ITEM 1. BUSINESS.
GENERAL
Camco International Inc. and subsidiaries (collectively, "Camco" or the "Company") is one of the world's leading providers of oilfield equipment and services for numerous specialty applications in key phases of oil and gas drilling, completion and production. Many of the Company's products and services have recognized names in the industry and are associated with technological innovation and quality. Camco operates on a worldwide basis with its equipment and services being sold or used in approximately 50 countries. Approximately 66% of the Company's revenues in 1997 were derived from equipment or services sold or provided outside the United States.
Camco is the leading world producer of gas lift systems. Camco also operates one of the largest fleets of coiled tubing units in the United States, is one of the world's two leading providers of subsurface safety valve systems, synthetic diamond drill bits and electric submersible pump systems and is the world's third leading provider of roller cone drill bits. On June 13, 1997, Camco acquired Production Operators Corp.("Production Operators"), the market leader in total responsibility gas compression services. The business combination has been accounted for using the pooling-of-interests method of accounting. Accordingly, the financial information reflected in this document has been prepared as if Camco and Production Operators were combined as of the beginning of the earliest period presented. Information regarding world markets excludes the former Soviet Union (the "FSU") and China, for which reliable market information is unavailable.
Camco's business consists of an Oilfield Equipment Segment and an Oilfield Services Segment.
Oilfield Equipment Segment. Camco's Oilfield Equipment Segment provides a wide range of manufactured oilfield products, principally under the names Reda Pump ("Reda"), Lasalle Engineering ("Lasalle"), Lawrence Technology, Hycalog, Reed Tool ("Reed"), Camco Products and Site Oil Tools ("Site"). Reda manufactures electric submersible pumps ("ESPs") used to lift high volumes of fluids from producing wells. Lasalle, acquired in September 1996, provides oil well production services, project management and ancillary equipment for ESP systems. Lawrence Technology manufactures electric cables and wire used with ESPs. Hycalog manufactures synthetic diamond drill bits, and Reed manufactures roller cone drill bits. Synthetic diamond drill bits have a faster rate of penetration, drill more footage, generally have a higher unit sales price and are used primarily in high cost drilling locations where their relatively higher price can be justified by their corresponding reduction in total drilling time and, therefore, costs. Roller cone drill bits generally have lower unit prices, are less application sensitive and are used in a wider variety of drilling applications. Camco Products manufactures gas lift systems used to increase the volume of production from oil wells, subsurface safety valves used as fail-safe devices to shut-in production in oil and gas wells in emergencies, and packers and other items used in the completion and production phases of oil and gas development. In December 1996, Camco Products expanded its gas lift business by acquiring the artificial lift business line of Halliburton Company. Site Oil Tools, which was acquired by the Company in March 1995, manufactures a full line of packers, accessory equipment and services for the completion of oil and gas wells. The Oilfield Equipment Segment accounted for approximately 76% of Camco's total revenues in 1997.
Oilfield Services Segment. Camco's Oilfield Services Segment provides a wide range of oilfield services, principally under the names Production Operators, Camco Coiled Tubing Services ("Camco Coiled Tubing"), Camco Wireline and Drilling & Services. Production Operators provides total responsibility gas compression services including project management and operation for clients engaged in gas gathering, injection, treating and processing. Camco Coiled Tubing provides coiled tubing services and nitrogen services and performs other downhole operations used in the initial completion of wells and in well maintenance and treatment during the productive life of a well. Camco Wireline provides mechanical wireline services used to install or retrieve downhole flow control devices and to obtain reservoir data using specialized instruments. Drilling & Services provides steerable rotary drilling system services used in directional and horizontal drilling applications. The Oilfield Services Segment accounted for approximately 24% of Camco's total revenues in 1997.
Selected financial data related to Camco's business segments, foreign and domestic operations, and export sales is set forth in Note 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.
The Company, which was incorporated in Delaware in 1988, is the successor to Camco, Incorporated, which was incorporated in Texas in 1946. The Company's headquarters are located at 7030 Ardmore, Houston, Texas 77054.
BUSINESS OPERATIONS
OILFIELD EQUIPMENT SEGMENT
Electric Submersible Pumps. Reda was founded in 1930 and manufactures downhole ESPs. An ESP system consists of an electric motor, which provides direct drive to a pump immediately above the motor, and surface control systems. The motor and pump are positioned above the perforation of the production zone at the bottom of the production tubing string in an oil well. ESPs are often the most economical means of lifting high volumes of reservoir fluids (600 to 20,000 barrels per day) to the surface from oil wells which either do not flow naturally or have low natural flow rates. In many cases, use of an ESP makes a well economical to produce where it otherwise would be abandoned. Many ESPs are used in wells where large quantities of water are produced with the oil. As high flow rate wells mature, they will, in most cases, begin to produce large quantities of water. Water also may be present as a consequence of secondary recovery techniques involving the injection of steam or water into the oil-bearing formation to increase oil production. ESPs are also used in deep or deviated wells where other artificial lift systems cannot function reliably.
Although the actual life of an ESP system is influenced by variable well characteristics such as corrosive and abrasive content in the fluid and by downhole temperatures, the average life of a typical ESP system is approximately 18 months. Upon failure, the ESP system is pulled and either repaired with new components or replaced entirely depending on wear and condition. Reda's network of sales and service centers and responsiveness to replacement demands have been important in developing new markets. Demand for Reda's products is primarily driven by oil prices, replacement of other artificial lift systems and the replacement market for ESPs worldwide.
Lawrence Technology manufactures cable for submersible pump installations. This specialized cable, capable of withstanding corrosive fluids and the high temperatures encountered downhole, carries the electric current from the surface to the motor located at the production zone. Demand for Lawrence Technology's products is driven primarily by demand for ESPs and by the replacement market for ESP cable worldwide.
Lasalle specializes in providing oil well production services, project management and ancillary equipment for ESPs. Lasalle has led the development of offshore ESP systems and was project manager in Brazil for the first subsea ESP installation in the world.
Electric submersible pumps, ESP cable and related services and equipment accounted for revenues of $284.1 million, $234.6 million and $204.8 million in 1997, 1996 and 1995, respectively.
Drill Bits. Hycalog manufactures synthetic diamond drill bits. It was founded in 1946 and manufactured its first natural diamond drill bits in 1953. The bits manufactured by Hycalog are polycrystalline diamond compact ("PDC") bits which utilize synthetic diamonds as the primary cutting element. PDC bits allow faster rates of drilling penetration and can drill complete well sections without the need for bit replacement. As a result, they are used in high cost drilling locations (such as offshore or in remote locations) where their technical advantages reduce drilling time sufficient to justify the high unit sales prices. Hycalog manufactures both steel body bits and matrix bits. Steel body bits are favored for large cutter PDCs used to drill in softer formations at fast rates of penetration. Matrix bits have a tungsten carbide body which makes them better suited for soft to medium formations and better able to resist abrasive drilling fluids. Several different types of diamond bits may need to be used in one well (diamond bits can also be used in conjunction with roller cone bits) as different formations are encountered in drilling a well. As a result, diamond drill bit designs are often custom engineered for specific formation characteristics expected to be encountered. A single PDC bit may drill from several hundred feet to over 20,000 feet depending on the hardness and abrasiveness of the
formation. Hycalog's patented "hybrid bit" technology, which combines synthetic and natural diamonds on a single bit, has longer wear life in harder formations than other PDC bits that do not include natural diamonds. PDC bits are often used with a downhole motor.
Reed manufactures roller cone drill bits and has been an established bit manufacturer since 1916. Reed produces roller cone drill bits for a wide variety of oil and gas well drilling applications, primarily for use in the high-performance markets. Roller cone bits consist of a steel body and three rotating cones which have cutting teeth. Reed manufactures bits with milled teeth and with tungsten carbide insert teeth, which have a longer life in harder formations. A number of different sizes of bits are used during the drilling of the well, and the bits are generally dulled during the drilling process. Drilling an average well in the United States to a depth of 6,000 feet typically might consume four to six roller cone bits. The bits are manufactured for inventory in a variety of standard sizes. Reed has proprietary nozzle designs (Mudpick and Mudpick II trademarks) used in its drill bits. Mudpick allows the drilling fluid to clean the bit more effectively while drilling, which increases rates of drilling penetration by up to 25%. By providing a sweeping effect across the interface of the teeth and rock, Mudpick II hydraulics improve the removal of the cuttings (in addition to cleaning the bit) and further improve the rate of drilling penetration. Reed also holds a patent for a threaded ring bearing design that significantly reduces the likelihood of losing a cone from the drill bit in the well when it becomes worn and, as a result, reduces the likelihood of costly retrieval operations. The combination of Mudpick II hydraulics and the threaded ring bearing was introduced as enhanced hydraulic performance ("EHP") bits in 1992. Demand for Camco's drill bit products is primarily driven by levels of drilling activity worldwide.
Drill bits accounted for revenues of $231.7 million, $193.4 million and $180.6 million in 1997, 1996 and 1995, respectively.
