1 333 West Loop S outh • S uite 17 00 • Houston, Texas 77 027 71 3 -51 3 - 3300 • www. coopercameron . com BALANCE 2005 ANNUAL REPORT C OO PE R C AM E R O N C O R PO RA TI O N • 200 5 A NNU A L R E P O RT
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- 1. 2005 ANNUAL REPORTC 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 77 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. DIRECTORSOFFICERS SHELDON R. ERIKSONCOOPER CAMERONCAMERON COOPER COMPRESSION Chairman of the Board, President and Chief Executive Ofcer, SHELDON R. ERIKSONJACK B. MOORE ROBERT J. RAJESKI Cooper Cameron CorporationChairman, President and President*President** Houston, TexasChief Executive Ofcer STEVEN P. BEATTYJEFFREY G. ALTAMARI NATHAN M. AVERY FRANKLIN MYERSVice President, Finance Vice President, Finance STRUCTURE InvestorSenior Vice President and Houston, TexasChief Financial OfcerHAROLD E. CONWAY, JR. JOHN C. BARTOS President, Drilling Systems Vice President, Engineering and C. BAKER CUNNINGHAM R. SCOTT AMANNProduct Development President and Chief Executive Ofcer, Vice President, HAL J. GOLDIE Belden CDT Inc. (retired) Investor RelationsPresident, Subsea Systems RONALD J. FLECKNOE The three divisions of Cooper Cameronoffer balanced solutions to customers worldwide. Clayton, Missouri Vice President, Aftermarket Sales WILLIAM C. LEMMER GARY M. HALVERSON PETER J. FLUORVice President, President, Surface SystemsEDWARD E. ROPER Chairman and Chief Executive Ofcer,General Counsel and Secretary Vice President, Marketing and Texas Crude Energy, Inc.BRITT O. SCHMIDTNew Unit Sales Houston, TexasERIK PEYRER Vice President and General Cooper Cameron is a leading international manufacturer of oil and gas Vice President, Manager, Flow Control CYNTHIA D. SPARKMAN LAMAR NORSWORTHY pressure control equipment, including valves, wellheads, controls, chokes,Chairman and Chief Executive Ofcer, Business Development, Asia Pacic and Middle East S. JOE VINSON Vice President, Human Resources blowout preventers and assembled systems for oil and gas drilling, production Holly Corporation Dallas, Texas JANE C. SCHMITT Vice President, Human Resources RICHARD E. STEGALL and transmission used in onshore, offshore and subsea applications, and MICHAEL E. PATRICK Vice President, Human Resources EDWARD E. WILL Vice President, Operationsprovides oil and gas separation, metering and ow measurement equipment.Vice President and Chief Investment Ofcer,CHARLES M. SLEDGE Vice President, Marketing WAYNE T. WOOTTON Vice President, Supply Chain Cooper Cameron is also a leading manufacturer of centrifugal air compressors, Meadows Foundation, Inc. Dallas, Texas Vice President andCOOPER CAMERON VALVES Corporate ControllerPETRECO integral and separable gas compressors and turbochargers. JOHN D. CARNE DAVID ROSS IIIDALTON L. THOMASPresident*BRADFORD W. GOEBEL InvestorVice President, President Houston, TexasWILLIAM B. FINDLAY Cameron engineers and manufactures systems used in Cooper Compression makes engines and compressors Operations Support President, Engineered ValvesLESLIE A. HILLER oil and gas production and drilling in onshore, offshore for the oil and gas production, gas transmission and BRUCE W. WILKINSONVice President and General Chairman and Chief Executive Ofcer,KEVIN FLEMING Manager, Western Hemisphere and subsea applications, provides separation equipment process markets, manufactures and services centrifugal air McDermott International, Inc. Vice President, Houston, TexasMITCHELL K. ULREY and furnishes aftermarket parts and service to the energycompression equipment for manufacturing and processHuman Resources Vice President, Finance industry worldwide.applications, and provides aftermarket parts and service PATRICK C. HOLLEY Cooper Cameron Valves is a leading global provider offor a wide range of compression equipment. Vice President and GeneralDAVID R. ZACHARIAH Manager, MeasurementVice President and General valves, related products and services for the oil and gas Manager, Eastern Hemisphere DAVID R. MEFFORD production, transmission, rening and process markets. Cooper Camerons website: www.coopercameron.comVice President, Engineering *Also, Senior Vice President, Cooper Cameron Corporation REMBERT B. MORELAND **Also, Vice President, Vice President, Marketing Cooper Cameron CorporationJAN L. ROTHFUSZ Vice President, International SalesR. SCOTT ROWE Vice President, OperationsRICHARD A. STEANS Vice President, FinanceJAMES E. WRIGHT President, Distributed and Process Valves 3. FINANCIAL ($ thousands except per share, number of shares and employees)Highlights and balances for year sending December 312005 20042003 Revenues ................................................................................................................................... $2,517,847 $2,092,845 $1,634,346 Earnings before interest, taxes, depreciation and amortization (EBITDA) ................................................................. 340,303228,639164,127 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 ...................................................................................................................................... 171,13094,415 69,450 Earnings per share:1Basic before cumulative effect of accounting change .................................................. 1.550.89 0.53Cumulative effect of accounting change ............................................................................. 0.11 Basic ......................................................................................................................................................... 1.550.89 0.64Diluted before cumulative effect of accounting change ............................................. 1.520.88 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 ...................................................................................................................................... 110,732,000 106,545,000108,806,000 Diluted ................................................................................................................................ 112,608,000 107,708,000119,601,000 Capital expenditures ..................................................................................................................... 77,50853,481 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 1,228,2471,136,723 Shares outstanding3 .......................................................................................................... 115,629,11753,137,815453,803,0584 Number of employees ................................................................................................................. 12,200 8,8007,7001 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. 2Net of cash and short-term investments. 3Net of treasury shares. 4Reflects share counts prior to stock split.3 4. Our operating and nancial performance in 2005 was very good.The combination of a robust market across our business lines andsolid performance from all of our divisions generated some of our In this letter a year ago, I referenced the impact that $40/barrel oil and $6/mcf natural gas were having on best nancial results ever. As a result, our stock price reached new our business. I resisted the temptation to refer to those prices as high or to forecast where they might go in highs, and our board authorized a 2-for-1 stock split (the second the future; instead, I related that we were prepared to deal with whatever might happen with prices, activity and spending in the oilpatch. With oil prices above $60/barrel and natural gas around $10/mcf at the closein our history) effective in December 2005. of 2005, I believe our results demonstrate that we struck the appropriate balance in the way we approachedDIRECTION 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 developmentFollowing are some of our recent milestones: is the single largest factor inuencing our business, and Cooper Camerons 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 benchmarkssplit), 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 cyclesthose 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 continueAt this time a year ago, we had planned to include in our our productivity enhancement steps, which effectively addnancial results an expense related to stock option grants capacity without adding rooine 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 tophase-in such recognition.We elected to defer adoption ofthis expense recognition until the rst quarter of this year,and we expect to record approximately $0.10 per sharefor stock-based compensation expense during 2006.4 5. I personally believe that the true nancial impact of stock Cooper Compressions revenues and earnings were their highest While natural gas productive capacity is forecast to increase in Cash generation maintains