News Column

CAMERON INTERNATIONAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 24, 2014

In addition to the historical data contained herein, this document includes forward-looking statements regarding future market strength, customer spending and order levels, revenues and earnings of the Company, as well as expectations regarding equipment deliveries, margins, profitability, the ability to control and reduce raw material, overhead and operating costs, cash generated from operations, capital expenditures and the use of existing cash balances and future anticipated cash flows made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results may differ materially from those described in any forward-looking statements. Any such statements are based on current expectations of the Company's performance and are subject to a variety of factors, some of which are not under the control of the Company, which can affect the Company's results of operations, liquidity or financial condition. Such factors may include overall demand for, and pricing of, the Company's products; the size and timing of orders; the Company's ability to successfully execute large subsea and drilling projects it has been awarded; the possibility of cancellations of orders in backlog; the Company's ability to convert backlog into revenues on a timely and profitable basis; the impact of acquisitions the Company has made or may make; changes in the price of (and demand for) oil and gas in both domestic and international markets; raw material costs and availability; political and social issues affecting the countries in which the Company does business; fluctuations in currency markets worldwide; and variations in global economic activity. In particular, current and projected oil and gas prices historically have generally directly affected customers' spending levels and their related purchases of the Company's products and services. As a result, changes in oil and gas price expectations may impact the demand for the Company's products and services and the Company's financial results due to changes in cost structure, staffing and spending levels the Company makes in response thereto. See additional factors discussed in "Factors That May Affect Financial Condition and Future Results" contained herein. Because the information herein is based solely on data currently available, it is subject to change as a result of, among other things, changes in conditions over which the Company has no control or influence, and should not therefore be viewed as assurance regarding the Company's future performance. Additionally, the Company is not obligated to make public disclosure of such changes unless required under applicable disclosure rules and regulations. 19



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SECOND QUARTER 2014 COMPARED TO SECOND QUARTER 2013

Market Conditions

Information related to a measure of drilling activity and certain commodity spot and futures prices during each quarter and the number of deepwater floaters and semis under contract at the end of each period follows: Three Months Ended June 30, Increase (Decrease) 2014 2013 Amount % Drilling activity (average number of working rigs during period)(1): United States 1,852 1,761 91 5.2 % Canada 202 155 47 30.3 % Rest of world 1,345 1,306 39 3.0 % Global average rig count 3,399 3,222 177 5.5 % Commodity prices (average of daily U.S. dollar prices per unit during period)(2): West Texas Intermediate Cushing, OK crude spot price per barrel in U.S. dollars $ 103.06$ 94.14$ 8.92 9.5 % Henry Hub natural gas spot price per MMBtu in U.S. dollars $ 4.59$ 4.02$ 0.57 14.2 % Twelve-month futures strip price (U.S. dollar amount at period end)(2): West Texas Intermediate Cushing, OK crude oil contract (per barrel) $ 101.10$ 93.62$ 7.48 8.0 % Henry Hub natural gas contract (per MMBtu) $ 4.35$ 3.76$ 0.59 15.7 % Contracted drillships and semi-submersibles by location at period-end(3): U.S. Gulf of Mexico 49 40 9 22.5 % Central and South America 76 88 (12 ) (13.6 )% Northwestern Europe 46 47 (1 ) (2.1 )% West Africa 45 27 18 66.7 % Southeast Asia and Australia 26 23 3 13.0 % Other 44 45 (1 ) (2.2 )% Total 286 270 16 5.9 % (1) Based on average monthly rig count data from Baker Hughes (2) Source: Bloomberg (3) Source: ODS-Petrodata Ltd. The increase in average worldwide operating rigs during the second quarter of 2014 as compared to the second quarter of 2013 was primarily due to a 30% increase in activity in Canada as a result of a 41% increase in the average number of rigs drilling for gas. Also contributing to the increase during the quarter was a 9% increase in the average number of rigs drilling for oil in North America as compared to the second quarter of 2013. Crude oil prices (West Texas Intermediate, Cushing, OK) were fairly consistent but trended upward towards the end of the second quarter of 2014 reaching a high of $107.26 in late June before closing the period at $105.37 per barrel. On average, crude oil prices were almost 10% higher during the second quarter of 2014 as compared to the second quarter of 2013. The twelve month futures price for crude oil at June 30, 2014 was slightly lower compared to spot prices near the end of the quarter. 20



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Natural gas (Henry Hub) prices were fairly consistent throughout the second quarter of 2014, averaging $4.59 per MMBtu, which is a 14% increase as compared to the same period in 2013. The 12-month futures strip price for natural gas at June 30, 2014 was $4.35 per MMBtu, which is comparable to the spot price at June 30, 2014. With the recent increase in the number of drillships and semi-submersibles available for contract and under contract, a slowdown in demand for newbuild construction has occurred as the drilling industry undergoes a rebalancing of supply and demand for such rigs. The oilfield service industry has also been experiencing customer slowdowns and delays on certain large subsea projects. As an example, the Company announced in November 2013 that Chevron's Rosebank project in the UK North Sea was being deferred in order for Chevron to work with its partners to improve project economics. The original award received by Cameron for this project totaled in excess of $500 million. It was agreed that OneSubsea would continue to work on its awarded scope and work with Chevron on improving the project's economics.



Critical Accounting Policies

Goodwill - During the first quarter of each annual period, the Company reviews the carrying value of goodwill in accordance with accounting rules on impairment of goodwill, which require that the Company estimate the fair value of each of its reporting units annually, or when impairment indicators exist, and compare such amounts to their respective carrying values to determine if an impairment of goodwill is required. The estimated fair value of each reporting unit is determined using discounted future expected cash flow models (level 3 unobservable inputs) consistent with the accounting guidance for fair value measurements. Certain estimates and judgments are required in the application of the discounted cash flow models, including, but not limited to, estimates of future cash flows and the selection of a discount rate. As described further in Note 2 of the Notes to Consolidated Condensed Financial Statements, effective June 1, 2014, the Company completed the previously announced sale of its Reciprocating Compression business, a division of the Process and Compression Systems (PCS) segment, to General Electric for cash consideration of approximately $547 million, net of transaction costs. Reciprocating Compression had previously been included with the Process Systems and Equipment (PSE) business in the Process Systems & Reciprocating Compression reporting unit for goodwill impairment evaluation purposes. As a result of the classification of Reciprocating Compression as a discontinued operation in the first quarter of 2014 when a definitive agreement to sell the business was entered into, total reporting unit goodwill was allocated between the two businesses. Following this, the PSE business was evaluated as a separate reporting unit in connection with the Company's annual goodwill impairment review conducted during the first quarter of 2014. As a result of this review, the PSE goodwill amount, totaling approximately $40 million, was fully impaired at that time. Consolidated Results Net income attributable to Cameron stockholders for the second quarter of 2014 totaled $221 million, compared to $140 million for the second quarter of 2013. Earnings from continuing operations per diluted share totaled $1.02 for the second quarter of 2014, compared to $0.55 per diluted share for the second quarter of 2013. Included in the second quarter 2014 results were certain gains, net of costs, totaling $0.02 per diluted share, primarily associated with:



a gain from remeasurement of a prior interest in an equity method investment,

and



an impairment of certain intangible assets.

