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DRC > SEC Filings for DRC > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for DRESSER-RAND GROUP INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for DRESSER-RAND GROUP INC.


1-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ($ in millions)

Overview

We are among the largest global suppliers of custom-engineered rotating equipment solutions for long-life, critical applications in the oil, gas, chemical, petrochemical, process, power, military and other industries worldwide. Our high-speed rotating equipment is also supplied to the environmental market space within energy infrastructure.

Our products and services are widely used in oil and gas applications that include gas gathering, gas compression and export, gas lift and high pressure re-injection; carbon dioxide re-injection, enhanced oil recovery, main refrigeration compression and other duties for liquefied natural gas ("LNG") plants; gas transmission and storage as well as gas processing; a variety of refinery services; ammonia and methanol synthesis gas; ethylene and other petrochemical services and chemical plant services. We are also a supplier of diesel and gas engines that provide customized energy solutions across worldwide energy infrastructure markets based upon reciprocating engine power systems technologies.

Our custom-engineered products are also used in other advanced applications in the environmental markets we serve and use renewable energy sources, reduce carbon footprint, and recover energy and/or increase energy efficiency. These products include, among others, hot gas turbo-expanders for energy recovery in refineries; co- and tri-generation combined heat and power packages for institutional and other clients; and a large number of steam turbine applications to generate power using steam produced by recovering exhaust heat from the main engines in ships, recovering heat from mining and metals production facilities and exhaust heat recovery from gas turbines in on-shore and off-shore sites. We also have substantial experience in the design, construction and development of power generation and cogeneration plants and mini-hydroelectric plants, and the development and exploitation of wind farms and biomass, used oil and landfill gas, photovoltaic solar energy and farming waste processing. Other biomass and biogas applications for our steam turbine product line include gasification of municipal solid waste or incineration of wood, palm oil, sugar or pulp and paper residues to generate power. Our equipment is used for compressed air energy storage ("CAES") for utility sized power generation. These applications are environmentally-friendly and provide unique grid management features. A typical CAES plant makes use of our classes of axial compressors, centrifugal compressors, gas expanders, controls and rotating equipment system integration capabilities. Other general industrial markets served include steel and distributed power generation. We operate globally with manufacturing facilities in the United States ("U.S."), France, United Kingdom ("UK"), Germany, Spain, Norway and India.

We provide a wide array of products and services to our worldwide client base in over 150 countries from our global locations in 18 U.S. states and 32 countries (over 76 sales offices, 49 service and support centers, including six engineering and research and development centers, and 13 manufacturing locations).

Our solutions-based service offering combines our industry-leading technology, extensive worldwide service center network, deep product expertise and a culture of safety and continuous improvement. This approach drives our growth as we offer integrated service solutions that help our clients lower the life cycle costs of their high speed rotating equipment, minimize adverse environmental impact and maximize returns on their production and processing equipment. We believe our business model and alliance-based approach based on alliance and frame agreements align us with our clients who increasingly choose service providers that can help optimize performance over the entire life cycle of their equipment. Our alliance/frame agreement program encompasses both the provision of new units and/or parts and services. We offer our clients a dedicated team, advanced business tools, a streamlined engineering and procurement process, and a life cycle approach to manufacturing, operating and maintaining their equipment, whether originally manufactured by us or by another manufacturer.

From a long-term perspective, we believe that the fundamentals driving trends in our industry include population and economic growth; maturing producing oil and gas fields worldwide that require greater use of compression equipment to maintain production levels; the increase in demand for electricity requiring greater use of power generation equipment; the increase in demand for natural gas that is driving growth in gas production, storage, transmission infrastructure and liquefied natural gas; international regulatory and environmental initiatives, including clean fuel legislation and stricter emission controls; the aging installed base that is increasing demand for aftermarket parts and services, overhauls and upgrades; and the increased outsourcing of equipment maintenance and operation. With respect to our long-term business strategy, certain of our key strategic objectives include:

• Increasing sales of aftermarket parts and services to the existing installed base;

• Expanding aftermarket parts and services business to non-Company original equipment manufacturers' equipment;

• Growing alliances;

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• Expanding our performance-based long-term service contracts;

• Introducing new and innovative products and technologies;

• Driving operational excellence;

• Continuing to improve profitability;

• Selectively pursuing acquisitions; and

• Developing local execution capability with strategic investments.