balance sheet integrity options is already reected in a companys results when share in more than ve years. Their energy-related business beneted, 2006 as the industry recovers from the storms of 2005, LNG We have always emphasized the importance of cash ow in count increases due to options being exercised (of course, such in both aftermarket and new equipment, from activity in the U.S.continues to make up a larger, but overall still small, percentage taking advantage of opportunities in our business. In recent exercises generally occur because the stock price has gone up). natural gas markets. Increased revenues in the air compressionof supply. Supply growth from LNG will need to continue so asyears, our people have done an outstanding job of focusing on Since we are now required to recognize some assigned expense, side were the result of the high backlog that existed enteringto avoid continuing price shocks. During 2005, LNG imports generating cash and earnings in our day-to-day operations. we have reduced the use of stock options in our compensation2005 and the ongoing strong demand in international markets accounted for about three percent of U.S. natural gas supplies; by That has given us the freedom to search out uses for cash, rather programs so our earnings will not be overly burdened. We regret for industrial compression equipment. 2007, it is forecast to exceed ve percent. The addition of LNGthan worrying about sources of funds. Beyond daily funding doing so, because options are an effective means of aligningconversion facilities should provide additional opportunities forrequirements and capital spending, our primary options have employees interests with that of stockholders; if the stock goes With the natural gas markets continuing to drive Northsome of our products, particularly in Cooper Cameron Valves. been share repurchase and acquisitions; this past year, we spent higher, everyone benets. Many of our employees are alsoAmerican 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 solidinternational air compression orders, Cooper CompressionWhen commodity prices reach historical highs, the tendency islimited our repurchases of our own shares. operating and nancial performance has on stock price.should see another year of gains in both revenues and prots. to expect them to moderate. Growth in demand for natural gas New product introductions and further attention to cost is expected to resume in 2006, increasing in line with a strongerWe spent more than $300 million on acquisitions, including Markets should lead to further improvement in 2006reduction efforts will also be important to their bottom line.economy in the U.S. Still, with storage levels relatively high and the approximately $217 million on the Dresser transaction, and our Our Cameron divisions 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 million during 2005 as the drilling and surface product lines hit Hurricanes have minimal impact on operationscome down. Natural gas remains primarily a North Americanwill manage our businesses in a manner that emphasizes scal new highs. Subsea revenues declined modestly from year-agoWe were fortunate that Cooper Camerons 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 signicant damage from thereserves and increased funding of LNG will be required in thewill 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 onevaluate 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 ve million shares remaining under our Cameron nished the year with record orders by a wide marginfacilities and we had no injuries to employees, a number ofboard-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 explorationBalancing expectations year ago. Some of those orders are for projects that will beattendant disruption in their day-to-day activities. In response, and production of oil, and we have a presence in nearly everyNumerous stakeholders have a vested interest in how our delivered over the next couple of years, but the vast majoritywe established a fund at the Company to aid those employees energy-producing region in the world. Global demand for oilbusinesses perform and how we treat each of our constituents. of that backlog should be turned into revenue by year-end. Ourand their families who needed help with their recovery and increased by about 1.5 percent during 2005. While ChinasBalancing the needs and expectations of customers, employees, challenge is to convert that backlog into revenues efciently 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 protably. Meanwhile, the level of inquiries and orders fromour facilities were all back to normal operations, and the nancial 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 partys needs to come at the expense as of early 2006. Projected gains in production capacity are anticipated to temper of anothers. 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. Politicalwe deal with the challenges this market brings to us and work to During 2005, Cooper CameronValves (CCV) did an outstandingneeded to address gas demand growth upheaval, economic crises or weather could all have signicant continue to deliver quality and value on all fronts. job of incorporating the late-2004 acquisition of several valve Natural gas prices in the U.S. were clearly affected by the impact on an already unsettled market. manufacturing businesses (the PCC acquisition) and a owdisruptions in productive capacity from the hurricanes in the Gulf. While U.S. gas demand did not increase signicantlySincerely, measurement business acquired in mid-2005 (NuFlo).As a result A year ago, we speculated that higher oil prices might dampen of these acquisitions and continuing strength in the valve markets, during the year about 22 trillion cubic feet (Tcf) were global economic activity; that did not happen. The global CCVs revenues gained nearly 80 percent year-over-year. used in 2005, similar to 2004s consumption damage 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 productionSheldon R. Erikson Now, we are asking them to perform once again by integratingimpact on deliverability, leading to new highs in prices. When in the next couple of years in line with current expectations, Chairman of the Board, the Dresser acquisition facilities into CCV. This $217 millioncombined with operators struggles to replace production perhaps prices will subside. If not, we will almost certainlyPresident and Chief Executive Ofcer acquisition is the largest and most challenging we have undertakenwith new reserves, the need for additional supplies, particularly reach a point where high prices cause demand destruction, to date. It more than doubles CCVs revenue base from their liqueed natural gas (LNG), becomes more apparent. and the commodity markets will respond accordingly. Whatever 2004 levels, and at year-end 2005, CCVs 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 inuences and weather.67 6. Different constituents have varying expectations. Employees and the nancial community are two of the EXPECTATIONS PECTATIOE ATIO AT O Companys constituents that have a material stake in Cooper Camerons 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 Camerons efforts its inception in 1995, and has served in a couple of different to attract and retain the best people available forroles during his tenure. In his current position as Senior VP our widespread operations. With more than 12,000 and Chief Financial Ofcer of the Company, much of his employees spread over numerous countries, Jane and time is spent with representatives of the nancial community, her associates at the Companys division ofces balanceincluding commercial bankers, who help the Company the competitive environment, local standards and lawsnance its operations; investment bankers, who may bring and internal requirements in their efforts to insure thatacquisitions or other nancial proposals to him; industry employee needs are fairly addressed. Having been withanalysts, who are looking for the factors that differentiate Cooper Cameron since its creation ten years ago, JaneCooper 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 isCompanys prospects and performance. One of Franklins overwhelmingly cyclical, and entails a unique set of stafng challenges is to ensure balance in the allocation of the and employee relations issues. Companys nancial resources so that the best interests ofthese constituents are addressed and we take full advantageof Cooper Camerons nancial exibility in order to maximizereturns 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 efciency.