The results for the second quarter of 2013 included after-tax charges of $0.22 per share, primarily related to formation costs for OneSubsea, including additional income tax expense incurred in connection with the formation, as well as currency devaluation, severance, restructuring and other costs. Absent these gains, net of certain costs, and other costs for the same period in 2013, diluted earnings from continuing operations per share would have increased nearly 30% in the second quarter of 2014 as compared to the second quarter of 2013. 21



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Total revenues for the Company increased $432 million, or 19.6%, during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. Nearly 35% of the increase was attributable to businesses acquired during the last twelve months with the remaining increase reflecting higher revenues in each major product line in the Drilling & Production Systems (DPS) segment. Revenues in the Valves & Measurement (V&M) segment were relatively flat compared to the same period last year, while PCS segment revenues, excluding discontinued operations, were down nearly 15%. As a percent of revenues, cost of sales (exclusive of depreciation and amortization) increased from 70.9% during the second quarter of 2013 to 71.7% for the second quarter of 2014, mainly as a result of higher costs in relation to revenues in the DPS segment as described further below under "Segment Results". Selling and administrative expenses increased $31 million, or 9.8%, during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. This increase was primarily due to higher business activity levels in the DPS segment, along with the impact of additional costs from newly acquired businesses. Selling and administrative expenses were 13.1% of revenues for the second quarter of 2014, down from 14.3% for the second quarter of 2013, reflecting the impact of cost control efforts initiated in 2014. Depreciation and amortization expense totaled $90 million for the second quarter of 2014 as compared to $67 million during the second quarter of 2013, an increase of $23 million. The increase was due mainly to higher depreciation expense as a result of recent increased levels of capital spending and the impact of additional depreciation and acquired intangible amortization expense associated mainly with businesses acquired from Schlumberger in connection with the formation of OneSubsea. Net interest increased $5 million, from $25 million during the second quarter of 2013 to $30 million during the second quarter of 2014, mainly resulting from additional interest associated with $750 million of new senior notes issued by the Company in December 2013. Other credits, net of costs totaled $4 million for the three months ended June 30, 2014 as compared to costs of $35 million for the three months ended June 30, 2013. See Note 3 of the Notes to Consolidated Condensed Financial Statements for further information on the nature of these items. The Company's effective tax rate on income from continuing operations for the second quarter of 2014 was 23.0% compared to 31.8% for the second quarter of 2013. The components of the effective tax rates for both periods were as follows (dollars in millions): Three Months Ended June 30, 2014 2013 Tax Provision Tax Rate Tax Provision Tax Rate Forecasted tax expense by jurisdiction $ 68 24.0 % $ 50 24.7 % Adjustments to income tax provision: Recognition of certain historical tax benefits as prior uncertainty regarding those benefits has been resolved - - (1 ) (0.3 ) Finalization of prior year returns (1 ) (0.5 ) 10 4.8 Changes in valuation allowances - - 5 2.6 Accrual adjustments and other (1 ) (0.5 ) - - Tax provision $ 66 23.0 % $ 64 31.8 % 22



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Table of Contents Segment Results DPS Segment - Three Months Ended June 30, Increase (Decrease) ($ in millions) 2014 2013 $ % Revenues $ 1,903$ 1,438$ 465 32.3 % Income from continuing operations before income taxes $ 235$ 196$ 39 19.9 % Income from continuing operations before income taxes as a percent of revenues 12.3 % 13.6 % N/A (1.3 )% Orders $ 1,690$ 1,503$ 187 12.4 % Backlog (at period-end) $ 9,209$ 8,470$ 739 8.7 % Revenues



The increase in revenues was due to:

a 37% increase in drilling equipment revenues, primarily related to increased

shipments associated with higher beginning-of-the-period backlog levels and

production efficiency improvements,

growth of 37% in subsea equipment revenues, mainly due to businesses acquired

during the last twelve months, which represented almost three-fourths of the

change, along with higher revenues on a large project offshore West Africa, and

a 19% increase in sales of surface equipment, largely as a result of higher

activity levels in the unconventional resource regions of North America, as

well as higher shipments to customers operating in the North Sea and the impact

of businesses acquired during the last twelve months.

Income from continuing operations before income taxes as a percent of revenues

The decrease in the ratio of income from continuing operations before income taxes as a percent of revenues was due primarily to:

a 0.9 percentage-point increase in the ratio of cost of sales to revenues

resulting mainly from lower project margins in the drilling equipment product

line due to higher costs, as well as higher warranty costs, partially offset by

better cost recovery on a West African subsea project, and

a 0.6 percentage-point increase in the ratio of depreciation and amortization

expense to revenues as a result of higher depreciation and amortization expense

during the second quarter of 2014 largely related to (1) businesses acquired

from Schlumberger as part of the formation of OneSubsea and (2) higher capital

spending to (a) enhance the Company's aftermarket capabilities, and (b) expand

the fleet of rental equipment available in the Surface Systems division.

Orders

The increase in total segment orders was primarily the result of a 70% increase in subsea orders mainly due to businesses acquired during the last twelve months, which accounted for approximately 63% of the growth, as well as changes to a large project offshore West Africa.



Partially offsetting these increases was a 5% decline in orders for drilling equipment primarily reflecting a slowdown in activity relating to jack-up rigs.