Completion Equipment. Camco Products manufactures gas lift systems, downhole safety valves used in oil and gas well completions, packers and accessory equipment. Camco began distributing gas lift systems in 1946 and started manufacturing its own equipment in 1951. Gas lift systems consist principally of mandrels containing gas lift valves which are placed in the production tubing string of an oil well. Gas is compressed and injected from the surface down the annulus between the production tubing and casing, enters the tubing through the gas lift valves and lifts the oil in the production tubing to the surface. The gas is then separated from the oil at the surface and compressed and reinjected downhole, forming a closed-loop system. Gas lift is usually the most economical method of lifting fluid when natural gas is produced with the oil or is available from other wells for injection.
Safety valve systems are typically installed several hundred feet below the well head in an oil or gas well and connected to surface control equipment. If loss of control pressure at the surface occurs, the valve automatically closes, thereby preventing a potential blowout and environmental harm. Safety valves, made by certified manufacturers, are required by regulation in offshore wells and other environmentally sensitive areas of the United States and many foreign locations.
Camco Products' other completion equipment includes packers, expansion joints and sliding sleeves, as well as equipment to facilitate wireline operations in a well. Demand for equipment manufactured by Camco Products is principally driven by the level of offshore well completions worldwide.
OILFIELD SERVICES SEGMENT
Contract Gas Compression Services. Production Operators provides contract gas compression services. Contract gas compression services consist principally of contract gas compression, which is the boosting of natural gas pressure by mechanical means using custom-designed and engineered high-performance reciprocating compression equipment. Production Operators provides total responsibility compression operating service to oil and gas producers, pipeline operators and gas processors. This service focuses on the custom engineering, fabrication, turn key construction, installation, operation and maintenance of the equipment necessary to handle any gas compression on a full responsibility, guaranteed mechanical availability, value-added basis rather than on the lease or sale of equipment. Gas compression services have been expanded in recent years to include contract operation of client owned equipment and contract gas processing and
treating. Demand for Camco's gas compression services is driven by decisions by petroleum and pipeline companies to outsource their gas compression and other production requirements.
Production Operators, founded in 1961 and acquired by Camco in June 1997, currently provides contract gas compression services primarily in the United States, Venezuela and Argentina. The Company believes that there are significant opportunities for Production Operators to leverage off of Camco's existing marketing and operational infrastructure to expand its business into other geographic regions.
Contract gas compression services accounted for revenues of $114.6 million, $91.8 million and $72.8 million in 1997, 1996 and 1995, respectively.
Coiled Tubing Services. Camco Coiled Tubing provides coiled tubing and nitrogen services in the United States, Nigeria and Venezuela. Camco Coiled Tubing operates a fleet of approximately 55 coiled tubing units and 105 nitrogen pumping units. Nitrogen pumping has various oilfield applications including pipeline purging. Coiled tubing is flexible steel tubing with a diameter of up to 3 1/2 inches manufactured in lengths of thousands of feet and wound or coiled around a large reel mounted on a truck or a skid unit. Coiled tubing is inserted into wells to perform various well-servicing operations, including the injection of nitrogen to clean out debris from the well and the injection of chemicals for well treatment. Because the coiled tubing can be inserted through the wellhead into the production tubing, it can be used to perform workovers without using a larger, more costly workover rig. The other principal advantages of employing coiled tubing in a workover include (i) not having to "kill" the well during such operations, thereby reducing the risk of formation damage to the well, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, which must be jointed and unjointed, (iii) the ability to direct fluids into a wellbore with more precision, allowing for localized stimulation treatments and providing a source of energy to manipulate downhole tools and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit.
Camco Coiled Tubing principally operates in the United States, Nigeria and Venezuela and demand for its services are primarily driven by the level of oil and gas well service and workover activity in those areas. Well service and workover activity is driven by energy prices. The Company believes the demand for coiled tubing services will grow due to continued technological improvements that have increased the dependability and durability of tubing, and the range and types of services available.
Wireline Services. Camco Wireline provides mechanical wireline (or slickline) services. Mechanical wireline services are distinct from electric wireline services used for geologic data collection and interpretation. A wireline is a piano-wire sized smooth cable with which special tools can be lowered into the well bore to place or retrieve equipment, such as a gas lift valve or a downhole safety valve, or to measure and record bottom hole data to determine the condition of producing wells. These services are performed under full well pressure without the need to "kill" the well. Camco Wireline provides services in the United States and worldwide to offshore markets where the majority of gas lift systems and safety valves are used. Demand for Camco Wireline's services is primarily driven by the level of completions and workovers worldwide.
Extended Reach Drilling Services. The Company's newly formed Drilling & Services division is developing a steerable rotary drilling system to be used in extended reach drilling which is expected to solve some of the technical limitations of current technology in directional and horizontal drilling applications.
SALES, SERVICE AND DISTRIBUTION
The Company markets its various products and services primarily through its own sales organization, providing technical assistance to customers on the application of various products. In certain international locations, products are distributed through independent sales agents who have access to technical support from the Company. Camco maintains finished goods and repair parts inventories at various stocking points and service centers around the world. Inventories are replenished from the production of the Company's manufacturing facilities based on expected business levels and customer requirements.
In recent years, a number of major oil and gas producers along with many leading oilfield equipment and service providers, including Camco, have entered into business alliances in an attempt to reduce or better
control the overall cost to find, drill, complete and produce oil and gas. These alliances involve relatively long-term supply and service arrangements. The Company's management believes that as alliances become more prevalent, most of its key customers will select alliance partners primarily on a product-by-product basis, particularly for the higher technology, value-added equipment and services which constitute most of Camco's business. Camco has successfully entered into alliances in various regions around the world and with respect to many of its key products.
CUSTOMERS
Camco's customers are primarily major and independent oil and gas companies and foreign national oil companies. No single customer accounted for more than 10% of Camco's total revenues in 1997, but the loss of a major oil or gas company or certain foreign national oil companies as a customer would be significant.
INTERNATIONAL OPERATIONS
Camco's equipment and services are used in approximately 50 countries by U.S. customers operating abroad and by foreign customers. Sales of equipment and services outside of the United States accounted for 66%, 65% and 64% of total revenues in 1997, 1996 and 1995, respectively. Certain of Camco's international operations are subject to special risks inherent in doing business outside the United States such as risks of war, boycotts, civil disturbances and governmental activities, including currency restrictions and arbitrary imposition of taxes. See Note 10 to the Consolidated Financial Statements included elsewhere herein for additional financial data related to Camco's revenues by geographic region.
The Company wholly owns all of its foreign subsidiaries engaged in manufacturing outside of the United States and wholly owns most of its sales and service operations outside of the United States. Government-owned petroleum companies located in some of the countries in which Camco operates have adopted policies (or are subject to governmental policies) giving preference to the purchase of goods and services from companies that are majority owned by local nationals. As a result of such policies, Camco relies on joint ventures, license arrangements and other business combinations with local nationals in these countries. Camco is a participant in joint ventures or a shareholder in corporations in Abu Dhabi, Dubai and Ras Al Khaimah in the United Arab Emirates, Egypt, Colombia, Malaysia, Brunei, Indonesia, Norway, Venezuela and the FSU.
The Company has significant operations in areas which have experienced political instability, high inflation and significant currency fluctuations in recent years, including Nigeria, Venezuela and the FSU. Given the dynamic political and economic environment in each of these areas, business activity is expected to remain somewhat volatile from year to year. Exposure to these risks is actively monitored by management and action is taken when appropriate under the circumstances to limit such exposures. Despite these actions, there can be no assurance that volatility in these markets will not adversely impact the Company's operations.
Camco operates in various foreign countries and is, therefore, subject to currency fluctuations in these countries. Changes in the value of the U.S. dollar against these currencies will affect the Company's results of operations and financial position. Camco conducts a portion of its business in highly inflationary environments such as South America and Nigeria. The effect of currency rate changes in highly inflationary countries is reflected in the results of operations in accordance with Statement of Financial Accounting Standards No. 52.
In 1997, 1996 and 1995, the Company recorded translation losses of $1.8 million, $4.8 million and $5.7 million, respectively, primarily due to the devaluation of the bolivar in Venezuela and the naira in Nigeria. Additionally, during 1997, 1996 and 1995, the cumulative translation account, a component of stockholders' equity, reflected a $3.8 million loss, a $7.2 million gain and a $.5 million gain, respectively, primarily due to movements in the U.K. pound sterling versus the U.S. dollar. The Company actively monitors foreign subsidiaries' net asset positions denominated in foreign currencies and takes actions when appropriate under the circumstances to limit its risk to currency fluctuation and devaluation.
MANUFACTURING AND RAW MATERIALS
Most of Camco's oilfield equipment products are made from steel and steel alloys which are machined to some degree of close tolerance in the manufacturing process. Machined pieces are inspected against product specifications and assembled. Some products are performance tested after assembly. Some parts are purchased in finished form from qualified suppliers when it is not economical for Camco to perform the machining, or when the material, such as elastomers, is other than steel. Camco has more than one source for every material it requires in the manufacture of its products.