Segment information

We have two reportable segments based on the engineering and production processes, and the products and services provided by each segment, as follows:

1) New units are highly engineered solutions to new requests from clients and standardized equipment such as engines and single stage steam turbines. This segment includes engineering, manufacturing, sales and administrative support.

2) Aftermarket parts and services consist of support solutions for the existing population of installed equipment and the operation and maintenance of several types of energy plants. This segment includes engineering, manufacturing, sales and administrative support.

Unallocated amounts represent expenses and assets that cannot be assigned directly to either reportable segment because of their nature. Unallocated net expenses include certain corporate expenses and research and development expenses. Assets that are directly assigned to the two reportable segments are trade accounts receivable, net inventories and goodwill. Unallocated assets include cash, prepaid expenses and other, deferred taxes, property, plant and equipment and intangible assets.

Results of Operations

Three months ended September 30, 2012, compared to the three months ended
September 30, 2011:



                                          Three Months Ended           Three Months Ended            Period to Period Change
                                          September 30, 2012           September 30, 2011         2011 to 2012         % Change
Consolidated Statement of Operations
Data:
Revenues                                $    594.4        100.0 %    $    630.5        100.0 %    $       (36.1 )           (5.7 )%
Cost of sales                                423.8         71.3           459.1         72.8              (35.3 )           (7.7 )%

Gross profit                                 170.6         28.7           171.4         27.2               (0.8 )           (0.5 )%
Selling and administrative expenses           90.2         15.2            89.6         14.2                0.6              0.7 %
Research and development expenses              6.4          1.1             8.6          1.4               (2.2 )          (25.6 )%

Income from operations                        74.0         12.4            73.2         11.6                0.8              1.1 %
Interest expense, net                        (15.7 )       (2.6 )         (13.7 )       (2.2 )             (2.0 )           14.6 %
Other income (expense), net                    1.2          0.2            (0.5 )       (0.1 )              1.7           (340.0 )%

Income before income taxes                    59.5         10.0            59.0          9.3                0.5              0.8 %
Provision for income taxes                    17.4          2.9            17.9          2.8               (0.5 )           (2.8 )%

Net income                                    42.1          7.1            41.1          6.5                1.0              2.4 %
Net income attributable to
noncontrolling interest                       (0.9 )       (0.2 )          (0.8 )       (0.1 )             (0.1 )           12.5 %

Net income attributable to
Dresser - Rand                          $     41.2          6.9 %    $     40.3          6.4 %    $         0.9              2.2 %

Bookings                                $    873.4                   $  1,170.7                   $      (297.3 )          (25.4 )%

Backlog - ending                        $  3,111.0                   $  2,724.2                   $       386.8             14.2 %

Revenues. Revenues were $594.4 for the three months ended September 30, 2012, compared to $630.5 for the three months ended September 30, 2011, a decrease of $36.1 or 5.7%. Generally, oil prices and other macroeconomic conditions that affect the oil and gas industry have an impact on our business over an extended period of time. On a quarterly or annual basis, however, there is typically not a meaningful correlation of those factors to our periodic financial results. Fluctuations in revenues and bookings are generally due to variability in the timing and size of very large orders in the new units segment, which is typical in the oil and gas industry. Furthermore, the highly engineered nature of our worldwide products and services does not easily lend itself to measuring the impact of price, volume and mix on changes in our total revenues from year to year. Nevertheless, based on factors such as measures of labor hours and purchases from suppliers, revenues decreased as a result of lower volume in the new units segment partially offset by higher volume in the aftermarket segment for the three months ended September 30, 2012. An adverse translation impact of foreign currency fluctuations of approximately $42.6 resulting from a stronger U.S. dollar also contributed to lower revenues.

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Cost of sales. Cost of sales was $423.8 for the three months ended September 30, 2012, compared to $459.1 for the three months ended September 30, 2011. As a percentage of revenues, cost of sales was 71.3% for the three months ended September 30, 2012, compared to 72.8% for the three months ended September 30, 2011. The decline in cost of sales as a percentage of revenues from the three months ended September 30, 2011 to the three months ended September 30, 2012 was principally the result of a shift in mix both between the segments and within each of the segments.