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Backlog (at period-end)

Higher subsea equipment backlog, largely as a result of strong 2013 order rates, accounted for nearly 80% of the total increase in DPS segment backlog from June 30, 2013 to June 30, 2014. Strong order rates, primarily in North America and the Asia Pacific/Middle East region, as well as backlog added from businesses acquired during the last twelve months, also led to a nearly 24% increase in surface equipment backlog levels from June 30, 2013. Drilling equipment backlog was down less than 1% despite the reversal of nearly $243 million in backlog in the first quarter of 2014 as the result of a customer cancellation of a large drilling project award issued in 2012. The Company reached agreement with the customer in July 2014 which will result in an additional payment from the customer of $21 million in connection with the cancelled contract. V&M Segment - Three Months Ended June 30, Increase/(Decrease) ($ in millions) 2014 2013 $ % Revenues $ 536$ 534$ 2 0.4 % Income from continuing operations before income taxes $ 107$ 109$ (2 ) (1.8 )% Income from continuing operations before income taxes as a percent of revenues 20.0 % 20.4 % N/A (0.4 )% Orders $ 517$ 524$ (7 ) (1.3 )% Backlog (at period-end) $ 1,026$ 1,063$ (37 ) (3.5 )% Revenues Favorable North American market conditions and the impact of businesses acquired in the last twelve months contributed to an increase of 25% in sales of measurement products and a 12% improvement in sales of distributed valves. Mostly offsetting these gains were lower activity levels resulting from project slippage and recent order weakness for pipeline valves and the timing of valve deliveries due to various customer changes which resulted in sales declines of 14% and 7% for engineered valves and process valves, respectively.



Income from continuing operations before income taxes as a percent of revenues

The ratio of income from continuing operations before income taxes as a percent of revenues was down slightly compared to the same period of the year. Increased overhead costs and higher depreciation and amortization expense as a result of increased capital spending in recent periods more than offset slightly higher product margins. Orders



Overall, total segment orders were down modestly when compared to the same period last year. Project timing delays contributed to a 19% decrease in engineered valve orders. Mostly offsetting this decline was a 28% improvement in distributed valve orders reflecting higher activity levels in North America.

Backlog (at period-end)

Backlog levels for the V&M segment decreased slightly from June 30, 2013, as recent order rates for new engineered and process valves have not kept up with recent deliveries. These decreases were partially offset by strong demand for distributed valves and measurement products reflecting continued strength in the North American market. 24



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Table of Contents PCS Segment - Three Months Ended June 30, Increase (Decrease) ($ in millions) 2014(1) 2013(1) $ % Revenues $ 202$ 237$ (35 ) (14.8 )% Income from continuing operations before income taxes $ 13$ 17$ (4 ) (23.5 )% Income from continuing operations before income taxes as a percent of revenues 6.4 % 7.2 % N/A (0.8 )% Orders $ 229$ 212$ 17 8.0 % Backlog (at period-end) $ 908$ 832$ 76 9.1 % (1) Excluding discontinued operations



Revenues

The revenue decrease in the PCS segment was due primarily to:

an 18% decrease in custom process systems revenues largely as a result of the

timing of manufacturing activity on large projects,

a 7% decrease in centrifugal compression revenues mainly due to declines in

deliveries of plant air equipment and aftermarket revenues as a result of

recent weak order rates, and

a 4% decline in deliveries of wellhead and midstream processing equipment due

to weak demand.



Income from continuing operations before income taxes as a percent of revenues

The decrease in the ratio of income from continuing operations before income taxes as a percent of revenues was due primarily to a 1.1 percentage-point increase in the ratio of depreciation and amortization expense to revenues as a result of higher depreciation and amortization expense during the second quarter of 2014 in relation to lower revenues for the period, as mentioned above. Depreciation and amortization increased across each of the businesses mainly due to increased capital spending in recent periods.



Orders

The increase in segment orders was almost entirely attributable to a 46% increase in demand for wellhead and midstream processing equipment, mainly related to a large award for a new cryogenic gas processing system.

Backlog (at period-end)

Overall segment backlog was up 9% at June 30, 2014 as compared to June 30, 2013, as a 33% increase in backlog in the custom process systems business, largely resulting from a $250 million award received in the fourth quarter of 2013 for equipment to be provided for a gas processing facility in Malaysia, was partially offset by a 19% decline in backlog for centrifugal compression equipment, due to recent weak order rates for new plant air, air separation and engineered air units. 25



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Corporate Segment -

The $53 million decrease in the loss from continuing operations before income taxes in the Corporate segment during the second quarter of 2014 as compared to the second quarter of 2013 (see Note 10 of the Notes to Consolidated Condensed Financial Statements) was due mainly to:



a $39 million decrease in other costs, net of credits, as described further in

Note 3 of the Notes to Consolidated Condensed Financial Statements, and

a $12 million decrease in selling and administrative expenses, mainly

reflecting the effects of cost control efforts put in place in 2014 which have

lowered employee-related costs, including travel, and information technology

and other facility costs.



SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO SIX MONTHS ENDED JUNE 30, 2013

Market Conditions

Information related to drilling activity and certain commodity spot prices during the first six months of each period follows:

Six Months Ended June 30, Increase 2014 2013 Amount % Drilling activity (average number of working rigs during period)(1): United States 1,816 1,760 56 3.2 % Canada 364 346 18 5.2 % Rest of world 1,341 1,290 51 4.0 % Global average rig count 3,521 3,396 125 3.7 % Commodity prices (average of daily U.S. dollar prices per unit during period)(2): West Texas Intermediate Cushing, OK crude spot price per barrel in U.S. dollars $ 100.89$ 94.22$ 6.67 7.1 % Henry Hub natural gas spot price per MMBtu in U.S. dollars $ 4.95$ 3.76$ 1.19 31.6 % (1) Based on average monthly rig count data from Baker Hughes (2) Source: Bloomberg The increase in average worldwide operating rigs during the first six months of 2014 as compared to the first six months of 2013 was driven by higher North American oil drilling activity and higher foreign activity primarily in the Middle East and Africa. Despite the improvement in natural gas pricing, the challenging economics associated with horizontal shale development drilling at current prices continues to constrain the overall rig market. The average number of rigs drilling for gas was flat in North America in the first half of 2014 as compared to the first half of 2013. Crude oil prices (West Texas Intermediate, Cushing, OK) continued to trend upward throughout much of the first half of 2014 reaching a high of $107.26 per barrel in mid-June before closing the period at $105.37 per barrel. On average, crude oil prices were 7% higher during the first half of 2014 as compared to the first half of 2013. In early February 2014, natural gas (Henry Hub) prices reached their highest levels since September 2011, before leveling off to close at $4.41 per MMBtu at June 30, 2014. On average, prices during the first half of 2014 were up 32% as compared to the same period in 2013. 26



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Consolidated Results

Net income attributable to Cameron stockholders for the six months ended June 30, 2014 totaled $332 million, compared to $289 million for the first six months of 2013. Earnings from continuing operations per diluted share totaled $1.54 for the first six months of 2014, compared to $1.14 per diluted share for the same period in 2013. Included in the results for the six months ended June 30, 2014 were charges, net of certain gains, totaling $0.19 per diluted share, primarily associated with:



a goodwill impairment charge related to the PSE business and an impairment of

certain intangible assets,

a gain from remeasurement of a prior interest in an equity method investment,

and



severance, restructuring, integration and other costs, net of certain gains.