RESEARCH AND PRODUCT DEVELOPMENT
Camco's business strategy is to be an industry leader in technically demanding oilfield equipment and services markets. Camco attempts to keep each of its key products at the forefront of engineering and technical advances, and each business unit has ongoing programs to advance this goal. In 1997, 1996 and 1995, total research and development expenditures were $33.2 million, $26.3 million and $24.3 million, respectively.
PATENTS AND TECHNOLOGY
At December 31, 1997, Camco had approximately 248 U.S. patents and 290 foreign patents in effect with approximately 89 U.S. patent applications and approximately 134 foreign patents pending. Camco has been diligent in obtaining patents to protect its technological developments. There is, however, no patent or group of related patents which would enable any Camco group to dominate its industry and no single patent or group of related patents that is material to Camco's business.
SEASONALITY
Demand for Camco's equipment and services is subject to some seasonality factors. Higher activity generally is experienced in the fall and winter. Demand generally increases in the second half of the year as a result of industry spending patterns as well as economic factors that affect the Company's customers, such as increased cash flow from winter demand for natural gas. In addition, in cold weather climates activity generally slows in the spring due to both difficulty in moving equipment and government restrictions on moving heavy equipment on affected roadways during the spring thaws. Weather conditions in the North Sea and Arctic areas (during the winter) and in the Gulf of Mexico (during the summer and early fall) can cause temporary disruptions to activity in areas in which Camco operates.
ORDER BACKLOG
At December 31, 1997, the Company's backlog of firm orders for products and equipment was approximately $99.2 million compared to approximately $76.5 million at December 31, 1996. Substantially all of such orders are expected to be filled in 1998.
INDUSTRY CONDITIONS
Demand for and pricing of Camco's equipment and services depends primarily upon the number of oil and gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of well service and workover activity worldwide. Drilling, completion and workover activity in turn is largely dependent on the level and volatility of oil and natural gas prices. Given the substantially longer lead times required and higher levels of capital investments necessary, drilling, completion and workover activity has historically been less volatile in international markets, from which the Company derived 56% of its revenues in 1997, than in North America.
Pricing for crude oil and natural gas declined during 1997 reversing a three-year upward trend. West Texas Intermediate ("WTI") crude prices averaged $20.58 per barrel in 1997, or $1.59 per barrel lower than in 1996. U.S. natural gas prices averaged $2.47 per MCF in 1997, down slightly from the previous year. Worldwide drilling activity increased for the third consecutive year in 1997 as the long-term outlook remained
favorable for the pricing of oil and natural gas. Average rig count activity for the previous three years is summarized in the table below:
The Company believes that the long-term outlook for drilling, completion and production activity remains positive as supply and demand are almost in equilibrium and worldwide demand for crude oil is forecasted to increase through the turn of the century. Growth in the demand for and production of natural gas is expected to exceed that of oil.
While the Company's long-term outlook for drilling, completion and production activity is optimistic, short-term uncertainty exists with respect to the outlook for the industry in North America given the recent significant declines in the price of crude oil. The price of WTI crude oil averaged $16.40 per barrel during the first two months of 1998, and declined to below $14.50 per barrel in March 1998. The decline in U.S. natural gas prices from 1997 levels has not been as significant. The Company believes that if WTI crude oil prices remain depressed for a prolonged period, drilling, completion and production activity in North America, particularly in land-based markets, could decline significantly below 1997 levels.
The international average rig count increased for the third consecutive year, to an average rig count of 808. The Company expects international drilling, completion and production activities to remain relatively stable as most international projects do not fluctuate based on short-term changes in commodity prices.
While facing economic and currency instability, developing countries with oil reserves in South America, Eastern Europe and the Far East often increase exploration and production activities to provide additional hard currency inflows to their economies. The Company believes that there continues to be significant opportunities to provide oilfield equipment and services to increase production in these and other areas of the world.
Demand for the Company's contract gas compression services is driven by decisions by petroleum and pipeline companies to outsource gas compression and other production requirements. The Company believes that demand for contract gas compression services will increase and that significant opportunities exist to expand high-end compression services in many markets outside the United States.
Industry conditions will continue to be influenced by numerous factors over which Camco has no control, including the level and volatility of world oil and gas prices, production levels of the Organization of Petroleum Exporting Countries ("OPEC") and general activity levels of oil and gas producers worldwide. Although it is impossible to predict the impact of such factors on the Company, management believes these risks are acceptable. However, there can be no assurance that any one of these factors would not have a material adverse effect on its operations.
BUSINESS STRATEGY
Camco's business strategy is to be an industry leader in technically demanding oilfield equipment and services markets where the Company's technology and high quality products and services make it possible for customers to produce oil and gas in increasingly remote and technically demanding environments. The Company provides customers with technical innovations in its products and services which lower their costs to find and produce oil and gas. The Company seeks to minimize the effect of volatility of oil and gas prices and to maximize profitability under varying market conditions by managing its cost structure in response to changes in its markets.
Consistent with the Company's business strategy, Camco's equipment and services are focused on serving difficult drilling and production environments, providing value-added applications and developing innovative solutions to customer problems. Camco seeks to maintain a reputation for offering advanced technology through an ongoing research and development program. This commitment is evidenced by numerous drilling records set over the past three years by both Reed Tool and Hycalog. In addition, Camco's Products and Services business unit was awarded the A.S.M.E. Best Mechanical Engineering Achievement Award for its patented system for "Drilling with Coiled Tubing" at the 1995 Offshore Technology Conference ("OTC"). Field tests of this technology are ongoing and based on recent results, drilling with coiled tubing continues to show promise as a means to economically produce smaller infield oil reserves. Reed was also a runner-up at the 1995 OTC for its new "PMC" drill bit design using a patented manufacturing process.
COMPETITION
Camco's equipment and services are sold in highly competitive markets and its sales and earnings can be affected by competitive actions such as price changes, new product developments, or improved availability and delivery. Camco competes with a large number of companies, some of which are larger than the Company, have greater financial resources and offer substantially broader product and service lines. The Company believes that competition for sales of its products and services is based on numerous factors, including quality, performance and reliability, availability, technological advances and price.
Camco is responding to this highly competitive environment through efforts both to reduce the actual cost of its products and to increase their economic value to the customer. Camco's design engineers and manufacturing engineers have worked toward reducing the cost of manufacturing products to permit lower selling prices while maintaining the technical qualities that the various markets require. In addition, Camco's research and development efforts are focused on improving a product's economic value to the customer by improving its performance, thereby allowing Camco to compete on technology rather than on price alone.
The principal competitors in ESPs are Centrilift (a division of Baker Hughes) and ESP Inc. (a division of Wood Group).
Camco's principal competition in drill bits comes from Hughes Christensen (a division of Baker Hughes), Smith International and Security DBS (a division of Dresser Industries).
The principal competitors for contract gas compression are Hanover Compressor Co., Dresser Rand (a division of Dresser Industries) and Global Compression Services Inc.
Competition for gas lift equipment comes primarily from a division of Weatherford Enterra. Baker Hughes and Halliburton are the principal competitors in safety valves.
The primary competitors for coiled tubing and nitrogen services are Halliburton, Dowell (a division of Schlumberger) and BJ Services. Competition for mechanical wireline services comes primarily from Halliburton and numerous small regional companies.
OPERATING RISKS AND INSURANCE
Camco's operations are subject to hazards inherent in the oil and gas industry, such as fire, explosion, blowouts and oil spills that can cause personal injury or loss of life, damage to property, equipment, the environment and marine life, and suspension of operations. In addition, claims for loss of oil and gas production and damages to formations can occur in the completion and workover business. Litigation arising from a catastrophic occurrence at a location where Camco's products are used may in the future result in the Company being named as a defendant in lawsuits asserting potentially large claims. The Company maintains insurance coverage that it believes to be customary in the industry against these hazards. The Company maintains general liability and property damage insurance, as well as product liability, business interruption and other insurance, and self-insures against workers' compensation claims. However, insurance may not provide complete protection against casualty losses. Further, no assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable.
Although the Company believes it will be able to obtain insurance coverage adequate for its current operations, a successful liability claim for which the Company is underinsured or uninsured could have a material adverse effect on the Company.
Camco has safety and environmental compliance programs staffed by full-time professional employees. In addition, Camco involves all levels of executive and operating management in a continuous effort to improve its safety and environmental record.
EMPLOYEES
At December 31, 1997, the Company had approximately 5,500 employees worldwide, including approximately 2,400 who were employed in international locations. Approximately 720 employees at December 31, 1997, are represented under collective bargaining agreements in two of its manufacturing facilities in the United States and one international plant in Belfast. The Company believes that its relations with its employees are satisfactory.