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 important to the continuing success of our business. provide competitive wages, benets and job opportunitiesCooper Cameron has established itself as a good corporate citizen ever ywhere we operate.in the more than 100 countries where we operate. Balance in this context doesnt mean that we must give up All of our employees strive to fulll one of our most something in one area in order to accomplish our goalsimportant values,No one gets hurt. Nothing gets in another. It means that we strive to achieve operationalharmed, 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 benets that accrue from a safe and well-managedlocal contractors and suppliers, and we expect them to workplace, and minimize the risk of any negative impact on ouradhere to our ethical standards and to local laws. stakeholders including employees, customers, shareholders We support local and national charitable efforts with and the environment.nancial and in-kind contributions, and we encourage As a publicly owned company and signicant participant inand fund employees who volunteer their support to the global economy, we recognize we have a responsibility to local organizations. 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 whichrecords, and a number have posted ve years or more of we operate. As a member of the global community, we alsooperation 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 planetand review processes under a framework that applies for future generations.strict criteria across all of our operations. Achieving the goals of economic growth and nancial Our emphasis on safe and responsible standards supports performance, respect for social issues and care of the our customers need to produce, process and deliver their environment are the guiding principles of how we run our products in environmentally-friendly ways. business. Our commitment to these pillars of sustainable development is demonstrated in the following: Our Standards of Conduct Policy sets out the principles under 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 meetwith these guidelines in every aspect of their work. and exceed our investors expectations. Our nancial performance conrms our success inCooper Camerons long-term operating performance, generating earnings and managing cash ow.the disclosure standards we are required to meet and the We have one of the healthiest balance sheets in the industry.enhanced transparency of nancial reporting rules provide our constituents with substantial insight into the social, economic and As an equipment and services provider:environmental impacts of Cooper Camerons operations. Our Our products are noted for their quality, safety and board of directors regularly reviews the Companys performancelong-term reliability. from a social responsibility perspective, and is committed to We have won awards from government and industryproviding the processes, facilities, standards, training, disciplineorganizations for innovation and technological and work culture to ensure that No one gets hurt. Nothingadvancement. gets harmed. Many of our technology innovations deliver greatervalue to customers, consume fewer resources and aremore environmentally and ecologically efcient. We strive to comply with the highest ethical standardsOur products are essential to meeting present and futureand the local laws and guidelines in the many locales energy and other industrial needs in environmentally andwhere we do business.10socially responsible ways. 8. The performance of Cooper Camerons products is critical to the success of our customers. In manyPROCESS cases, if our equipment doesnt perform, our customers protability 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 thecapital expenditure program to date. We expect to spend need to deliver value to customers must be balancedas 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 thingsapplying more efcient technologies to manufacturing better, or faster, or at lower cost. processes and generally making more effective use ofour resources. This effort is a direct result of the current Cooper Camerons 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 rooine. It will also serve us, and our Six Sigma provides the methodology, tools and supportshareholders, 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 qualied 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 worlds leading providers of systems and equipment used to control pressures and direct ows of oil and gas wells. Its products are employed in a wide variety of operating environments,including basic onshore elds, 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 aftermarketgeothermal 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)200520042003 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. FINANCIAL OVERVIEW - Camerons revenues increased to $1,507.8 million in 2005, up seven percentDuring 2005, Cameron upgraded several drilling aftermarketCameron continued to deliver new surface technology forlocations with new machine tools, including Berwick, Louisiana; traditional North Sea customers. BP plans to use Camerons from $1,402.8 million in 2004. EBITDA was up 31 percent from a year ago, at $222.7 million, compared Oklahoma City; Macae, Brazil and Vera Cruz, Mexico. The Rockpremium land and platform wellhead system,the SSMC model,on with 2004s $170.2 million. EBITDA as a percent of revenues was 14.8 percent in 2005, up from 12.1 Springs, Wyoming facility will be upgraded and expanded totheir Claire platform, and will use Camerons Conductor Sharing percent. Orders totaled $2,301.1 million, up 81 percent from the prior year. address the growing natural gas market in the Northern Rockies. Wellheads (CSW), which allow multiple completions in a singlePlans are also in development for a new facility in India to servicewell slot, for use in the expansion of the BP Magnus platform ina major customer in the region. the North Sea. Statoil Norway engaged Cameron in a program Cameron organization realigned Drilling Systemsto extend the life of the Statfjord eld by incorporating articial 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. specic 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 customersequipment, including wellheads, Christmas trees and chokes used Customers in the growing natural gas markets in the Middle East 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 Camerons performance and technical capabilities Control, as well as its separation systems provider, Petreco.effective. Drilling equipment designed and manufactured byinstalled base of surface equipment in the industry.with signicant 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 Camerons prior structure split management responsibilities ondrilling 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; Camerons 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 ow of in the region doubled in 2005. In addition, Cameron booked the each business unit has global responsibility for specic product(MUX) control systems, and diverter systems. Cameron also business for Cameron throughout the year. Prices were raised on rst CSW systems to be used in a Mideast project outside Egypt, lines. The new alignment encourages greater responsivenessprovides services under CAMCHEC, an inspection systemsurface wellhead equipment in response to continuing increaseswith an award for 10 systems to be installed in Abu Dhabi. to customers needs in product-specic markets; focuses eachthat allows drilling contractors to inspect drilling riser on in raw material and transportation costs. Several of Camerons units managers on identifying cost reduction opportunities thattheir rigs ofine, saving time and money on maintenance and larger customers requested longer-term supply agreementsIn Asia, Cameron supplied more than 100 wellhead systems to benet their products and processes; and ensures that technologyunnecessary transportation. in exchange for security of equipment supply and in hopes ofTotal Indonesia as part of a continuing supply agreement; and the advancements and expansion opportunities in specic product lines are spread across global boundaries. minimizing cost ination in their supply chains.Company booked orders from Woodside in Australia and fromDuring 2005, Camerons drilling business experienced a levelSTOS in New Zealand, both representing market share gains in This product- and systems-driven organization will allow of activity not seen since the early 1980s. Cameron continuedCamerons performance in the delivery of new equipment andthese respective regions. Cameron to better serve customers needs and support the to book orders for new surface BOPs for land rigs, continuingin providing service has allowed the surface organization toa trend that had begun in 2004, as the industry embarked on attainment of growth and prot targets for the coming years, record market share gains in numerous regions; the CompanysSubsea Systems while leveraging off the