The results for the first six months of 2013 included after-tax charges of $0.31 per share, primarily related to formation costs for OneSubsea, including additional income tax expense incurred in connection with the formation, as well as currency devaluation, severance, restructuring and other costs.



Absent these costs in both periods, diluted earnings from continuing operations per share would have increased nearly 19% as compared to the first half of 2013.

Total revenues for the Company increased $802 million, or 18.8%, during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. Nearly 34% of the increase was attributable to businesses acquired during the last twelve months with the remaining increase reflecting higher revenues in each major product line in the DPS segment. Revenues in the V&M segment were down 3% compared to the same period last year while PCS segment revenues, excluding discontinued operations, were down 14%. As a percent of revenues, cost of sales (exclusive of depreciation and amortization) were 72.1% for the first six months of 2014 as compared to 70.7% for the first six months of 2013. The increase was mainly the result of higher costs in relation to revenues in the DPS and PCS segments as described further below under "Segment Results". Selling and administrative expenses increased $57 million, or 9.2%, during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. This increase was primarily due to higher business activity levels in the DPS segment, along with the impact of additional costs from newly acquired businesses. Selling and administrative expenses were 13.3% of revenues for the first six months of 2014, down from 14.5% for the same period in 2013, reflecting the impact of cost control efforts initiated in 2014. Depreciation and amortization expense totaled $177 million for the six months ended June 30, 2014 as compared to $135 million for the six months ended June 30, 2013, an increase of $42 million. The increase was due mainly to higher depreciation expense as a result of recent increased levels of capital spending and the impact of additional depreciation and acquired intangible amortization expense associated mainly with businesses acquired from Schlumberger in connection with the formation of OneSubsea. Net interest increased $11 million, from $51 million during the first half of 2013 to $62 million during the first half of 2014, mainly resulting from additional interest associated with $750 million of new senior notes issued by the Company in December 2013. Other costs, net of credits, totaled $44 million for the six months ended June 30, 2014 as compared to $66 million for the six months ended June 30, 2013, a decrease of $22 million. See Note 3 of the Notes to Consolidated Condensed Financial Statements for further information on the nature of these items. 27



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The effective income tax rate for the first six months of 2014 was 25.1% as compared to 25.6% for the first six months of 2013. The components of the effective tax rates for both periods were as follows (dollars in millions):

Six Months Ended June 30, 2014 2013 Tax Provision Tax Rate Tax Provision Tax Rate Forecasted tax expense by jurisdiction $ 109 24.0 % $ 91 23.8 % Adjustments to income tax provision: Recognition of certain historical tax benefits as prior uncertainty regarding those benefits has been resolved - - (1 ) (0.1 ) Tax effect of goodwill impairment 10 2.1 - - Finalization of prior year returns (4 ) (0.9 ) 9 2.4 Tax effects of changes in legislation - - (7 ) (1.9 ) Changes in valuation allowances - - 5 1.4 Accrual adjustments and other (1 ) (0.1 ) - - Tax provision $ 114 25.1 % $ 97 25.6 % Segment Results DPS Segment - Six Months Ended June 30, Increase (Decrease) ($ in millions) 2014 2013 $ % Revenues $ 3,608$ 2,707$ 901 33.3 % Income from continuing operations before income taxes $ 418$ 350$ 68 19.4 % Income from continuing operations before income taxes as a percent of revenues 11.6 % 12.9 % N/A (1.3 )% Orders $ 3,449$ 4,246$ (797 ) (18.8 )% Revenues



The increase in revenues was due to:

an increase of 47% in subsea equipment revenues, over two-thirds of which was

due to businesses acquired during the last twelve months, along with higher

revenues associated with a large project offshore West Africa, higher project

activity levels in the Europe/Africa region and increased aftermarket sales,

an increase of 37% in drilling equipment revenues, primarily related to

increased shipments associated with higher beginning-of-the-year backlog levels

and production efficiency improvements, and

growth of 16% in surface equipment revenues, largely as a result of increased

activity levels in unconventional resource regions of North America, as well as

increased deliveries to customers operating in the North Sea and the impact of

businesses acquired during the last twelve months. 28



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Income from continuing operations before income taxes as a percent of revenues

The decrease in the ratio of income from continuing operations before income taxes as a percent of revenues was due primarily to a 1.2 percentage-point increase in the ratio of cost of sales to revenues resulting mainly from:

a mix shift to a higher proportion of subsea project revenues, which inherently

carry lower margins than non-project related businesses, during the first six

months of 2014 as compared to the same period in 2013, and

lower margins in the drilling equipment product line due to higher project

costs, as well as higher warranty costs.

Orders

The decrease in orders was primarily due to:

a 62% decrease in subsea orders, mainly as a result of an award received during

the first six months of 2013 from Petrobras for subsea trees and associated

equipment for use in Pre- and Post-Salt basins offshore Brazil, as well as a

large booking in the same period to supply subsea production systems to a

project offshore Nigeria, with no similar-sized large awards received in the

first six months of 2014, and

a 5% decrease in orders for surface equipment due mainly to a slowdown in 2014

in the pace of orders from customers operating in Saudi Arabia and Iraq as

compared to the record level of orders received in 2013. This decline was

largely offset by continued strength in activity levels in the unconventional

resource regions in North America.

Offsetting these decreases were nearly $200 million of orders added from businesses acquired during the last twelve months and a 9% increase in orders for drilling equipment reflecting several large rig project awards received early in 2014. V&M Segment - Six Months Ended June 30, Decrease ($ in millions) 2014 2013 $ % Revenues $ 1,028$ 1,056$ (28 ) (2.7 )% Income from continuing operations before income taxes $ 201$ 222$ (21 ) (9.5 )% Income from continuing operations before income taxes as a percent of revenues 19.6 % 21.0 % N/A (1.4 )% Orders $ 1,053$ 1,062$ (9 ) (0.8 )% Revenues Overall segment sales were down modestly for the six months ended June 30, 2014 when compared to the same period last year. Project slippage and recent order weakness for pipeline valves and the timing of valve deliveries due to various customer changes contributed to sales declines of 15% and 9% for engineered valves and process valves, respectively. Partially offsetting these declines were increases of 8% and 19% for sales of distributed valves and measurement products, respectively, as a result of current strength in the North American market.