ENVIRONMENTAL MATTERS AND REGULATIONS
Camco's business is affected both directly and indirectly by governmental regulations relating to the oil and gas industry in general, as well as environmental and safety regulations that apply specifically to Camco's business. Various federal, state and local laws and regulations governing the discharge of materials into the environment, or otherwise relating to the protection of public health and the environment, may affect Camco's operations, expenses and costs. Environmental regulations have increasingly limited and restricted activities that may have an impact on the environment, such as emissions of air and water pollutants, generation and disposal of wastes, and use and handling of hazardous substances. These limitations and restrictions have increased operating costs for Camco and other similar businesses. In addition, it is reasonable to expect that the costs of compliance will continue to increase in the foreseeable future.
The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "superfund" law, imposes liability, regardless of fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the current or previous owner and operator of a facility and companies that disposed or arranged for the disposal of the hazardous substance found at a facility. CERCLA also authorizes the Environmental Protection Agency (the "EPA") and, in some cases, private parties to take actions in response to threats to the public health or the environment and to seek recovery from such responsible classes of persons of the costs of such actions. In the course of its operations, Camco has generated and will generate wastes that may fall within CERCLA's definition of "hazardous substances." In addition, prior owners or operators at current or past Camco sites may have disposed of hazardous substances on these properties. Camco may be responsible under CERCLA for all or part of the costs to clean up facilities at which such substances have been disposed.
Camco's operations may generate wastes that are subject to the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA has limited disposal options for certain hazardous wastes and may adopt more stringent disposal standards for nonhazardous wastes. In addition, RCRA includes a statutory exemption that allows oil and gas exploration and production wastes to be classified as nonhazardous wastes. A similar exemption is contained in many of the state counterparts to RCRA. If oil and gas exploration and production wastes were required to be managed and disposed of as hazardous wastes, either as a result of changes in RCRA or the imposition of more stringent state regulations, domestic oil and gas producers, including many of the Company's customers, could be required to incur substantial obligations with respect to such wastes. Because of the potential impact on the Company's customers, any regulatory changes that impose additional restrictions or requirements on the disposal of oil and gas wastes could adversely affect demand for the Company's services and products.
Camco is also subject to laws and regulations concerning occupational health and safety. These laws, such as the Federal Occupational Safety and Health Act ("OSHA") and comparable state statutes, establish standards that apply generally to businesses in the manufacturing sector, including Camco's businesses.
Camco is also subject to laws and regulations concerning transportation and pipeline operations. These laws, under the Department of Transportation, establish standards that apply generally to businesses in the oilfield sector, including Camco's businesses.
The Company believes that it is currently in compliance in all material respects with the requirements of transportation, environmental and occupational health and safety laws and regulations. Because such laws and regulations are frequently changed, the Company is unable to predict the impact that such laws and regulations may have on the Company's business.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, the Company's prospects, developments and business strategies for its operations, all of which are subject to certain risks, uncertainties and assumptions. These forward-looking statements are identified by their use of terms and phrases such as "expect," "estimate," "project," "believe," and similar terms and phrases. These risks include changes in market conditions in the oil and gas industry, declines in prices of oil and gas, political instability in foreign countries in which the Company operates, currency fluctuations and contracts, in particular those in Nigeria, South America and Southeast Asia, increased competition in the Company's markets, governmental restrictions affecting oil and gas exploration, the ability of the Company to integrate and realize anticipated synergies for its acquisitions, including that of Production Operators, the ability of the Company to achieve and execute internal business plans, and the impact of any economic downturns and inflation and other market factors affecting the demand and supply of oil and gas and the products and services relating thereto. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected.
ITEM 2.
ITEM 2. PROPERTIES
Camco's principal facilities are as shown in the table below:
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(a) Lease expires May 25, 2037.
(b) Lease expires December 10, 1999.
(c) Lease expires July 8, 2019.
(d) Lease expires March 31, 1999.
(e) Lease expires October 1, 2009.
(f) Lease expires May 16, 2011.
(g) Lease expires November 7, 2987.
(h) Lease expires December 31, 1998.
In addition, as of December 31, 1997, Camco operates in approximately 45 sales, service and other facilities in the United States, most of which are leased, and operates approximately 65 sales, service and other facilities in foreign countries, almost all of which are leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal course of business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value, trades on the New York Stock Exchange under the symbol "CAM". The following table sets forth, for the periods indicated, the high and low sales prices of the Company's Common Stock as reported on the NYSE Composite Tape and dividends per share.
As of February 27, 1998, there were 505 record holders of the Common Stock. This number does not include the number of security holders for whom shares are held in a "nominee" or "street" name.
The Company has paid quarterly dividends of $.05 per share since its initial public offering in December 1993. Subject to market conditions and other factors, the Company intends to continue paying regular quarterly dividends on its Common Stock. In addition, as long as any amount is outstanding under the Company's term loan facility, the Company is restricted by a covenant limiting the cumulative payment of dividends if the payment of such dividends results in the Company's net worth falling below acceptable minimum levels. This restriction has not had any impact on the Company's ability to pay its regular quarterly dividends to stockholders. Because the Company operates some of its business, particularly its international operations, through subsidiaries, its ability to pay dividends is partly dependent upon its ability to receive dividends and other payments from its subsidiaries.
ITEM 6.
ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements, including the notes thereto, included elsewhere herein.
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(a) On June 13, 1997, Camco International Inc. acquired Production Operators in a business combination accounted for using the pooling-of-interests method of accounting. Accordingly, the financial information reflected herein has been prepared as if Camco and Production Operators were combined as of the beginning of the earliest period presented. All costs of the merger, which were $12.5 million, or $8.6 million net of tax benefits ($.22 per share), were expensed during the second quarter of 1997. Excluding merger costs, income from operations in 1997 was $2.61 per share on a diluted basis. See Note 1 to the Consolidated Financial Statements included elsewhere herein for further discussion of this transaction.
(b) Production Operators discontinued its oil and gas production activities in 1995, as described in Note 11 to the Consolidated Financial Statements included elsewhere herein.
(c) The Company changed its method of accounting for reengineering costs, to expense all such costs incurred in connection with systems development projects, as required by an Emerging Issues Task Force pronouncement issued November 20, 1997. In 1994, Production Operators changed its method of accounting for income taxes. Camco changed to the accrual method of accounting for post retirement benefits other than pensions effective January 1, 1993.
(d) Earnings per share for 1993 has been calculated based on the average common equivalent shares outstanding subsequent to the Company's initial public offering on December 10, 1993, plus the number of shares of Camco common stock issued to the holders of Production Operators common stock.
(e) The Company has paid quarterly dividends on its common stock of $.05 per share, or $.20 per share annually, since its initial Camco public offering in December 1993. The amounts presented include the effect of dividends paid by Production Operators prior to the merger with Camco.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected Financial Information" and the Consolidated Financial Statements and related notes thereto, included elsewhere herein. As further described in Note 1 to the Consolidated Financial Statements included elsewhere herein, Camco merged with Production Operators in a business combination accounted for using the pooling-of-interests method of accounting. Accordingly, the financial information presented herein has been prepared as if Camco and Production Operators were combined as of the beginning of the earliest period discussed.
GENERAL
Demand for and pricing of Camco's equipment and services depends primarily upon the number of oil and gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of well service and workover activity worldwide. Drilling, completion and workover activity in turn is largely dependent on the level and volatility of oil and natural gas prices. Given the substantially longer lead times required and higher levels of capital investments necessary, drilling, completion and workover activity has historically been less volatile in international markets, from which the Company derived 56% of its revenues in 1997, than in North America.
Pricing for crude oil and natural gas declined during 1997 reversing a three-year upward trend. West Texas Intermediate ("WTI") crude prices averaged $20.58 per barrel in 1997, or $1.59 per barrel lower than in 1996. U.S. natural gas prices averaged $2.47 per MCF in 1997, down slightly from the previous year. Worldwide drilling activity increased for the third consecutive year in 1997 as the long-term outlook remained favorable for the pricing of oil and natural gas. Average rig count activity for the previous three years is summarized in the table below:
The Company believes that the long-term outlook for drilling, completion and production activity remains positive as supply and demand are almost in equilibrium and worldwide demand for crude oil is forecasted to increase through the turn of the century. Growth in the demand for and production of natural gas is expected to exceed that of oil.
While the Company's long-term outlook for drilling, completion and production activity is optimistic, short-term uncertainty exists with respect to the outlook for the industry in North America given the recent significant declines in the price of crude oil. The price of WTI crude oil averaged $16.40 per barrel during the first two months of 1998, and declined to below $14.50 per barrel in March 1998. The decline in U.S. natural gas prices from 1997 levels has not been as significant. The Company believes that if WTI crude oil prices remain depressed for a prolonged period, drilling, completion and production activity in North America, particularly in land-based markets, could decline significantly below 1997 levels.
The international average rig count increased for the third consecutive year, to an average rig count of 808. The Company expects international drilling, completion and production activities to remain relatively stable as most international projects do not fluctuate based on short-term changes in commodity prices.