strength of the Companys global networkwhat appeared to be a multi-year capital expansion to make upeld training program has grown through an employee referralCameron has been a key player in the subsea industry since of manufacturing and aftermarket locations.for years of limited reinvestment. The offshore drilling marketprogram, allowing Cameron to staff the service organization its beginning more than forty years ago, and continues to be awas already picking up, but the arrival of Hurricanes Katrinaappropriately in response to growing demand; and the salesleader in providing subsea wellheads, Christmas trees, manifolds Operating milestones and Rita in August and September put a considerable strainstaff has received targeted training in sales order management in and production controls, as well as complete production systems, Signicant accomplishments in the Cameron division duringon the industry. The storms damaged or destroyed more thanorder to better deal with the pace of business. to the industry. Camerons Subsea Systems organization, created 2005 included the following: 30 mobile offshore drilling units in the Gulf of Mexico, with anin 2005, has global responsibility for R&D, engineering, sales, Cameron was awarded Totals AKPO project, the largestestimated 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 than50 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 lled$350 million. 14 semi-submersibles, two drillships and one tender rig withcustomer facilities created a need for Camerons serviceby Cameron Offshore Systems in providing customers with In early 2005, Camerons Leeds, England facility producedoptions to build an additional 17 units.organization to shift its focus from new installations to performingintegrated solutions to subsea eld development requirementsits 600th subsea tree 400 of which have been thecritical workover and restoration activities. Cameron played an under engineering, procurement and construction (EPC)patented SpoolTree design. Cameron booked orders for two complete subsea drillingimportant role in supporting customers efforts to restore oilcontracts. Camerons multi-patented all-electric subsea productionsystems in 2005; the Stena Drill Max, a drillship, and Easternand gas production as safely and as quickly as possible.system, CameronDC, received two notable awards Drillings West E-Drill, a semi-submersible. Both will be outttedTimely execution of projects in backlog continued as a primaryduring 2005: the Spotlight on New Technology awardwith Camerons 18-3/4 inch, 15,000 psi subsea stacks, a MUXEastern Hemisphere surface markets grew steadily during 2005, focus in 2005, driven by delivery of multiple major subseafrom the Offshore Technology Conference and World Oils control system and Camerons patented LoadKing riser system.with Cameron providing equipment to new developmentssystems in West Africa. Cameron delivered a total of 100 subsea Innovative Thinkers award. Several more complete subsea system bookings are anticipatedin Azerbaijan, Sakhalin Island, Russia and North Africa. BPs trees during the year, including several under project agreements, Camerons Six Sigma program now includes 100 Black in early 2006, and Cameron expects to continue to book itsAzerbaijan unit awarded Cameron the contract to supplyas well as many for small eld developments requiring as few as Belts and more than 650 Green Belts who serve as internalhistoric market share of such business.SSMC wellhead and surface SpoolTree systems for four 48-one to ve subsea trees. Capacity expansions in Leeds, England, consultants, applying productivity improvement techniquesCamerons long-time leading market position in drilling has slot platform installations in the Caspian Sea. Cameron was Taubate, Brazil and Berwick, Louisiana will support expected to create benets for Cameron and its customers. Sixcreated the largest installed base of BOPs in the industry. Withinvolved in the rst stages of exploration on Sakhalin Island; this deliveries during 2006 of more than 130 subsea trees andSigma projects routinely generate signicant savings andsafety and reliability issues reinforcing demand for parts andhas grown into an arrangement for the supply of wellheads and associated manifolds, production controls and other equipment.productivity improvements for both Cameron andservice from original equipment manufacturers, Cameron offers trees for ExxonMobils Chayvo eld, and the supply contract forits customers.worldwide aftermarket services under the CAMSERV brand gas wells on the Orlan offshore platform. Following the opening The ongoing integration of the Sterom facility inand provides replacement parts for drilling equipment through a of Libyan markets to U.S. companies, Camerons North AfricanRomania, acquired in an acquisition in late 2004, hascomprehensive global network. business activities have expanded to include project awardsprovided the Company with signicant incrementalfrom Total, Wintershall and Woodside in this growing region.manufacturing capacity at very low cost. 1617 11. Cameron played an important role in ExxonMobils ability to bring The majority of Camerons subsea tree orders during 2005,Flow Control Petreco its Kizomba B subsea project on production six months ahead ofother than AKPO, were for relatively small projects andCamerons Flow Control business provides chokes and actuatorsPetreco produces highly engineered equipment, systems and plan by meeting an accelerated delivery schedule. Additionally, extensions to existing elds. Although a signicant number offor 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 ExxonMobils Erhatiming 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 treeCameron installations as well as those serviced by other treePetreco added to its offerings with the acquisition of the Howe- creating an opportunity for ExxonMobil to generate signicant orders during 2006 will likely be comprised of a number of manufacturers, and has beneted from the markets acceptance Baker line of electrostatic desalting, dehydration and distillate additions to production from the Erha Field. Camerons designsmaller projects.of its new product offerings and from overall increases in drillingtreating products. Petrecos 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.Camerons 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 rst electric surface actuator, Other subsea activity during the year included Huskys Whiteproduction system design, developed and patented by Cameronwhich offers operators an environmentally-friendly actuation Deliveries during 2005 included a major produced water treating Rose project offshore Newfoundland, which began productionin 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 rst phase of the projectassociated with hydraulic power units and hydraulic tubing runs. West Africa; advanced produced water ltration equipment have been delivered. Although much of Camerons subseaCamerons latest innovation is CameronDC, the industrys rst Operators in remote areas who are faced with the challengesfor 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 oor as much as 18 months earlier, the system which was introduced at the Offshore Technology Conference capability and greater reliability from integrating this electricin Brazil; and the worlds largest MEG reclamation unit, which will worked as designed at startup. Husky has now ordered additional in 2004. By eliminating hydraulically controlled actuators, theactuator into their existing systems.be used to purify, reclaim and regenerate ethylene glycol used in equipment to support future expansions of this eld.system is designed to provide greater reliability and cost savingsseparating water from gas, and is currently being installed in the and give operators the ability to extend stepouts on multi-wellAlso 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 operatorsunderbalanced 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 forPetreco recorded its fourth consecutive year of record orders for future delivery, securing a record year-end backlog in theengaged Camerons engineering staff to perform the upfront use in underbalanced drilling applications. The initial unit has and revenue, including the largest order in the Companys Brazilian market. Petrobras designated Cameron as a Supplier system design work on a funded basis for possible installation inbeen delivered and there should be signicant opportunities forhistory. Petreco received an order in excess of $55 million of Choice for subsea trees and tools based on Cameronsan existing eld 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 itsand 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 controlsBookings in the Flow Control business were up nearly 90 percentin Brazil. Other signicant orders