Income before income taxes as a percent of revenues

The decrease in the ratio of income from continuing operations before income taxes as a percent of revenues was primarily attributable to a 0.5 percentage-point increase in the ratio of selling and administrative costs to revenues, due mainly to higher employee-related costs in relation to the decline in revenues, and a 0.8 percentage-point increase in the ratio of depreciation and amortization expense to revenues due to higher depreciation from higher recent capital spending levels mainly in the engineered valve product line and the impact of businesses acquired during the last twelve months. 29



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Orders

Overall, total segment orders were relatively flat when compared to the same period last year. Project slippage contributed to declines of approximately 10% and 20% in both engineered and process valve orders, respectively. This was mostly offset by a 17% increase in orders for distributed valves resulting from higher North American activity levels. PCS Segment - Six Months Ended June 30, Decrease ($ in millions) 2014 2013 $ % Revenues $ 436$ 507$ (71 ) (14.0 )% Income from continuing operations before income taxes $ 28$ 37$ (9 ) (24.3 )% Income from continuing operations before income taxes as a percent of revenues 6.4 % 7.3 % N/A (0.9 )% Orders $ 416$ 480$ (64 ) (13.3 )% Revenues



The decrease in revenues was due primarily to:

a 13% decline in custom process systems revenues largely as a result of the

timing of manufacturing activity on large projects,

a 19% decline in wellhead and midstream processing equipment sales mainly to

customers in North America, and

a 16% decrease in sales of centrifugal air separation and engineered air

equipment due to recent weak order rates.

Income from continuing operations before income taxes as a percent of revenues

The decrease in the ratio of income before income taxes as a percent of revenues was primarily due to:

a 0.6 percentage-point increase in the ratio of cost of sales to revenues

primarily due to lower product margins in the wellhead and midstream processing

equipment product line, and

higher depreciation and amortization expense in relation to a decline in

revenues, primarily due to increased capital spending in recent periods, the

impact of which has been partially offset by an improvement in the ratio of

selling and administrative costs to revenues due to the effect of cost control

efforts implemented during 2014. 30



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Orders

Overall, segment orders decreased across most major product lines. The decreases were primarily the result of:

a 15% decline in orders for custom process systems largely related to slippage

of project timelines,



a 15% decline in centrifugal compression equipment orders driven mainly by a

45% decrease in demand for plant air machines, primarily from international

customers, and



a 7% decline in demand for wellhead and midstream processing equipment, mainly

from customers in North America.

Corporate Segment -

The $38 million decrease in the loss before income taxes in the Corporate segment during the six-month period ended June 30, 2014 as compared to the six-month period ended June 30, 2013 (see Note 10 of the Notes to Consolidated Condensed Financial Statements) was due primarily to:

a $22 million decrease in other costs, net of credits, as described further in

Note 3 of the Notes to Consolidated Condensed Financial Statements, and

a $15 million decrease in selling and administrative expenses, mainly

reflecting the effects of cost control efforts put in place in 2014 which have

lowered employee-related costs, including travel, and certain facility costs.

Liquidity and Capital Resources

Consolidated Condensed Statements of Cash Flows

During the first six months of 2014, net cash provided by operations totaled $39 million, an increase of $32 million from the $7 million of cash provided by operations during the first six months of 2013.

Cash totaling $588 million was used to increase working capital during the first six months of 2014 compared to $404 million during the first six months of 2013, an increase of $184 million. During the first six months of 2014, increased collections due to the high level of year end receivables added $111 million in cash. Offsetting this was $228 million of cash used to build inventory levels, primarily in the DPS segment, in order to meet the demands from the high backlog and activity levels in that business segment. The timing of payments to third parties and annual employee incentive payouts made in the first half of 2014 also contributed to a use of cash totaling $471 million for the period. Cash provided by investing activities was $346 million for the first six months of 2014. In June 2014, the Company received $547 million of cash, net of transaction costs, from the sale of the Reciprocating Compression business to General Electric. Additionally, capital spending during the first six months of 2014 totaled $178 million. Capital needs in the Surface Systems and OneSubsea divisions of the DPS segment, along with continued development of the Company's enhanced business information systems, accounted for the majority of the 2014 capital spending. Net cash used for financing activities totaled $677 million for the first six months of 2014. Approximately $1.2 billion of cash was used to acquire nearly 20 million shares of treasury stock during the first half of 2014. In 2014, the Board of Directors authorized the Company to initiate a commercial paper program with authority to issue up to $500 million in short-term debt. Under this program, the Company issued commercial paper totaling $263 million in principal amount for use in funding the treasury stock purchases referred to above and for other corporate needs. The average term of the outstanding commercial paper as of June 30, 2014 was approximately 62 days. The Company currently anticipates being able to continue to issue new commercial paper to fund or extend outstanding commercial paper as it comes due for payment. During June 2014, the Company repaid $250 million of floating rate notes upon maturity and issued a total of $500 million of new senior notes split equally between 3- and 10-year maturities. 31



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Future liquidity requirements

At June 30, 2014, the Company had $1.6 billion of cash, cash equivalents and short-term investments. Approximately $493 million of the Company's cash, cash equivalents and short-term investments at June 30, 2014 were in the OneSubsea venture. Dividends of available cash from OneSubsea to the venture partners, 40% of which would go to Schlumberger, require approval of the OneSubsea Board of Directors prior to payment. On July 11, 2014, a dividend of 75 million was paid to the venture partners with Cameron's non-U.S. partnership receiving 45 million and Schlumberger receiving 30 million. Of the remaining cash, cash equivalents and short-term investments not held by OneSubsea, $657 million was located in the United States. Of this amount, approximately $253 million, which included a make-whole premium plus accrued interest, was used to redeem early the Company's $250 million principal amount of 1.6% Senior Notes on July 21, 2014. Total debt at June 30, 2014 was nearly $3.4 billion, most of which was in the United States. Excluding capital leases, approximately $1.0 billion of the debt obligations have maturities within the next three-year period. The remainder of the Company's long-term debt is due in varying amounts between 2018 and 2043. Excluding discontinued operations, the Company's backlog decreased slightly from December 31, 2013, mainly due to the cancellation of a large drilling project award in the first quarter of 2014 totaling nearly $243 million, but was still at a near record high at June 30, 2014. Orders during the first six months of 2014 were down nearly 15% from the same period in 2013 due mainly to certain large subsea project awards received in the first six months of 2013 that did not repeat during the half of 2014. The timing of such large project awards are inconsistent period over period. The Company views its backlog of unfilled orders, current order rates, current rig count levels and current and future expected oil and gas prices to be, in varying degrees, leading indicators of and factors in determining its estimates of future revenues, cash flows and profitability levels. Information regarding actual 2014 and 2013 average rig count and commodity price levels and forward-looking twelve-month market-traded futures prices for crude oil and natural gas are shown in more detail under the captions "Market Conditions" above. A more detailed discussion of second quarter and year-to-date orders and June 30 backlog levels by segment may be found under "Segment Results" for each period above. The Company currently anticipates growth in consolidated orders, backlog and revenues during the second half of 2014 in relation to the same period in 2013. The Company also expects full year capital spending on new equipment and facilities to be between $450 million to $500 million for 2014, as compared to $520 million during 2013. The high backlog levels and expected growth however, may increase working capital needs in certain businesses in order in order to meet the increased customer demand. The Company believes, based on its current financial condition, existing backlog levels and current expectations for future market conditions, that it will be able to meet its short- and longer-term liquidity needs with existing cash, cash equivalents and short-term investments on hand, expected cash flow from future operating activities and amounts available for borrowing under its $835 million five-year multi-currency Revolving Credit Facility, which matures on June 6, 2016, and its new three-year $750 million Revolving Credit Facility, described further in Note 8 of the Notes to Consolidated Condensed Financial Statements. Up to $200 million of this new facility may be used for letters of credit. The Company also has a bi-lateral $40 million facility with a third-party bank, expiring on February 2, 2015. At June 30, 2014, no amounts had been borrowed under the $835.0 million facility. The Company had issued letters of credit totaling $77 million under the new $750 million Revolving Credit Facility and $29 million under the $40 million bi-lateral facility, leaving $673 million and $11 million, respectively, available for future use.