Gross profit. Gross profit was $170.6 for the three months ended September 30, 2012, compared to $171.4 for the three months ended September 30, 2011. As a percentage of revenues, gross profit was 28.7% for the three months ended September 30, 2012, compared to 27.2% for the three months ended September 30, 2011. We experienced increased gross profit as a percentage of revenues as a result of the factors discussed above.

Selling and administrative expenses. Selling and administrative expenses were $90.2 for the three months ended September 30, 2012, compared to $89.6 for the three months ended September 30, 2011. Selling and administrative expenses for the three months ended September 30, 2011, included approximately $1.9 of non-recurring transaction and integration costs associated with the acquisition of Guascor. Excluding these one-time costs, the increase in selling and administrative expenses was principally the result of inflation. As a percentage of revenues, selling and administrative expenses increased to 15.2% from 14.2%.

Research and development expenses. Research and development expenses for the three months ended September 30, 2012, were $6.4 compared to $8.6 for the three months ended September 30, 2011. The decline in research and development expenses is the result of efficient execution and a delay in expenses to later in 2012. We have continued to execute our strategy to introduce new and innovative products and technologies with a focus on key new product development initiatives for DATUM®, DATUM® Integrated Compression System ("ICS"), subsea compression, LNG, steam turbines and reciprocating engines. Additionally, the recent acquisition of Synchrony is expected to provide synergy through product design integration of active magnetic bearing technologies for DATUM®, DATUM® ICS and subsea compression.

Income from operations. Income from operations was $74.0 for the three months ended September 30, 2012, compared to $73.2 for the three months ended September 30, 2011, an increase of $0.8. As a percentage of revenues, income from operations for the three months ended September 30, 2012, was 12.4%, compared to 11.6% for the three months ended September 30, 2011. The increase in income from operations and income from operations as a percentage of revenues is the result of the factors discussed above.

Interest expense, net. Interest expense, net was $15.7 for the three months ended September 30, 2012, compared to $13.7 for the three months ended September 30, 2011. The increase in interest expense is principally the result of an increase in borrowings.

Other income (expense), net. Other income, net was $1.2 for the three months ended September 30, 2012, compared to other expense, net of $0.5 for the three months ended September 30, 2011. Other income (expense), net, consists principally of net currency gains and losses, gains and losses on tradable emission allowances and earnings and losses on investments accounted for under the equity method of accounting.

Provision for income taxes. Provision for income taxes was $17.4 for the three months ended September 30, 2012, and $17.9 for the three months ended September 30, 2011. During the three months ended September 30, 2012, we filed our 2011 U.S. tax return. The difference between the filed tax return and the estimated tax provision for the year ended December 31, 2011 of $2.5 was recorded as an income tax benefit in the three months ended September 30, 2012. Our estimated income tax provision for the three months ended September 30, 2012 and 2011, generally differs from the U.S. federal statutory rate of 35% because of different tax rates in foreign tax jurisdictions and certain exemptions and credits allowable for income tax purposes, partially offset by state and local income taxes, and valuation allowances on net operating loss carryforwards that more-likely-than-not will not be realized. We will adjust the valuation allowances in the future when it becomes more-likely-than-not that the benefits of deferred tax assets will be realized or not realized.

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Noncontrolling interest. Noncontrolling interest includes the share of net income and net losses in consolidated entities that are not 100% owned by us.

Bookings and backlog. Effective July 1, 2012, the Company elected to voluntarily change its policy for recording contract cancellations. Historically, contract cancellations were recorded as reductions in current period bookings. Beginning July 1, 2012, contract cancellations are being recorded as direct adjustments to backlog with no impact on current period bookings. Contract cancellations in historical periods presented have not been material to bookings or backlog. The change in policy is considered to provide more relevant information about current market activity by recognizing economic events in the periods in which they occur. In accordance with this policy, material contract cancellations directly adjusting backlog will be separately disclosed.