received in 2005 included an Companys health, safety and environmental record. Cameron is system that combines the traditional subsea control module during 2005. While orders increased across all the Companys order for six electrostatic dehydrators for a major new oil eld expanding its manufacturing facility in Taubate, Brazil, based on and the subsea accumulator module in a single package, allowingproduct offerings, the surface wellhead safety system area was in Saudi Arabia, a produced gas treating system for a major eld demand from Petrobras as well as projects planned by foreignfor more efcient operation of the subsea tree and manifoldparticularly 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 theproduced water treating and ltration equipment for a major in Camerons 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-yearfacilitates testing of the Companys control systems.sales force that will target growing its business outside of the frame agreement from BG for their elds in the region, traditional Cameron installations. The combination of this focused Petrecos orders were up 44 percent over 2004, with projects in as well as certain other locations. In addition, CameronAlso in 2005, Cameron launched its updated CAMTROL subseasales effort and continuing strong global activity is expected toSouth 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 powerlead 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 ber optic communicationshouses and other tree suppliers in 2006. Middle East declined from a year ago. Petreco nished 2005 with services in the U.K. North Sea. During 2005, BP placed orders to further increase reliability and enable extended offsetthe highest year-end backlog in its history. for ten subsea trees for installation in various North Sea elds, 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 theexpansion was completed, increasing manufacturing capacity byIn 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 increasesubsea processing area. The group is focused on leveragingproduction. The global market for all Flow Control products is Camerons proven capabilities in subsea equipment design and Camerons most signicant order for 2005 was the expected to continue to grow in 2006 as customers increase Petrecos well-established processing and separation technology largest subsea EPC contract awarded to date: Totals their spending on both upstream and midstream oil and gasfor 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.1819 12. Financial OverviewCCVs revenues were $625.1 million for the year, up more than The Dresser acquisition affects this group positively on a number78 percent from 2004s $350.1 million. EBITDA was $118.3of fronts.million, up nearly 137 percent from $50.0 million the previous Product line offerings now include the brand names of Grove,year. Orders nearly doubled, from $365.7 million in 2004 toRing-O and Tom Wheatley, signicantly strengthening CCVs$710.8 million in 2005. The year-over-year increases in orders and capabilities.These newly-acquired products will be combinedrevenues reect a combination of acquisitions and strong demandwith the Cameron line of fully-welded ball valves, broadeningacross CCVs product lines.CCVs ability to meet a wide scope of customer needs. Three additional facilities in Oklahoma, Brazil andDresser acquisition enhances CCVs role as Nigeria provide CCV with the opportunity to focus onglobal suppliertailoring Cameron and Grove valve products and LedeenThe acquisition of the On/Off valve business unit of the Flowactuators to meet specic customer requirements.Control segment of Dresser, Inc. was essentially completed inlate 2005, with a closing on one facility coming in early 2006. In 2005, increased orders and revenues in the Cameron ball valve Cooper Cameron Valves (CCV) is a leading provider of valves and relatedNotable product brands acquired in this transaction include product line were driven by pipeline activity in the Middle East systems primarily used to control pressures and direct the ow of oil and gasGrove, Entech, International Valves Ltd. (U.K.), Wheatley, and Asia, particularly China, while the business also benetedfrom pipeline integrity projects and key customer alliances inLedeen, Texsteam plug valves, Ring-O, Tom Wheatley, TK as they are moved from individual wellheads through ow lines,gathering linesValve and Control Seal. North America.and transmission systems to reneries, petrochemical plants and industrial This acquisition, along with others made during the past couple Process The process group provides valves for renery,of years, gives CCV a premier market position with an expandedpetrochemical and industrial applications through the Orbit line centers for processing. Equipment used in these environments is generallyinternational customer base. The Companys broad portfolioof valves. The Orbit brand is the worlds most accepted rising-stemball valve, and its unique design and sealing characteristics make required to meet demanding standards, including API 6D and the Americanof quality products and brands provides a solid platform forcontinued growth across the oil and gas production, pipeline andit well-suited for critical liqueed natural gas (LNG) applications. Society of Mechanical Engineers (ASME).process markets.Major project awards in LNG and gas processing, especially in theinternational arena, were an important contributor to revenuesDistributed Productsand orders during 2005. The acquisition of the General ValveValve products in this market are sold through distributorproduct line in 2004 proved to be important to CCVs efforts to Products Gate valves, ball valves, buttery valves, OrbitCustomers Oil and gas majors, independent producers,networks, primarily in North America, for use in oil and gasenhance its position within the liquids processing, transportation valves, block & bleed valves, plug valves, globe valves, engineering andconstruction companies, pipeline applications and include such widely recognized brand names and storage segments. The Dresser acquisition also added newas W-K-M, Demco, Nutron, TBV, AOP and Thornhillofferings to the process group, as the TK Valve and Control Seal check valves, actuators, chokes and aftermarket partsoperators, drilling contractors and major chemical, Craver. New brand offerings from the Dresser acquisition brands will complement the Orbit products. and services.petrochemical and rening companies.include Texsteam plug valves and Wheatley check valves. Theseenhancements to the Companys historical product lines will In 2006, continued expansion in international energy markets,strengthen CCVs abilities to serve an expanded range ofparticularly Europe, South America, the Middle East and Asia,customer requirements. The acquisition also added the Valgrois expected to drive demand for the equipment and servicesS TAT I STI C A L/ O P E RATI N G H I G H LI G H T S($ millions)(Canada) and International Valves Ltd. (U.K.) operations to thisof the pipeline and process segments. This growth, combineddivision, thereby improving their channels to market. with the added revenue from the businesses acquired in 2005,2005 2004 2003should generate a signicant increase in revenues and protsBusiness in the Distributed Products division tends to closely trackduring the year. Revenues ............................................................................................................... $625.1 .................... $350.1 ...................... $307.1North American oil and gas activity, particularly as measured by EBITDA ..................................................................................................................... 118.3 .......................... 50.0 ............................ 46.4 rig count. Continuing growth in rig activity and increased spending Aftermarket Servicesfrom oil and gas operators kept demand for oileld valves and CCVs Aftermarket Services group provides such services as OEM EBITDA (as a percent of revenues) ............................................................... 18.9% ...................... 14.3% ........................ 15.1%related products high during 2005, and the Distributed Products parts, repair, eld service, asset management and remanufactured Capital expenditures ............................................................................................ 13.8 .......................... 13.7 ............................... 9.7 group saw signicant gains in orders and revenues throughout theproduct to customers. Revenues in the aftermarket business were Orders ....................................................................................................................... 710.8 ....................... 365.7 ......................... 