In addition, the Company announced in January 2014 that it was exploring strategic alternatives for its Centrifugal Compression business.

The Company has an authorized stock repurchase program whereby the Company may purchase shares directly or indirectly by way of open market transactions or structured programs, including the use of derivatives, for the Company's own account or through commercial banks or financial institutions. The program, initiated in October 2011, has had a series of authorizations by the Board of Directors totaling $3.2 billion since inception. At June 30, 2014, the Company had remaining authority for future stock purchases totaling approximately $456 million. 32



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Factors That May Affect Financial Condition and Future Results

The inability of the Company to deliver its backlog or future orders on time could affect the Company's future sales and profitability and its relationships with its customers. At June 30, 2014, the Company's backlog was approximately $11 billion, excluding discontinued operations. The ability to meet customer delivery schedules for this backlog, as well as future orders, is dependent on a number of factors including, but not limited to, access to the raw materials required for production, an adequately trained and capable workforce, project engineering expertise for large subsea projects, sufficient manufacturing plant capacity and appropriate planning and scheduling of manufacturing resources. Many of the contracts the Company enters into with its customers require long manufacturing lead times and contain penalty clauses relating to on-time delivery. A failure by the Company to deliver in accordance with customer expectations could subject the Company to financial penalties or loss of financial incentives and may result in damage to existing customer relationships. Additionally, the Company bases its earnings guidance to the financial markets on expectations regarding future order rates and the timing of delivery of product currently in backlog.



Failure to deliver equipment in accordance with expectations could negatively impact the market price performance of the Company's common stock and other publicly-traded financial instruments.

Expansion of the Company's offerings in the drilling market creates additional risks not previously present.

The Company's acquisitions of LeTourneau Technologies Drilling Systems, Inc. and the TTS Energy Division of TTS Group ASA (TTS) expanded the Company's portfolio of products and services available to customers involved in oil and gas drilling activities. These acquisitions brought large drilling rig construction projects not previously offered and a record backlog. As a result of both, the complexity of execution within this business has increased from that of the past. Also, the Company has recently struggled to increase production capacity to deliver its record backlog. Large drilling rig projects are accounted for using accounting rules for production-type and construction-type contracts. In accordance with this guidance, the Company estimates the expected margin on these projects and recognizes this margin as units are completed. These projects (i) require significantly more engineering and project management expertise than are needed for projects involving the supply of drilling stacks and associated equipment to customers, (ii) are larger in financial scope and (iii) require longer lead times than many other projects involving the Company's Drilling Systems business. Additionally, unplanned difficulties in engineering and managing the construction of such major projects could result in cost overruns and financial penalties which could negatively impact the Company's margins and cash flow. Similar to subsea systems projects described below, a reduction in expected margins on these projects from such unplanned events would result in a cumulative adjustment to reduce margins previously recognized in the period a change in estimate is determined.



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

Cameron, through OneSubsea, is a significant participant in the subsea systems projects market. This market is different from most of the Company's other markets since subsea systems projects are larger in scope and complexity, in terms of both technical and logistical requirements. Subsea projects typically (i) involve long lead times, (ii) are larger in financial scope, (iii) require substantial engineering resources to meet the technical requirements of the project and (iv) often involve the application of existing technology to new environments and, in some cases, may require the development of new technology. The Company's OneSubsea business has a backlog of approximately $4 billion for subsea systems projects at June 30, 2014. To the extent the Company experiences unplanned difficulties in meeting the technical and/or delivery requirements of the projects or has difficulty fully integrating the businesses contributed by Schlumberger to OneSubsea into its operations, the Company's earnings or liquidity could be negatively impacted. As the integration of the Schlumberger and Cameron businesses continues, issues may arise as we continue to refine the technologies and scale up the combined operations to meet customer demand. The Company accounts for its subsea projects, as it does its separation and drilling projects, using accounting rules for construction-type and production type contracts. Factors that may affect future project costs and margins include the ability to properly execute the engineering and design phases consistent with our customers' expectations, production efficiencies obtained, and the availability and costs of labor, materials and subcomponents. These factors can impact the accuracy of the Company's estimates and materially impact the Company's future period earnings. If the Company experiences cost overruns, the expected margin could decline. Were this to occur, in accordance with the accounting guidance, the Company would record a cumulative adjustment to reduce the margin previously recorded on the related project in the period a change in estimate is determined. Subsea systems projects accounted for approximately 14.9% of total revenues in the first six months of 2014. 33



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



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

The Company has a project underway to upgrade its SAP business information systems worldwide. The first stage of this multi-year effort was completed at the beginning of the third quarter of 2011 with the deployment of the upgraded system for certain businesses within the Company's PCS segment. Certain other businesses began operating on the upgraded system during 2012. As of December 2013, nearly all businesses within the V&M segment were utilizing the upgraded system and, effective July 1, 2014; the Surface Systems division of the DPS segment began operating on the upgraded system. The Drilling Systems and OneSubsea divisions of the DPS segment and the corporate office functions are expected to be migrated to the upgraded system during the remainder of 2014 and beyond, with completion anticipated in 2016. The DPS and V&M segments are major contributors to the Company's consolidated revenues and income before income taxes.