While facing economic and currency instability, developing countries with oil reserves in South America, Eastern Europe and the Far East often increase exploration and production activities to provide additional hard currency inflows to their economies. The Company believes that there continues to be significant opportunities to provide oilfield equipment and services to increase production in these and other areas of the world.
Demand for the Company's contract gas compression services is driven by decisions by petroleum and pipeline companies to outsource gas compression and other production requirements. The Company believes that demand for contract gas handling services will increase and that significant opportunities exist to expand high-end compression services in many markets outside the United States.
Industry conditions will continue to be influenced by numerous factors over which Camco has no control, including the level and volatility of world oil and gas prices, production levels of the Organization of Petroleum Exporting Countries ("OPEC") and general activity levels of oil and gas producers worldwide. Although it is impossible to predict the impact of such factors on the Company, management believes these risks are acceptable. However, there can be no assurance that any one of these factors would not have a material adverse effect on its operations.
Camco operates in various foreign countries and is, therefore, subject to currency fluctuations in these countries. Changes in the value of the U.S. dollar against these currencies will affect the Company's results of operations and financial position. Camco conducts a portion of its business in highly inflationary environments such as South America and Nigeria. The effect of currency rate changes in highly inflationary countries is reflected in the results of operations in accordance with Statement of Financial Accounting Standards No. 52. A number of countries in Southeast Asia began experiencing economic and currency instability in late 1997 and such instability has continued into 1998. While the Company has significant operations in this region, it has not to date been adversely affected by these events as a significant portion of its sales transactions are denominated in U.S. dollars and such countries need to continue exploration and production activities to ultimately obtain additional cash inflows.
In 1997, 1996 and 1995, the Company recorded translation losses of $1.8 million, $4.8 million and $5.7 million, respectively, primarily due to the devaluation of the bolivar in Venezuela and the naira in Nigeria. Additionally, during 1997, 1996 and 1995, the cumulative translation account, a component of stockholders' equity, reflected a $3.8 million loss, a $7.2 million gain and a $.5 million gain, respectively, primarily due to movements in the U.K. pound sterling versus the U.S. dollar. The Company actively monitors foreign subsidiaries' net asset positions denominated in foreign currencies and takes actions when appropriate under the circumstances to limit its risk to currency fluctuation and devaluation.
The distribution of Camco's revenues by geographic region is shown below, based upon the region in which equipment or services were sold or provided to the customer:
See Note 10 to the Consolidated Financial Statements contained elsewhere in this report for further information related to Camco's business segments and revenues by geographic region. The information in Note 10 to the Consolidated Financial Information is based on the source from which the equipment and services originated.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Consolidated revenues for 1997 increased $149.3 million, or 19.5%, from 1996 to $913.8 million. This increase reflects the continued increase in worldwide drilling and completion activity and the effect of increased revenues attributable to business acquisitions by the Company over the past two years. Oilfield Equipment Segment revenues climbed 22.6% to $697.0 million in 1997, primarily due to higher sales of drill bits in North America, increased completion product sales worldwide, and higher ESP sales in North America, Europe, the Middle East and Southeast Asia. Oilfield Services Segment revenues were up 10.5% to $216.8 million in 1997, primarily reflecting increased contract gas compression revenues in the United States and South America. This increase corresponds directly to the increase in revenue generating horsepower from 469,000 horsepower as of December 31, 1996, to 556,000 horsepower as of December 31, 1997.
Revenues in the United States and Canada increased $63.0 million, or 18.5%, from $340.1 million in 1996 to $403.1 million in 1997. The year over year increase is principally due to significant increases in sales of drill bits, ESPs, completion equipment and contract gas compression revenues. These increases were partially offset by a decrease in 1997 in well service revenues. On the strength of higher sales of completion products and services and increased contract gas compression revenues, Mexico and Central and South American revenues for 1997 were $153.0 million, or 20.3% higher than in 1996. Revenues were up 19.1% in Europe to $145.7 million in 1997, principally due to the addition of Lasalle and improved sales of completion products, partially offset by decreased sales of ESPs in the FSU. Revenues in the Middle East and Africa improved by 12.8% over 1996 levels to $131.9 million, due to higher sales of completion products and increased ESP sales and services. Far East revenues improved to $80.1 million in 1997, 38.2% higher than in 1996, reflecting significantly higher sales of completion products and ESPs.
Gross margins increased $81.9 million to $387.4 million, or 42.4% of revenues in 1997, from $305.4 million, or 39.9% of revenues in 1996. This margin increase in 1997 reflects higher volume, selective price increases in certain markets and lower manufacturing costs due to higher production levels. The majority of the margin increase is attributable to completion products, drill bits and ESPs.
Selling, general and administrative expenses ("SG&A") increased $27.8 million to $219.5 million in 1997, in conjunction with the revenue increase. SG&A as a percentage of revenues declined to 24.0% in 1997 from 25.1% in 1996 as a portion of these expenses are not directly variable with revenues. In addition, translation losses which are included in SG&A declined to $1.8 million in 1997 from $4.8 million in 1996.
Operating income, as a result of the significant increase in revenues combined with improved gross margins, increased $39.5 million, or 36.8% in 1997 to $146.8 million. Excluding $12.5 million in transaction costs resulting from the merger with Production Operators, operating income increased 48.4% to $159.3 million, or 17.4% of revenues, in 1997, from $107.3 million, or 14.0% of revenues in 1996. Oilfield Equipment Segment operating income increased 43.2% to $125.9 million in 1997 on revenue growth of 22.6% as a result of improved gross margin percentages without corresponding increases in SG&A. The Oilfield Services Segment operating income increased 20.6% to $48.4 million in 1997, primarily reflecting the year over year growth in revenues.
Net interest expense increased $1.1 million from $4.5 million in 1996 to $5.7 million for 1997 reflecting higher average debt balances outstanding during 1997.
1996 COMPARED TO 1995
Consolidated revenues for 1996 increased $96.6 million, or 14.5%, from 1995 to $764.5 million. This increase reflects the increase in worldwide drilling and completion activity and includes the effect of increased revenues attributable to business acquisitions by the Company in 1996 and 1995. Oilfield Equipment Segment revenues were up 15.2% to $568.3 million in 1996, due to significantly higher sales of completion products in the United States and Canada, the Middle East and Africa and Europe, increased sales of ESPs in the United States, Middle East and Africa and Europe and to a lesser extent increased drill bit sales in most regions of the world. Oilfield Services Segment revenues were up 12.4% to $196.2 million reflecting increased contract gas compression revenues in the United States and South America, increased coiled tubing revenues in Nigeria, and wireline revenues in the North Sea offset by slightly lower coiled tubing revenues in the United States.
Revenues in the United States and Canada increased $42.0 million, or 14.1%, from $298.1 million in 1995 to $340.1 million in 1996. Increased Canadian completion product sales by Site, increased contract gas compression revenues in the United States and an increase in United States equipment sales, reflecting overall activity increases, accounts for the majority of the increased revenue. Revenues in Mexico and Central and South America declined slightly with modest declines in equipment revenues offsetting improvements in contract gas compression revenues. European revenues totaled $122.4 million in 1996, up 41.0% compared to 1995, and included a $12 million increase in ESP sales into the FSU after two consecutive years of decline. Increased completion products and services revenues, record PDC bit revenues and the acquisition of Lasalle in the third quarter of 1996, in the North Sea region also contribute to the improvement in European revenues. Revenues increased by 30.1% to $116.9 million in 1996 in the Middle East and Africa, reflecting higher sales of completion products and ESPs into that region. Far East revenues declined $7.5 million in 1996 to $58.0 million, primarily due to a reduction in ESP and completion products sales.
Gross margins increased $43.9 million to $305.4 million, or 39.9% of revenues in 1996, from $261.6 million, or 39.1% of revenues in 1995. The majority of the margin increase is attributable to higher revenues and improved margins on oilfield services resulting from cost reduction programs begun in previous years.
Selling, general and administrative expenses increased $14.2 million to $191.7 million in 1996, but as a percentage of revenues declined to 25.1% in 1996 from 26.6% in 1995 as a portion of these expenses are not directly variable with revenues. Translation losses declined to $4.8 million in 1996, from $5.7 million in 1995, favorably affecting SG&A.
Operating income increased $29.2 million, or 37.4% in 1996 to $107.3 million. Oilfield Equipment Segment operating income increased 41.3% to $87.9 million in 1996 on revenue growth of 15.2%. Oilfield Services Segment operating income increased 36.8% to $40.1 million in 1996 on revenue growth of 12.4%. These improvements were partially offset by a $7.3 million increase in corporate expenses in 1996. Operating income from completion products increased substantially, primarily due to the volume increase described above, improved pricing in selected markets and lower manufacturing costs as a result of higher throughput in its plants. Oilfield Equipment Segment operating income was also higher due to increased drill bit sales into the premium international markets. The increase in Oilfield Services Segment operating income is primarily a result of increased revenues and profitability attributable to contract gas compression services and higher wireline activity in the North Sea and U.S. Gulf of Mexico. In addition, losses incurred by the Company's
coiled tubing joint venture in the FSU were $1.5 million less than the previous year, as sales of condensate were sufficient to cover operating expenses in the last half of 1996.
