston,Texas 77027 Telephone: (713) 513-3322 The following documents are available on the Annual Meeting Company’s website at www.coopercameron.com: The Annual Meeting of Stockholders will be held at • The Company’s filings with the Securities and 10:00 a.m., Friday, May 5, 2006, at the Company’s corporate Exchange Commission (SEC). headquarters in Houston, Texas. A meeting notice and proxy • The charters of the Committees materials are being mailed to all stockholders of record on of the Board. March 10, 2006. • Other documents that may be required Certifications to be made so available by the SEC or The Company filed with the Securities and Exchange Commission, the New York Stock Exchange. as Exhibit 31 to its Annual Report on Form 10-K for the 2005 fiscal year, certifications of its Chief Executive Officer and Chief Financial Officer regarding the quality of the Company's public disclosures. The Company also submitted to the New York Stock Exchange (NYSE) the previous year's certification of its Chief Executive Officer certifying that he was not aware of any violations by the Company of the NYSE corporate governance listing standards. 72