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

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

Cameron continues to increase its dependence on digital technologies to conduct its operations. Many of the Company's files are digitized and more employees are working in almost paperless environments. Additionally, the hardware, network and software environments to operate SAP, the Company's main enterprise-wide operating system, have been outsourced to third parties. Other key software products used by the Company to conduct its operations either reside on servers in remote locations or are operated by the software vendors or other third parties for the Company's use as "Cloud-based" or "Web-based" applications.



The

Company has also outsourced certain information technology development, maintenance and support functions. As a result, the Company is exposed to potentially severe cyber incidents at both its internal locations and outside vendor locations that could result in a theft of intellectual property and/or disruption of its operations for an extended period of time resulting in the loss of critical data and in higher costs to correct and remedy the effects of such incidents, although no such material incidents have occurred to date.



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

The Company has established multiple "Centers of Excellence" facilities for manufacturing such products as subsea trees, subsea chokes, subsea production controls and blowout preventers. These production facilities are located in the United Kingdom, Brazil, Romania, Italy, Norway and other European and Asian countries. To the extent the Company sells these products in U.S. dollars, the Company's profitability is eroded when the U.S. dollar weakens against the British pound, the euro, the Brazilian real and certain Asian currencies, including the Singapore dollar. Alternatively, profitability is enhanced when the U.S. dollar strengthens against these same currencies. For further information on the use of derivatives to mitigate certain currency exposures, see Item 3, "Quantitative and Qualitative Disclosures about Market Risk" below and Note 14 of the Notes to Consolidated Condensed Financial Statements. 34



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

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



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

The political and economic risks of doing business on a worldwide basis include the following: volatility in general economic, social and political conditions; the effects of civil unrest and sanctions imposed by the United States and



other governments on transactions with various countries, such as Iran; the effects of civil unrest and, in some cases, military action on the

Company's business operations, customers and employees, such as that

recently occurring in several countries in the Middle East, in Ukraine and

in Venezuela; exchange controls or other similar measures that result in restrictions on

repatriation of capital and/or income, such as those involving the currencies of, and the Company's operations in, Angola and Nigeria; and reductions in the number or capacity of qualified personnel. In recent months, civil unrest and military action have increased in Iraq which may impact the ability of that country to continue to produce and export oil at current levels. Such unrest may also jeopardize the Company's in-country investments and on-going business activities supporting Iraq's oil and gas production infrastructure. At June 30, 2014, less than 1% of the Company's backlog related to future deliveries to customers doing business in Iraq. Additionally, less than 1% of the Company's property, plant and equipment was located in Iraq and less than 1% of the Company's receivables were for sales into Iraq to multinational operators and to Iraqi drilling and production companies. The Company is also evaluating its options under the force majeure clauses of each of the major contracts with its customers doing business in Iraq in the event the current situation in that country continues to deteriorate. Cameron also has manufacturing and service operations that are essential parts of its business in other developing countries and volatile areas in Africa, Latin America, Russia and other countries that were part of the Former Soviet Union, the Middle East, and Central and South East Asia. Recent increases in activity levels in certain of these regions have increased the Company's risk of identifying and hiring sufficient numbers of qualified personnel to meet increased customer demand in selected locations. The Company also purchases a large portion of its raw materials and components from a relatively small number of foreign suppliers in China, India and other developing countries. The ability of these suppliers to meet the Company's demand could be adversely affected by the factors described above. 35 -------------------------------------------------------------------------------- Table of Contents In addition, customers in countries such as Angola and Nigeria increasingly are requiring the Company to accept payments in the local currencies of these countries. These currencies do not currently trade actively in the world's foreign exchange markets. The Company also has various manufacturing and aftermarket operations in Venezuela that contributed $37 million in revenues during the first six months of 2014. The economy in Venezuela is highly inflationary and becoming more regulated. These factors, along with recent civil unrest, create political and economic uncertainty with regard to their impact on the Company's continued operations in this country. The Venezuelan government has maintained currency controls and a fixed official exchange rate since February 2003. In February 2013, the Venezuelan government devalued its currency from 4.3 bolivars to the U.S. dollar to an official rate of 6.3 bolivars to the U.S. dollar. Since then, the Company has used the official rate of 6.3 bolivars to the U.S. dollar to remeasure non-functional currency transactions in its financial statements. Due to the highly inflationary status of the Venezuelan economy, the Company's operations in Venezuela are accounted for as U.S. dollar functional currency entities. In addition, the Company considers its earnings in Venezuela to be permanently reinvested. In early 2014, Venezuelan government officials indicated that this official rate will increasingly be reserved only for settlement of U.S. dollar denominated obligations related to purchases of "essential goods and services." Through the end of the second quarter of 2014, Petroleos de Venezuela (PDVSA), the Company's primary customer, has continued to pay its U.S. dollar denominated obligations to the Company at the official rate. Recent events, however, create uncertainty as to whether this will continue. First, in January 2014, the Venezuelan government significantly expanded the use of the Supplementary Foreign Currency Administration System (SICAD) auction rate and indicated this rate (SICAD 1) would be used for certain transactions and activities. In February 2014, the Venezuelan government signed into law a plan to open a new exchange control mechanism (SICAD 2) which may be available to all entities for all transactions. At June 30, 2014, the published SICAD 1 rate was 10.6 bolivars to the U.S. dollar and the published SICAD 2 rate was approximately 49.98 bolivars to the U.S. dollar. Recently, Rafael Ramirez, the Venezuelan Vice President for the Economy and Oil Minister announced that the three exchange rates would progressively converge, with a new system involving a single unified rate that could be in place by the end of 2014. The Company is currently evaluating the impact of these changes on its business and is monitoring the payment practices of its primary customer to determine what effect there may be on its non-functional currency assets and liabilities. A foreign exchange loss during 2014 may ultimately result from this evaluation or from changes in the payment practices of the Company's primary customer. Increasingly, some of the Company's customers, particularly the national oil companies, have required a certain percentage, or an increased percentage, of local content in the products they buy directly or indirectly from the Company. This requires the Company to add to or expand manufacturing capabilities in certain countries that are presently without the necessary infrastructure or human resources in place to conduct business in a manner as typically done by Cameron. This increases the risk of untimely deliveries, cost overruns and defective products.