324.0 year. Programs to increase manufacturing productivity and improve up by nearly 45 percent during 2005, a result of growth in bothsupply chain management in these operations were implementedthe U.S. and international markets and the acquisitions of three Backlog (as of year-end) ......................................................................................... 469.0 ....................... 122.9 ............................ 72.4 in 2004; those steps proved to be essential in responding to theaftermarket businesses, two in Canada and one in the U.S., sincedemands placed on CCV by customers during 2005. mid-year 2004. CCVs installed base of long-lived equipment,which generates demand for replacement parts and serviceEngineered Valves over the life of the product, is a vital component of a successfulPipelines The pipeline group of the Engineered Valve division aftermarket business.provides large-diameter valves for use in natural gas, crude oiland rened products transmission lines, most often through itsAcquisition of NuFlo extends product offeringsline of traditional Cameron brand products.Nuo Measurement Systems, acquired in 2005, designs,manufactures and distributes measurement and controlinstrumentation for the global oil and gas and process controlindustries. The transaction represented a logical extension ofCCVs product line into the ow measurement and processmarkets, and NuFlos position as a market leader provides aplatform for additional expansion or acquisitions.2021 13. Financial OverviewCooper Compressions revenues totaled $384.9 million duringrelationships with new channel-to-market partners led to2005, up 13 percent from $340.0 million in 2004. EBITDAsignicant growth in other domestic markets; and a strongwas $42.1 million, up from $41.5 million in 2004. EBITDA asrecord of recent performance provided the impetus for gainsa percent of revenues was 10.9 percent, compared with 12.2 in international markets, particularly in the Former Soviet Unionpercent during 2004. Orders totaled $449.8 million, up nearly 22 (FSU), Mexico and Europe.percent from 2004s $369.3 million. The Companys Superior-brand separable compressor productReciprocating Technology also saw gains in orders during 2005. Strength in global naturalCooper Compression is a leading provider of reciprocatinggas markets, especially in the Asia-Pacic and Latin Americacompression equipment and related aftermarket parts andregions, was a primary factor. In addition, Cooper Compressionsservices for the oil and gas industry. Its products and services are 2005 rationalization of Superiors distribution channels, includingmarketed under the Ajax, Superior, Cooper-Bessemer, Penn,adding new domestic and international packagers and eliminatingEnterprise,Texcentric, Compression Specialties and Turbinemarginal distributors, also contributed to the improvement.Specialties brand names. Cooper Compression provides globalsupport for its products and maintains sales and/or service ofces 2006 Outlook Reciprocating Cooper Compression is a leading provider of reciprocating and centrifugalin key international locations.Domestic gas producers are expected to continue development of new gas reserves and exploitation of existing elds during compression equipment and aftermarket parts and services. ReciprocatingProducts Aftermarket parts and services, integral engine-2006. Such activity will support both new compressor sales andcompressors, separable compressors and turbochargers.the aftermarket business related to installed equipment. On the compression equipment (Reciprocating Technology) is used throughout international front, natural gas will continue to be the fuel ofCustomers Gas transmission companies, compression leasingchoice for developing countries like China, India and the FSU the energy industry by gas transmission companies, compression leasing companies, oil and gas producers and processors and independentnations, and compressed natural gas (CNG) applications are companies, oil and gas producers and independent power producers.power producers. expected to take on greater emphasis.Integrally geared centrifugal compressors (Centrifugal Technology) are Aftermarket initiatives key to reciprocating businessTwo new offerings were recently introduced in the reciprocatingApproximately 75 percent of Cooper Compressions reciprocating product line. The AXIS reciprocating compressor is an all-new used by customers around the world in a variety of industries, including air business revenues are generated by aftermarket parts and barrel-frame design targeted at the natural gas lease eet markets. This new, more exible design replaces two prior offerings, allows separation, petrochemical and chemical.services in support of the Companys worldwide installed baseof compression equipment. Cooper Compressions aftermarket the buyer to select a variety of crankshaft congurations andstrategy combines cost-effective products and services with theresults in a lighter-weight frame with added dynamic stiffness.Thedevelopment of business alliances with select customers. Thisnew C-Force compressor was created through the addition ofmulti-year effort helps customers reduce their vendor population new tandem cylinders to a small Superior reciprocating frame,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 Compression20052004 2003 who offer a broad range of capabilities and expertise on aglobal basis.Another new development by Cooper Compression for Revenues ............................................................................................................... $384.9 .................... $340.0 ...................... $308.8 aftermarket application is a magnetic, springless poppet valve for EBITDA ........................................................................................................................ 42.1 .......................... 41.5 ............................ 27.5 Additional strategies for taking advantage of opportunities with use in reciprocating compressors. The new Magneta valveaftermarket customers include: increasing the number and types replaces springs one of the leading failure components in EBITDA (as a percent of revenues) ............................................................... 10.9% ...................... 12.2% ........................... 8.9%of customer alliances, bundling repair capabilities, expanding reciprocating compressors with a magnet. The Magneta valve Capital expenditures ............................................................................................... 7.3 ............................. 6.9 ............................... 7.2 vendor consignment agreements to assure parts availability,is expected to provide increased reliability and, with the capabilitydeveloping and marketing retrot enhancements and realignmentto provide higher valve lifts, improved overall operating efciency. Orders ....................................................................................................................... 449.8 ....................... 369.3 ......................... 340.2 of the sales force to better meet market and customer demands. The Magneta valve is being eld tested in the rst half of 2006, Backlog (as of year-end) ......................................................................................... 183.2 ....................... 124.2 ......................... 102.4 The Company will also continue to provide customers with and is expected to be offered commercially later in the year.contract maintenance agreements, assuring them ready access toparts and services.While 2006 should be another active order year, keeping pressure on delivery deadlines, the pace is not expected to beReciprocating compressor market steps up as robust as 2005. Cooper Compressions efforts will be aimedIn 2005, record natural gas prices in the U.S. generated signicantat gaining market share with its reciprocating unit products, andincreases in compression equipment orders for all suppliers. maintaining share in its large but declining aftermarketCooper Compressions orders for new gas compressor units services on the installed base of Cooper Compressionsmore than doubled during the year. If natural gas prices remainequipment. Results for 2006 will depend on activity in globalat historically high levels, the pace of activity is likely to continuegas markets, further renement of the Companys channels toin 2006. market, the success of new product offerings and continued focus on cost reduction.Ajax integral compressor orders reached a record level in2005. Ajaxs reputation for reliability and ease of maintenancewas a key factor in its penetration of the lease eet market; 2223 14. Centrifugal Technology Managements Discussion and Analysis of Results of Operations and Cooper Compression manufactures and supplies integrallyNew