Bookings for the three months ended September 30, 2012, were $873.4 compared to $1,170.7 for the three months ended September 30, 2011, a decrease of $297.3 or 25.4%. During the three months ended September 30, 2011, the Company was awarded contracts for compression equipment and services which includes up to 80 DATUM compressor trains that will be installed on eight floating, production, storage and offloading ("FPSO") vessels. In the three months ended September 30, 2011, approximately $410.0 and $60.0 have been reflected in the Company's new units and aftermarket bookings, respectively, in accordance with the Company's bookings policy. Backlog was $3,111.0 at September 30, 2012, compared to $2,724.2 at September 30, 2011.

Segment Analysis - three months ended September 30, 2012, compared to three months ended September 30, 2011:

                                          Three Months Ended           Three Months Ended            Period to Period Change
                                          September 30, 2012           September 30, 2011         2011 to 2012         % Change
Revenues
New units                               $    247.5         41.6 %    $    292.6         46.4 %    $       (45.1 )          (15.4 )%
Aftermarket parts and services               346.9         58.4 %         337.9         53.6 %              9.0              2.7 %

Total revenues                          $    594.4        100.0 %    $    630.5        100.0 %    $       (36.1 )           (5.7 )%

Gross profit
New units                               $     44.9                   $     56.2                   $       (11.3 )          (20.1 )%
Aftermarket parts and services               125.7                        115.2                            10.5              9.1 %

Total gross profit                      $    170.6                   $    171.4                   $        (0.8 )           (0.5 )%

Income from operations
New units                               $     21.1                   $     30.2                   $        (9.1 )          (30.1 )%
Aftermarket parts and services                76.1                         68.8                             7.3             10.6 %
Unallocated                                  (23.2 )                      (25.8 )                           2.6            (10.1 )%

Total income from operations            $     74.0                   $     73.2                   $         0.8              1.1 %

Bookings
New units                               $    478.8                   $    732.1                   $      (253.3 )          (34.6 )%
Aftermarket parts and services               394.6                        438.6                           (44.0 )          (10.0 )%

Total bookings                          $    873.4                   $  1,170.7                   $      (297.3 )          (25.4 )%

Backlog - ending
New units                               $  2,449.9                   $  2,180.2                   $       269.7             12.4 %
Aftermarket parts and services               661.1                        544.0                           117.1             21.5 %

Total backlog                           $  3,111.0                   $  2,724.2                   $       386.8             14.2 %

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New Units

Revenues. Revenues for this segment were $247.5 for the three months ended September 30, 2012, compared to $292.6 for the three months ended September 30, 2011, a decrease of $45.1 or 15.4%. Generally, oil prices and other macroeconomic conditions that affect the oil and gas industry have an impact on our new units business over an extended period of time. On a quarterly or annual basis, however, there is typically not a meaningful correlation of those factors to our periodic financial results. Fluctuations in revenues and bookings are generally due to variability in the timing and size of very large orders in the new units segment, which is typical in the oil and gas industry. Furthermore, the highly engineered nature of our worldwide products and services does not easily lend itself to measuring the impact of price, volume and mix on changes in our total revenues from year to year. Revenues declined resulting from the timing of large shipments. An adverse translation impact of foreign currency fluctuations of approximately $14.0 resulting from a stronger U.S. dollar also contributed to lower new unit revenues.

Gross profit. Gross profit was $44.9 for the three months ended September 30, 2012, compared to $56.2 for the three months ended September 30, 2011. Gross profit, as a percentage of segment revenues, was 18.1% for the three months ended September 30, 2012, compared to 19.2% for the three months ended September 30, 2011. The decline in gross margin is principally the result of decreased operating leverage of fixed costs resulting from lower volumes.

Income from operations. Income from operations was $21.1 for the three months ended September 30, 2012, compared to $30.2 for the three months ended September 30, 2011. As a percentage of segment revenues, income from operations was 8.5% for the three months ended September 30, 2012, compared to 10.3% for the three months ended September 30, 2011. Income from operations as a percentage of revenues decreased compared to the prior year as a result of the factors discussed above.

Bookings and backlog. Effective July 1, 2012, the Company elected to voluntarily change its policy for recording contract cancellations. This change is more fully described in the Bookings and backlog caption in the section titled Three months ended September 30, 2012, compared to the three months ended September 30, 2011 of this Form 10-Q.