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

Economic conditions around the world have resulted in decreased tax revenues for many governments, which have led and could continue to lead to changes in tax laws in countries where the Company does business, including further changes in the United States. Changes in tax laws could have a negative impact on the Company's future results. The Company's operations require it to deal with a variety of cultures, as well as agents and other intermediaries, exposing it to anti-corruption compliance risks. Doing business on a worldwide basis necessarily involves exposing the Company and its operations to risks inherent in complying with the laws and regulations of a number of different nations. These laws and regulations include various anti-bribery and anti-corruption laws. The Company does business and has operations in a number of developing countries that have relatively underdeveloped legal and regulatory systems compared to more developed countries. Several of these countries are generally perceived as presenting a higher than normal risk of corruption, or as having a culture in which requests for improper payments are not discouraged. Maintaining and administering an effective anti-bribery compliance program under the U.S. Foreign Corrupt Practices Act (FCPA), the United Kingdom's Bribery Act of 2010, and similar statutes of other nations, in these environments presents greater challenges to the Company than is the case in other, more developed countries. 36



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

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



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

Environmental concerns have been raised regarding the potential impact on underground water supplies of hydraulic fracturing which involves the pumping of water and certain chemicals under pressure into a well to break apart shale and other rock formations in order to increase the flow of oil and gas embedded in these formations. Recently, a number of U.S. states have proposed regulations regarding disclosure of chemicals used in fracking operations or have temporarily suspended issuance of permits for such operations. Additionally, the United States Environmental Protection Agency (EPA) issued rules, which become effective in January 2015, that are designed to limit the release of volatile organic compounds, or pollutants, from natural gas wells that are hydraulically fractured. The EPA has published draft permitting guidance for oil and gas hydraulic fracturing activities using diesel fuels and is continuing to study whether the fracking process has any negative impact on underground water supplies. A draft of the final report on the results of the study is expected in 2014. Should these regulations, or additional regulations, restrict or curtail hydraulic fracturing activities, the Company's revenues and earnings could be negatively impacted.



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

The EPA has made a finding under the United States Clean Air Act that greenhouse gas emissions endanger public health and welfare and the EPA has enacted regulations requiring monitoring and reporting by certain facilities and companies of greenhouse gas emissions. In June 2014, the U.S. Supreme Court prohibited the EPA from being able to require limits on carbon dioxide and other heat trapping gases from sources that would otherwise not need an air pollution permit. Also, in June 2014, the EPA, acting under President Obama's Climate Action Plan, proposed its Clean Power Plan, which would set U.S. state-by-state guidelines for power plants to meet by 2030 to cut their carbon emissions by 30% nationwide from 2005 levels. The guidelines are also intended to cut pollution, nitrogen oxides and sulfur dioxide by more than 25% during the same period. Under the Clean Power Plan, states are to develop plans to meet state-specific goals to reduce carbon pollution and submit those plans to the EPA by June 2016, with a later deadline provided under certain circumstances. While these proposed rules may hasten the switch from coal to cleaner burning fuels such as natural gas, the overall long-term economic impact of the plan is uncertain at this point. Carbon emission reporting and reduction programs have also expanded in recent years at the state, regional and national levels with certain countries having already implemented various types of cap-and-trade programs aimed at reducing carbon emissions from companies that currently emit greenhouse gases. 37



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To the extent the Company's customers are subject to these or other similar proposed or newly enacted laws and regulations, the Company is exposed to risks that the additional costs by customers to comply with such laws and regulations could impact their ability or desire to continue to operate at current or anticipated levels in certain jurisdictions, which could negatively impact their demand for the Company's products and services. To the extent Cameron becomes subject to any of these or other similar proposed or newly enacted laws and regulations, the Company expects that its efforts to monitor, report and comply with such laws and regulations, and any related taxes imposed on companies by such programs, will increase the Company's cost of doing business in certain jurisdictions, including the United States, and may require expenditures on a number of its facilities and possibly on modifications of certain of its products. The Company could also be impacted by new laws and regulations establishing cap-and-trade and those that might favor the increased use of non-fossil fuels, including nuclear, wind, solar and bio-fuels or that are designed to increase energy efficiency. If the proposed or newly executed laws have the effect of dampening demand for oil and gas production, they could lower spending by customers for the Company's products and services.



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

Demand for most of the Company's products and services, and therefore its revenue, depends to a large extent upon the level of capital expenditures related to oil and gas exploration, development, production, processing and transmission. Declines, as well as anticipated declines, in oil and gas prices could negatively affect the level of these activities, or could result in the cancellation, modification or rescheduling of existing orders. As an example, natural gas spot prices in the United States declined during the first half of 2012 to less than $2 per MMBtu, the lowest level in the last decade. Although natural gas prices have subsequently increased, current rig count levels associated with dry gas extraction activities have not fully recovered to previous levels. This price decline negatively impacted 2012 order levels by certain of the Company's customers which affected the Company's 2012 and 2013 revenues and profitability. See also the discussion in "Market Conditions" above. Environmental Remediation The Company's worldwide operations are subject to domestic and international regulations with regard to air, soil and water quality as well as other environmental matters. The Company, through its environmental management system and active third-party audit program, believes it is in substantial compliance with these regulations. The Company is heir to a number of older manufacturing plants that conducted operations in accordance with the standards of the time, but which have since changed. The Company has undertaken clean-up efforts at these sites and now conducts its business in accordance with today's standards. The Company's clean-up efforts have yielded limited releases of liability from regulators in some instances, and have allowed sites with no current operations to be sold. The Company conducts environmental due diligence prior to all new site acquisitions. For further information, refer to Note 13 of the Notes to Consolidated Condensed Financial Statements.



Environmental Sustainability

The Company has pursued environmental sustainability in a number of ways. Processes are monitored in an attempt to produce the least amount of waste. All of the waste disposal firms used by the Company are carefully selected in an attempt to prevent any future Superfund involvements. Actions are taken in an attempt to minimize the generation of hazardous wastes and to minimize air emissions. Recycling of process water is a common practice. Best management practices are used in an effort to prevent contamination of soil and ground water on the Company's sites. Cameron has implemented a corporate "HSE Management System" based on the principles of ISO 14001 and OHSAS 18001. The HSE Management System contains a set of corporate standards that are required to be implemented and verified by each business unit. Cameron has also implemented a corporate regulatory compliance audit program to verify facility compliance with environmental, health and safety laws and regulations. The compliance program employs or uses independent third-party auditors to audit facilities on a regular basis specific to country, region, and local legal requirements. Audit reports are circulated to the senior management of the Company and to the appropriate business unit. The compliance program requires corrective and preventative actions be taken by a facility to remedy all findings of non-compliance which are tracked on the corporate HSE data base. 38



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