product offerings in the centrifugal line include the TA- Financial Condition of Cooper Cameron Corporation geared centrifugal compressors and aftermarket services to 2020 line of plant air compressors, which represent a streamlined customers worldwide. Centrifugal air compressors, used primarily version of Cooper Compressions smallest frame. With anThe following discussion of Cooper Cameron Corporations (the Company or Cooper Cameron) historical results of operations and financial in manufacturing processes (plant air), are sold under the trade effective capability from 250 to 400 horsepower, this new model condition should be read in conjunction with the Companys consolidated financial statements and notes thereto included elsewhere in this Annual name of Turbo Air, with specic models including the TA-2000, is targeted toward the large oil-free screw compressor market. InReport. All per share amounts included in this discussion are based on diluted shares outstanding and have been revised to reflect the 2-for-1 TAC-2000, TA-2020, TA-3000, TA-6000 and TA-9000. Cooperlate 2005, the TA-9000 was introduced as an entirely new framestock split effective December 15, 2005. Compression engineered compressors are used in the process air size. As the largest plant air frame in Cooper Compressions and gas industries and are identied by the MSG trade name. lineup, the TA-9000 represents a cost-effective alternative toOverviewprevious offerings in the 1,500 to 2,250 horsepower range. Products Integrally geared centrifugal compressors, compressorThe Companys operations are organized into three business segments Cameron, Cooper CameronValves (CCV) and Cooper Compression. systems and controls. Complete aftermarket services including2006 Outlook CentrifugalBased upon the amount of equipment installed worldwide and available industry data, Cameron is one of the worlds leading providers of spare parts, technical services, repairs, overhauls and upgrades.Centrifugal compressor demand is closely tied to global systems and equipment used to control pressures, direct flows of oil and gas wells and separate oil and gas from impurities. Camerons productsmanufacturing activity and overall economic health. Strategically are employed in a wide variety of operating environments including basic onshore fields, highly complex onshore and offshore environments, Customers Petrochemical and rening companies, natural gas important markets like China, Taiwan, Turkey, India, South Korea, deepwater subsea applications and ultra-high temperature geothermal operations. Camerons products include surface and subsea production processing companies, durable goods manufacturers, utilities, airBrazil and the U.S. are expected to offer continuing opportunitiessystems, blowout preventers, drilling and production control systems, oil and gas separation equipment, gate valves, actuators, chokes, wellheads, separation and chemical companies. for Cooper Compression during 2006. drilling risers and aftermarket parts and services. Camerons customers include oil and gas majors, national oil companies, independent producers,engineering and construction companies, drilling contractors, oilfield rental companies and geothermal energy producers. Based upon the amount Centrifugal compressor marketCooper Compression plans to more fully participate in the of equipment installed worldwide and available industry data, CCV is a leading provider of valves and related systems primarily used to control Centrifugal unit orders in both air separation and engineeredChinese steel manufacturing markets by offering a largerpressures and direct the flow of oil and gas as they are moved from individual wellheads through flow lines, gathering lines and transmission systems air applications showed increases during 2005, driven primarilyengineered compressor, and by increasing the Companys facilities to refineries, petrochemical plants and industrial centers for processing. CCVs products include gate valves, ball valves, butterfly valves, Orbit valves, by new orders from Europe, the FSU and China. Continuedand stafng 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. CCVs weakness in the U.S. dollar gave some price advantage to domesticheadquarters from Singapore to Beijing. Indonesia, Korea andcustomers include oil and gas majors, independent producers, engineering and construction companies, pipeline operators, drilling contractors manufacturers like Cooper Compression in selling into Europe,Thailand also offer opportunities for standard machine sales into and major chemical, petrochemical and refining companies. Cooper Compression provides reciprocating and centrifugal compression equipment but the meaningful growth in this market again came from new the strong electronics markets. and related aftermarket parts and services. The Companys 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 Companys Managements Standard plant air markets, however, became signicantly moreGermany and Italy, all experienced at to declining industrialDiscussion and Analysis and elsewhere in this report, may include forward-looking statements regarding the Companys future revenues and earnings, competitive during 2005. With the Companys manufacturingproduction and capacity utilization in the last couple of years,equity compensation charges, cash generated from operations, costs associated with integrating the recently acquired Flow Control segment of capacity operating at relatively high utilization levels, Cooper and are projecting only marginal GDP growth in the near future. Dresser, Inc. (the Dresser Flow Control Acquisition) and capital expenditures, as well as expectations regarding rig activity, oil and gas demand Compression chose not to compete for lower-margin business,Cooper Compression plans to expand its presence in promisingand pricing and order activity, made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The and declined jobs that would have generated less-than-acceptable regions like the UAE, Saudi Arabia, Egypt, Algeria and Nigeria.Companys actual results may differ materially from those described in any forward-looking statements. Any such statements are based on current margins. With a series of cost reduction initiatives currently Centrifugal aftermarket growth should continue to be strongexpectations of the Companys performance and are subject to a variety of factors, some of which are not under the control of the Company, underway, the Company will consider taking on additional plant after a record year in 2005. Continuing initiatives to increasewhich can affect the Companys results of operations, liquidity or financial condition. Such factors may include overall demand for, and pricing of, air business in 2006, but only at margins that generate appropriatemarket share include alliances, unit exchanges, e-business andthe Companys products; the size and timing of orders; the Companys ability to successfully execute large subsea projects it has been awarded; returns. Recent efforts to diversify both the products and the repair services, building on the additions to sales staff and servicefacilities that were made in 2005.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 markets served by the Companys centrifugal products have led towhich 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 decline in any single market.of raw materials; fluctuations in currency and financial markets worldwide; and variations in global economic activity. In particular, current andprojected oil and gas prices have historically affected customers spending levels and their related purchases of the Companys products andservices. Additionally, the Company may change its cost structure, staffing or spending levels due to changes in oil and gas price expectations andthe Companys judgment of how such changes might affect customers spending, which may impact the Companys financial results. See additionalfactors 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 inconditions over which the Company has no control or influence, and should not therefore be viewed as assurance regarding the Companys futureperformance. Additionally, the Company is not obligated to make public indication of such changes unless required under applicable disclosurerules and regulations. The Companys discussion and analysis of its financial condition and results of operations are based upon the Companys consolidated financialstatements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of thesefinancial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those relatedto warranty obligations, bad debts, inventories, intangible assets, assets held for sale, exposure to liquidated damages, income taxes, pensions and otherpostretirement benefits, other employee benefit