Net interest expense decreased $600 thousand from 1995 to $4.5 million for the year reflecting a reduction in borrowings of high interest rate bolivar debt in Venezuela.
FINANCIAL CONDITION
Capital Resources and Liquidity
Net cash flows from operating activities were $156.7 million, $147.7 million, and $65.8 million in 1997, 1996 and 1995, respectively. Increases in net cash flows from operating activities in each period reflect the substantial increases in net income and depreciation and amortization offset by an increase in working capital in 1997 and 1995, and benefited by a decrease in working capital in 1996. Cash flow from operating activities exceeded capital expenditure requirements in 1997 and 1996 and is anticipated to be sufficient to fund future capital expenditure requirements.
Net cash outflows from investing activities were $143.1 million, $95.7 million and $85.7 million in 1997, 1996 and 1995, respectively. Capital expenditures increased to $95.8 million in 1997 from $61.9 million in 1996 and $89.2 million in 1995. The reduced level of capital spending in 1996 is attributable to lower additions of gas compression units in 1996 than in 1995 or 1997. Proceeds from the sale of assets totaled $.4 million, $14.9 million and $14.3 million in 1997, 1996 and 1995, respectively. The Company used $14.5 million of cash in 1997 to acquire gas lift valve businesses in the United States and Argentina and the remaining interest in a contract compression subsidiary in Argentina. The Company purchased Lasalle Engineering and a gas lift business in 1996 for $46.4 million in cash. In 1997, the Company invested $21.7 million in its 33 1/3%-owned Venezuelan joint venture to fund progress payments on the construction of contract gas compression, transmission and injection equipment and facilities in connection with a twenty-year contract jointly awarded to Production Operators and Williams International Company, the Company's venture partner. This contract is the largest outsourced natural gas injection project in Venezuela.
Financing activities provided $1.4 million and $16.5 million in cash in 1997 and 1995, respectively, and used cash of $44.2 million in 1996. In October 1997, the Company refinanced substantially all of its previously outstanding debt under a new $220 million unsecured revolving credit facility. Borrowings under the revolving credit facility are due in October 2002. Interest rates on borrowings are LIBOR based. Total debt outstanding under the revolving credit facility was $110.0 million as of December 31, 1997. Borrowing availability under the revolving credit facility was $110.0 million as of December 31, 1997. Borrowings under the revolving credit facility are expected to fluctuate with seasonal changes and changes in the Company's financing needs.
In addition to customary representations, warranties, borrowing conditions, affirmative covenants and events of default, the credit facility includes financial covenants, with which Camco is in compliance, relating to maintenance of a minimum level of net worth, maintenance of a minimum interest coverage ratio, a maximum ratio of funded debt to total capital and limitations on payment of dividends, sales of assets, pledges of assets, subsidiary indebtedness, mergers, consolidations and transactions with affiliates.
The Company believes that the combination of its working capital, the unused portion of the revolving credit facility and its cash flow from operations should provide it with sufficient capital resources and liquidity to meet its debt service requirements under the credit facility and manage its business needs.
Requirements for Capital
Capital expenditures, excluding acquisitions, were $95.8 million, $61.9 million and $89.2 million in 1997, 1996 and 1995, respectively. New contracts for gas compression services often require the addition of gas compression units and related equipment. Capital expenditures for gas compression units and related equipment totaled $52.2 million, $28.3 million and $63.3 million in 1997, 1996 and 1995, respectively. The Company's manufacturing operations and other service businesses require an ongoing level of spending to maintain the Company's productive assets, and new service contracts may require upgraded equipment to meet job specifications and new safety requirements. In this regard, increased demand for leased equipment,
primarily ESPs, substantial refurbishment and upgrade of machine tools in the international completion product plants, purchase of larger diameter capability coiled tubing units and the continued refurbishment of the rock bit plant in Singapore has resulted in increases in spending over the three-year period. Capital expenditures in 1998 are anticipated to increase to approximately $100 million, primarily due to anticipated increases in spending for additional service equipment required for contracts and compression business opportunities. In addition, the Company is committed to provide up to $40.0 million in additional funding to its Venezuelan joint venture for construction of gas compression, transmission and injection equipment and facilities. The venture expects to obtain project financing upon completion of construction and to repay all advances.
Year 2000
The Company is currently evaluating its information technology infrastructure for the Year 2000 compliance and does not expect that the cost of required modifications will be material to its financial condition or results of operations. The Company does not anticipate any material disruption in its operations as a result of any failure by the Company to be in compliance.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, the Company's prospects, developments and business strategies for its operations, all of which are subject to certain risks, uncertainties and assumptions. These forward-looking statements are identified by their use of terms and phrases such as "expect," "estimate," "project," "believe," and similar terms and phrases. These risks include changes in market conditions in the oil and gas industry, declines in prices of oil and gas, political instability in foreign countries in which the Company operates, currency fluctuations and contracts, in particular those in Nigeria, South America and Southeast Asia, increased competition in the Company's markets, governmental restrictions affecting oil and gas exploration, the ability of the Company to integrate and realize anticipated synergies for its acquisitions, including that of Production Operators, the ability of the Company to achieve and execute internal business plans, and the impact of any economic downturns and inflation and other market factors affecting the demand and supply of oil and gas and the products and services relating thereto. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Camco International Inc.:
We have audited the consolidated balance sheets of Camco International Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Camco International Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective November 20, 1997, the Company changed its method of accounting for costs of business process reengineering activities associated with systems development projects.
ARTHUR ANDERSEN LLP
Houston, Texas February 10, 1998
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated financial statements.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Camco International Inc. and subsidiaries ("Camco" or the "Company") manufactures products and provides services to customers in the oil and gas drilling, completion and production sectors of the oilfield services industry. The consolidated financial statements include the accounts of the Company and all of its wholly owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in 20% to 50% owned joint ventures where the Company exercises significant influence over operating and financial policies are accounted for by the equity method. All other investments are carried at cost, which does not exceed the estimated net realizable value of such investments.
On June 13, 1997, Camco, acquired Production Operators Corp. ("Production Operators") through a merger (the "Merger") of a wholly owned subsidiary of the Company with and into Production Operators. The Merger was effected pursuant to an Agreement and Plan of Merger dated February 27, 1997, by and among the Company, a wholly owned subsidiary of the Company, and Production Operators. A total of 13,300,404 shares of the Company's common stock was issued to the stockholders of Production Operators as consideration for the acquisition. The principle followed in fixing the exchange ratio in the Merger was based on negotiations between the parties. The business combination has been accounted for using the pooling-of-interests method of accounting. Accordingly, the financial statements have been prepared as if Camco and Production Operators were combined as of the beginning of the earliest period presented. All costs of the Merger, which were $12.5 million, or $8.6 million net of tax benefits ($.22 per share), were expensed during the second quarter of 1997.
As a result of the differing year-ends of Camco and Production Operators, financial information for different period-ends have been combined. Camco's financial position, results of operations and cash flows as of and for the years ended December 31, 1996 and 1995, have been combined with Production Operators' financial position, results of operations and cash flows as of and for the years ended September 30, 1996 and 1995, respectively. Effective January 1, 1997, Production Operators' fiscal year-end was changed to conform to Camco's December 31 year-end. Financial information as of and for the year ended December 31, 1997, combines both Camco's and Production Operators' results of operations for comparable periods. Production Operators' unaudited revenues, net income and dividends on its common stock for the three-month period ended December 31, 1996, were $26.7 million, $5.3 million and $.7 million, respectively. Accordingly, adjustments are included in the consolidated statements of operations, stockholders' equity and cash flows for the activity attributed to the three-month period.
Use of Estimates
The preparation of these financial statements required the use of certain estimates by management in determining the Company's assets, liabilities, revenue and expenses. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased with original maturities of three months or less to be cash equivalents. The reported amounts of such investments approximate fair value.
Inventories
Inventories, net of allowances, are valued at the lower of cost (first-in, first-out or last-in, first-out) or market. Inventory costs consist of materials, labor and plant overhead.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and generally depreciated on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives used in computing depreciation range from 10 to 30 years for buildings and 3 to 12 years for machinery and equipment, including service equipment. Expenditures for major additions and improvements are capitalized while minor replacements, maintenance and repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the related accounts and any resulting gain or loss is included in the consolidated statements of operations.
Intangible Assets
Intangible assets is comprised primarily of goodwill which is amortized over 20 to 40 years using the straight-line method. Camco's management periodically evaluates goodwill, net of accumulated amortization, for impairment based on the undiscounted cash flows associated with the asset compared to the carrying amount of that asset. Management believes that there have been no events or circumstances which warrant revision to the remaining useful life or affect the recoverability of goodwill in any of its business units.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This standard requires an asset and liability approach for financial accounting and income tax reporting based on enacted tax rates and laws in effect in the years in which differences are expected to reverse.