New units bookings for the three months ended September 30, 2012, were $478.8 compared to $732.1 for the three months ended September 30, 2011. During the three months ended September 30, 2011, the Company was awarded contracts for compression equipment and services which includes up to 80 DATUM compressor trains that will be installed on eight FPSO vessels. In the three months ended September 30, 2011, approximately $410.0 has been reflected in the Company's new units bookings, in accordance with the Company's bookings policy. Backlog was $2,449.9 at September 30, 2012, compared to $2,180.2 at September 30, 2011.

Aftermarket Parts and Services

Revenues. Revenues for this segment were $346.9 for the three months ended September 30, 2012, compared to $337.9 for the three months ended September 30, 2011, an increase of $9.0 or 2.7%. Generally, oil prices and other macroeconomic conditions that affect the oil and gas industry have an impact on our business over an extended period of time. On a quarterly or annual basis, there is typically not a meaningful correlation of those factors to our periodic financial results. The Company has experienced aftermarket growth in most geographic segments, but particularly in the Middle East and Latin America. An adverse translation impact of foreign currency fluctuations of approximately $28.6 resulting from a stronger U.S. dollar partially offset the increase in revenues.

Gross profit. Gross profit was $125.7 for the three months ended September 30, 2012, compared to $115.2 for the three months ended September 30, 2011. Gross profit as a percentage of segment revenues for the three months ended September 30, 2012, of 36.2% increased from 34.1% for the three months ended September 30, 2011. Gross profit as a percentage of revenues increased principally due to a more favorable mix.

Income from operations. Income from operations was $76.1 for the three months ended September 30, 2012, compared to $68.8 for the three months ended September 30, 2011. As a percentage of segment revenues, income from operations increased to 21.9% for the three months ended September 30, 2012, from 20.4% for the three months ended September 30, 2011. The changes in income from operations and income from operations as a percentage of segment revenues resulted principally from the reasons discussed above.

Bookings and backlog. Effective July 1, 2012, the Company elected to voluntarily change its policy for recording contract cancellations. This change is more fully described in the Bookings and backlog caption in the section titled Three months ended September 30, 2012, compared to the three months ended September 30, 2011of this Form 10-Q.

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Bookings for the three months ended September 30, 2012, were $394.6, compared to $438.6 for the three months ended September 30, 2011. The Company has experienced aftermarket growth in most geographic segments, but particularly in the Middle East and Latin America. During the three months ended September 30, 2011, the Company was awarded contracts for compression equipment and services which includes up to 80 DATUM compressor trains that will be installed on eight FPSO vessels. In the three months ended September 30, 2011, approximately $60.0 has been reflected in the Company's aftermarket bookings, respectively, in accordance with the Company's bookings policy. Backlog was $661.1 at September 30, 2012, compared to $544.0 at September 30, 2011.

Nine months ended September 30, 2012, compared to the nine months ended September 30, 2011:

                                         Nine Months Ended            Nine Months Ended             Period to Period Change
                                        September 30, 2012           September 30, 2011          2011 to 2012         % Change
Consolidated Statement of
Operations Data:
Revenues                              $  1,892.0        100.0 %    $  1,573.6        100.0 %    $        318.4             20.2 %
Cost of sales                            1,408.7         74.5         1,155.6         73.4               253.1             21.9 %

Gross profit                               483.3         25.5           418.0         26.6                65.3             15.6 %
Selling and administrative expenses        267.4         14.1           266.2         16.9                 1.2              0.5 %
Research and development expenses           17.6          0.9            20.7          1.3                (3.1 )          (15.0 )%

Income from operations                     198.3         10.5           131.1          8.4                67.2             51.3 %
Interest expense, net                      (47.9 )       (2.5 )         (44.7 )       (2.8 )              (3.2 )            7.2 %
Early redemption premium on debt              -            -            (10.1 )       (0.6 )              10.1           (100.0 )%
Other income, net                            0.8           -              1.3          0.1                (0.5 )          (38.5 )%

Income before income taxes                 151.2          8.0            77.6          5.1                73.6             94.8 %
Provision for income taxes                  49.8          2.6            26.4          1.7                23.4             88.6 %

Net income                                 101.4          5.4            51.2          3.4                50.2             98.0 %
Net (income) loss attributable to
noncontrolling interest                     (2.6 )       (0.1 )           0.7          0.0                (3.3 )         (471.4 )%

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