plans, and contingencies and litigation. The Company bases its estimates on historical experience andon various other assumptions that the Company believes are reasonable under the circumstances. Actual results may differ materially from theseestimates 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 Companys The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of inflation assumption is based on an evaluation of external market indicators. The expected rate of return on plan assets reflects asset allocations, its consolidated financial statements.These policies and the other sections of the Companys Managements Discussion and Analysis of Results ofinvestment strategy and the views of various investment professionals. Retirement and mortality rates are based primarily on actual plan experience. Operations and Financial Condition have been reviewed with the Companys Audit Committee of the Board of Directors.In accordance with SFAS 87, actual results that differ from these assumptions are accumulated and amortized over future periods and, therefore, Revenue Recognition The Company generally recognizes revenue once the following four criteria are met: (i) persuasive evidence of an generally affect recognized expense and the recorded obligation in future periods. While the Company believes the assumptions used are 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 appropriate, differences in actual experience or changes in assumptions may affect the Companys pension obligations and future expense. determinable and (iv) collectibility is reasonably assured. For certain engineering, procurement and construction-type contracts, which typically includeA significant reason for the increase in pension expense since 2002 is the difference between the actual and assumed rates of return on plan the Companys subsea systems and processing equipment contracts, revenue is recognized in accordance with Statement of Position 81-1,Accountingassets in prior years. During 2001 and 2002, the Companys pension assets earned substantially less than the assumed rates of return in those for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1). Under SOP 81-1, the Company recognizes revenue on years. In accordance with SFAS 87, the difference between the actual and assumed rate of return is being amortized over the estimated average these contracts using a units-of-completion method. Under the units-of-completion method, revenue is recognized once the manufacturing process isperiod 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 complete for each piece of equipment specified in the contract with the customer, including customer inspection and acceptance, if required by the 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 contract. Approximately 13% and 15% of the Companys revenue for the years ended December 31, 2005 and 2004, respectively, was recognizedrate of return in 2004. under SOP 81-1.The following table illustrates the sensitivity to a change in certain assumptions used in (i) the calculation of pension expense for the year ending Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses that may result from the December 31, 2006, and (ii) the calculation of the projected benefit obligation (PBO) at December 31, 2005 for the Companys pension plans: inability of its customers to make required payments. Such allowances are based upon several factors including, but not limited to, historical experience and the current and projected financial condition of specific customers. Were the financial condition of a customer to deteriorate,Increase (decrease)Increase (decrease) resulting in an impairment of its ability to make payments, additional allowances may be required. in 2006 Pre-taxin PBO at(dollars in millions)Pension ExpenseDecember 31, 2005 Inventories The Companys 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: 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 decrease in discount rate $ 1.0 $ 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 increase in discount rate $ (0.9) $ (13.8) million for the years ended December 31, 2005, 2004 and 2003, respectively. The Company provides a reserve for estimated obsolescence or excess25 basis point decrease 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 25 basis point increase in expected return on assets $ (1.0) 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 Companys current estimateFinancial 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 suchYear 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 20052004 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 Companys annual evaluations, no impairment of goodwill was required. However, should the CompanysRevenues100.0%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. Product Warranty The Company provides for the estimated cost of product warranties at the time of sale based upon historical experience, Costs and expenses: or, in some cases, when specific warranty problems are encountered. Should actual product failure rates or repair costs differ from the CompanysCost of sales (exclusive of depreciation and amortization shown separately below)71.374.572.3Selling and administrative expenses15.214.317.7 current estimates, revisions to the estimated warranty liability would be required. See Note 7 of the Notes to Consolidated Financial StatementsDepreciation and amortization 3.1 3.9 5.1 for additional details surrounding the Companys 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 expense0.5 0.9 0.5 based on advice from third parties or on managements judgment, as appropriate. Revisions to contingent liability reserves are reflected in income in the period in which different facts or information become known or circumstances change that affect our previous assumptions with respect Total costs and expenses 89.693.695.3 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 change10.46.44.7 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 thanIncome before cumulative effect of accounting change 6.8 4.53.5 not to be realized, considering future taxable income and ongoing prudent and feasible tax planning strategies. As of December 31, 2005, theCumulative 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. Currently, the Company believes it is more likely than not that it will generate sufficient future taxable income to fully utilize this net operatingNet income 6.8%4.5% 4.2% 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 wouldResults 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 Standards No. 87, Employers Accounting for Pensions (SFAS 87), which requires that amounts recognized in the financial statements beThe Company had net income of $171.1 million, or $1.52 per share, for the year ended December 31, 2005 compared to $94.4 determined on an actuarial basis. See Note 8 of the Notes to Consolidated Financial Statements for the amounts of pension expense included 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 in the Companys Results of Operations and the Companys contributions to the pension plans for the years ended December 31, 2005, 2004include 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 and 2003, as well as the unrecognized net loss at December 31, 2005 and 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 The assumptions used in calculating the pension amounts recognized in the Companys financial statements include discount rates, interest costs, a workforce reduction program at the Cameron division. expected return on plan assets, retirement and mortality rates, inflation rates, salary growth and other factors. The Company bases the discount 2627 16. RevenuesRevenues for 2005 totaled $2.518 billion, an increase of 20.3% from 2004 revenues of $2.093 billion. Revenues increased in each of the CompanysIncome 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 segments and across all product lines, except subsea, due to increased drilling and production activity in the Companys markets primarily resulting from 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 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.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 A discussion of revenue by segment may be found below.drilling and surface sales from lower-margin subsea systems sales and (iii) the application of relatively fixed overhead to a larger revenue base. 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 Cost and Expenses increase resulting from a change in the estimated recovery value of certain slow-moving inventory and higher warranty costs on a subsea systems project.Costs of sales (exclusive of depreciation and amortization) for 2005 totaled $1.796 billion, an increase of 15.1% from 2004s $1.560 billion. As aSelling 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