Revenue Recognition
The Company's revenues are composed of product sales and rental, service and other revenues. The Company records product sales when the goods are sold to a customer. Rental, service and other revenues are recorded as the services are performed.
Foreign Currency Translation
The Company's financial statements of foreign subsidiaries are reported in U.S. dollars based on the functional currency.
Foreign subsidiaries using the U.S. dollar as their functional currency translate as follows: current assets (except inventories) and all liabilities (except minority interests) at the rates of exchange in effect at year-end, long-term assets and inventories at historical rates and minority interest at the rates in effect at the dates provided. Revenue and expense accounts are translated at the average rates of exchange in effect during the year, except for depreciation and cost of manufactured products sold, which are translated at historical rates. Translation adjustments are charged or credited directly to operations.
Foreign subsidiaries using the local currency as their functional currency translate into U.S. dollars using the current rate method. Assets and liabilities are translated at the rates of exchange in effect at year-end, common stock and paid-in capital are translated using historical rates and revenue and expense accounts are translated at the average rates of exchange in effect during the year. Translation adjustments are recorded as a separate component of stockholders' equity rather than directly to operations.
Concentration of Credit Risk
The Company extends credit to various companies in the oil and gas industry which may be affected by changes in economic or other external conditions. The Company's policy is to manage its exposure to credit
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk through credit approvals and limits and, where appropriate, to be secured by collateral, and to provide an allowance for doubtful accounts for potential losses. Management does not believe the Company is exposed to concentrations of credit risk that are likely to have a material impact on the Company's financial position or results of operations.
Environmental Expenditures
Liabilities for environmental expenditures are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. Estimates are based on currently available facts and technology, presently enacted laws and regulations and the Company's prior experience in remediation of contaminated sites.
Change in Accounting Principle
The FASB Emerging Issues Task Force Issue No. 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation," issued November 20, 1997, required the Company to expense certain costs that were previously capitalizable prior to this pronouncement. The cumulative effect of this accounting change decreased income by $4.5 million ($2.9 million, net of tax) for the year ended December 31, 1997.
Earnings Per Share
SFAS No. 128, "Earnings Per Share," was adopted by the Company in the fourth quarter of 1997 and all earnings per share previously reported have been restated. Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. The computation of diluted earnings per share includes the dilutive effects of options to purchase common stock and restricted stock grants which aggregated 1,095,000, 724,000 and 523,000 in 1997, 1996 and 1995, respectively.
Pending Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997. The Company will adopt SFAS No. 130 in the first quarter of 1998. Had SFAS No. 130 been adopted in 1997, net income, as reported, would have been adjusted for changes in the cumulative translation for foreign currency.
2. ACQUISITIONS AND DIVESTITURES
During 1997, the Company acquired gas lift valve businesses in the United States and Argentina for a total of $11.8 million in cash.
In September 1996, the Company acquired Lasalle Engineering Limited for $29.5 million in a cash transaction. In December 1996, the Company acquired the gas lift business of Halliburton, including their Venezuelan subsidiary, for $16.9 million in a cash transaction.
In March 1995, the Company acquired Site Oil Tools, a Canadian manufacturer of completion equipment, for $5.8 million in a cash transaction. The Company sold the assets of its safety service business in March 1995. The Company recognized net income of $1.5 million, or 6 cents per share, on the disposal.
The acquisitions described above were accounted for using the purchase method of accounting.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of Production Operators in June 1997, which was accounted for using the pooling-of-interests method of accounting, is described in Note 1. Revenues and net income for the periods preceding the Merger were as follows (in thousands):
3. INVENTORIES
Inventories, net of allowances, are summarized as follows (in thousands):
Work-in-process and finished goods inventories include the cost of materials, labor and plant overhead. The excess of current costs, determined using the FIFO basis, over the carrying values of LIFO inventories was approximately $10.0 million and $11.9 million at December 31, 1997 and 1996, respectively.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
6. DEBT
Long-term debt consisted of the following (in thousands):
In October 1997, the Company refinanced its previously outstanding debt under a new $220 million unsecured revolving credit facility. Borrowings outstanding under the revolving credit facility are due October 2002 and interest rates on borrowings are LIBOR based. The weighted average interest rate for borrowings outstanding under the revolving credit facility was 6.2% for 1997. The maximum and average borrowings were $120.0 million and $107.0 million, respectively. The Company had $110.0 million of unused borrowing availability as of December 31, 1997.
In addition to customary representations, warranties, borrowing conditions, affirmative covenants and events of default, the revolving credit facility includes financial covenants, with which Camco is in compliance,
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relating to maintenance of a minimum level of net worth, maintenance of a minimum interest coverage ratio, a maximum ratio of funded debt to total capital and limitations on payment of dividends, sales of assets, pledges of assets, subsidiary indebtedness, mergers, consolidations and transactions with affiliates.
Maturities of the Company's long-term debt at December 31, 1997, are as follows (in thousands):
The weighted average interest rate for the Company's previously outstanding loans was 6.4% during 1997, 6.2% during 1996 and 6.5% during 1995.
7. INCOME TAXES
Income before provision for income taxes and provision (benefit) for income taxes is composed of the following (in thousands):
The table above excludes a tax benefit of $1.6 million recorded in 1997 in connection with the accounting change described in Note 1.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes in 1997 and 1996 reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The components of the net deferred tax asset (liability) are as follows (in thousands):
The consolidated provision for income taxes differs from the provision computed at the statutory U.S. Federal income tax rate for the following reasons (in thousands):
SFAS No. 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. During 1997, the net decrease in the valuation allowance was $8.3 million in connection with the disallowance of a portion of the previously reserved deferred tax assets.
Undistributed earnings of non-U.S. subsidiaries included in consolidated retained earnings amounted to $177.8 million at December 31, 1997. It is the Company's policy that these earnings, which reflect full provision for non-U.S. income taxes, have no additional provision for U.S. taxes on foreign subsidiaries earnings which are expected to be reinvested indefinitely. However, additional income taxes have been provided on planned repatriations of foreign earnings after taking into account tax-exempt earnings and applicable foreign tax credits.
8. RETIREMENT AND EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company and its subsidiaries have defined benefit retirement plans covering substantially all employees. The total cost of all plans for 1997, 1996 and 1995 was $6.0 million, $5.4 million and $5.2 million, respectively.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual cost is determined using the projected unit credit actuarial method. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits. An assumption is made for modified career average plans such that the average earnings base period will be updated to the years prior to retirement.
It is the Company's practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefit and tax laws and such additional amounts as the Company may determine to be appropriate from time to time. The assets of the various plans include corporate equities, government securities and corporate debt securities.
The funded status at December 31 was as follows (in thousands):
Net periodic pension cost for the years ended December 31 included the following components (in thousands):
All defined benefit pension plans sponsored by the Company are funded to the extent required by Federal regulation in each of the years ended December 31, 1997, 1996 and 1995. The assumed long-term rate of return on plan assets was 9.0%, the discount rate used in estimating benefit obligations was 8.0% and the rate of compensation increase assumed for salary-related plans was 6.5%.
Included in the above tables is the funded status and net periodic pension cost of Camco's deferred compensation plan (the "DC Plan"). Under the DC Plan, certain officers and selected key management personnel of the Company may receive an amount upon retirement at age 65 equal to (x) an award level for such individual as determined by the Board (up to a maximum of 60%) multiplied by the average of the
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
individual's highest five consecutive years earnings (including bonuses up to a maximum of 20% of base pay each year) out of the last ten consecutive years before retirement minus (y) the sum of the individual's benefits under the pension plan and other tax-qualified plans sponsored by the individual's former employers. An individual's benefits under the DC Plan vest on the earliest of the date the individual completes ten years of service, the individual's death or age 65. Benefits are subject to adjustment for early retirement (before age 65).
Thrift Plans
All U.S. employees are eligible to participate in the Company-sponsored thrift plans. The plan allows eligible employees to contribute a percentage of compensation, subject to IRS and plan limitations. The plans provide for matching contributions which amounted to annual expense recognized by the Company of $2.6 million, $2.3 million and $1.9 million in 1997, 1996 and 1995, respectively.
Nonpension Postretirement Benefits
The Company offers a postretirement medical plan to substantially all employees in the United States over age 60 who qualify for retirement and, on the last day of active employment, are enrolled as participants in Company medical plans for active employees. Participants under age 65 are required to pay the full average actual cost of providing benefits to active and retired employees. Participants age 65 and older contribute approximately 30% of the actual cost of providing benefits to active and retired employees. Total benefits provided over the lifetime of participants after they reach age 65 are limited to $100,000 per participant.
The expected cost of providing nonpension postretirement benefits is accrued during the years employees render service. The discount rate used in determining costs and future obligations was 8.0% in 1997, 1996 and 1995. The assumed health care cost trend rate was 10.0% in 1995, 9.0% in 1996 and 8.0% in 1997, scaling to 6.0% over six years. A one percent increase in the trend rate for health care costs would increase the accumulated postretirement benefit obligation by approximately 6.5% and the service and interest cost by approximately 7.0%. The Company is not required to fund its future obligation under the plan and does not intend to, unless favorable tax treatment becomes available.
Accumulated postretirement benefit obligations in excess of plan assets is classified in the accompanying balance sheets as other long-term liabilities and consists of the following as of December 31 (in thousands):
Net periodic postretirement cost for the years ended December 31, are as follows (in thousands):
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management Incentive Programs
The Company has an incentive bonus plan in which selected key employees, including executive officers, are eligible to receive cash bonus payments based on measures of profitability and cash flow of the Company and various units of the Company which are established and approved by the Board of Directors for each participant in the program at the beginning of each year. A minimum performance level must be achieved by the Company or a particular unit of the Company before any bonus may be earned.
Stock Plans
The Company has two plans currently in effect under which future stock option grants may be issued: the 1997 Long-Term Incentive Plan (the "1997 Incentive Plan") and the Non-Employee Directors Stock Option Plan (the "Directors' Plan").
The 1997 Incentive Plan provides for the granting of options to officers and key employees at an option price greater than or equal to the fair market value of a Company share on the date of grant. The term of each option is ten years and the options are generally exercisable in either three or four equal annual installments beginning one year after the date of grant. Initially, 1,500,000 shares of the Company's common stock were reserved for issuance under the 1997 Incentive Plan.
The Directors' Plan provides for the granting of options to non-employee directors at an option price greater than or equal to the fair market value of a Company share on the date of grant. The term of each option is ten years and the options are generally exercisable in three equal annual installments beginning one year after the date of grant. Two hundred and fifty thousand shares of the Company's common stock were reserved for issuance under the Directors' Plan.
Information regarding the Company's stock option plans, including predecessor plans, is summarized below:
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at the grant date for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.4% to 0.8%; expected stock price volatility range of 27.6% to 35.9%; risk-free interest rate range of 6.1% to 7.2%; and expected life of 10 years.
The ranges of option fair values granted during 1997, 1996 and 1995 are from $19.59 to $32.21 and from $12.61 to $18.39 and $10.01 to $11.54, respectively. The weighted average of these fair values are $25.77, $14.30 and $10.29, respectively.
Information with respect to stock options outstanding and stock options exercisable as of December 31, 1997, is as follows:
The Company's 1997 Incentive Plan also authorizes the granting of restricted stock awards. Under this and previous plans, 158,750 shares of restricted stock were awarded to Company executive officers and other key employees that will vest over periods ranging from three to five years based upon the completion of specified periods of future service with the Company. In addition, 135,000 restricted shares of Common Stock were awarded to executive officers and other key employees and approximately 119,000 shares have been earned based upon the attainment of specified performance objectives. Compensation is charged to income over the vesting period for these awards which resulted in expense recognition of $4.5 million, $2.3 million and $1.7 million in 1997, 1996 and 1995, respectively.
The Company's ESOP covers all full-time domestic employees of Production Operators. ESOP contributions are made at the discretion of the Company's Board of Directors. Contributions to the ESOP by the Company for the years ended December 31, 1997, 1996 and 1995, were $925,000, $891,000 and $818,000, respectively. Dividends received by the ESOP Trust and applied to reduction of the ESOP term loan were $65,000, $126,000 and $119,000 in 1997, 1996 and 1995, respectively.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases with lease terms in excess of one year as of December 31, 1997, are as follows (in thousands):
The Company incurred total rental expense of approximately $10.4 million, $10.0 million and $9.3 million in 1997, 1996 and 1995, respectively.
Construction Commitment
The Company is committed to provide up to $40.0 million in additional funding to its Venezuelan joint venture to fund progress payments on the construction of contract gas compression equipment and facilities. The venture expects to obtain project financing upon completion of construction and repay all advances.
Legal Proceedings
The Company is involved in certain lawsuits and claims, including claims by federal and local authorities under various environmental protection laws, arising in the normal course of business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company.
Foreign Exchange Contracts
Camco enters into a variety of foreign exchange contracts to manage its exposure to fluctuations in foreign currency exchange rates. These contracts generally involve the exchange of one currency for another at a future date. The carrying value of these contracts at December 31, 1997 and 1996, approximated fair value based on exchange rates and quoted market prices at December 31, 1997 and 1996, for comparable contracts and was not significant.
Standby Letters of Credit
As of December 31, 1997, the Company has $16.1 million of standby letters of credit outstanding under various unsecured credit arrangements.
Stockholder Rights Agreement
The Company has a Stockholder Rights Agreement to protect against coercive or unfair takeover tactics. Under the terms of the agreement, the Company distributed to its stockholders one right for each share of Common Stock held.
Each right, as amended, entitles the holder to purchase one share of Common Stock for $250 per share, subject to adjustment or, under certain circumstances, to purchase stock of the Company or of the acquiring entity for one half of the market value. The rights are exercisable only if a person or group acquires 15% or
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
more of the Company's Common Stock or makes a tender offer for 15 percent or more of the Common Stock. The rights expire on December 15, 2004.
Stock Repurchase Plan
In 1996, the Board of Directors authorized a stock repurchase program for up to $20 million of the Company's Common Stock. Shares of the Company's Common Stock purchased pursuant to the program are reserved and used exclusively for employee benefit plans. During 1996, the Company purchased 342,600 shares of the Company's stock for an aggregate amount of $13.4 million.
10. SEGMENT INFORMATION
The Company is a diversified international energy service and manufacturing company that provides a variety of services and equipment to the oil and gas industry.
Revenues by industry segment and geographic area include both revenues from unaffiliated customers and intercompany revenues from related companies. The price at which intercompany sales are made is generally based on the selling price to unaffiliated customers, less a discount, or the direct product cost plus a markup.
Export sales from the United States to other geographic areas, including intercompany sales to foreign subsidiaries, are as follows (in thousands):
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following financial information by geographic region for the years ended December 31, 1997, 1996 and 1995, is based on the source from which the equipment and services originate (in thousands):
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for industry segments is as follows (in thousands):
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(a) Includes merger expenses of $12.5 million incurred in connection with the merger between Camco and Production Operators.
11. DISCONTINUED OPERATIONS
The oil and gas production activities of Production Operators were discontinued in 1995 with a $6.7 million provision, net of tax, recorded related to the disposal of assets and $.5 million loss, net of tax, recorded related to operations. The discontinued operation's revenues, operating loss, tax benefit and loss after tax in 1995 were $9.2 million, $.7 million, $.2 million and $.5 million, respectively.
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. UNAUDITED QUARTERLY FINANCIAL DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Camco International Inc.:
We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Camco International Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1997, included in this Form 10-K and have issued our report thereon dated February 10, 1998. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Financial statement Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas February 10, 1998
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE MATTERS.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For certain information concerning directors and executive officers of the Company, reference is made to the information included under the captions "Proposal 1: Election of Three Directors", "Executive Officers" and "Compliance with Section 16(a) of the Securities Exchange Act" included in the definitive Proxy Statement, which relates to the Annual Meeting of Stockholders of the Company to be held on May 19, 1998 (the "Proxy Statement"), to be filed within 120 days after the close of the fiscal year, which information is incorporated herein by such reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
For information concerning this Item, reference is made to the captions "Compensation of Directors", "Executive Compensation Committee Report", "Executive Compensation", "Retirement Plans", "Nicholson Employment Agreement", "Executive Severance Agreements", "Performance Presentation", and "Compensation Committee Interlocks, Insider Participation and Certain Transactions" in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
For information concerning this Item, reference is made to the captions "Principal Stockholders", "Security Ownership of Management" and "Change of Control" in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this Item, reference is made to the "Compensation Committee Interlocks, Insider Participation and Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits, Financial Statements and Financial Statement Schedules.
(1) and (2) Financial Statements and Financial Statement Schedules.
Consolidated Financial Statements and related Schedule II of the Company are included in Item 8 (Consolidated Financial Statements and Supplementary Data). All other schedules for the Company have been omitted since the required information is not present or not present in an amount sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the notes thereto.
(3) Exhibits
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* Management Contract or Incentive Program.
As permitted by Item 601(b)(4) of Regulation S-K, the Company has not filed with this Annual Report certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries because the total amount of securities authorized under any of such instruments does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of any such agreements to the Securities and Exchange Commission upon request.
(b) On November 21, 1997, The Company filed a Current Report on Form 8-K reporting an amendment to the Company's Rights Agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 13, 1998.
CAMCO INTERNATIONAL INC.
By: /s/ GARY D. NICHOLSON ---------------------------------- Gary D. Nicholson Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons to the capacities and on the dates indicated.
EXHIBIT INDEX
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* Management Contract or Incentive Program.