Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
DRC > SEC Filings for DRC > Form 10-Q on 25-Apr-2013All 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.


25-Apr-2013

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 generation, military and other industries worldwide. Our equipment and service solutions are also used within energy infrastructure, including oil and gas, environmental solutions, and power generation.

Our products and services are widely used in oil and gas applications that include hydrogen recycle, make-up, wet gas and other applications for the refining industry; cracked gas, propylene and ethylene compression for petrochemical facilities; ammonia syngas, refrigeration, and carbon dioxide compression for fertilizer production; a number of compression duties for chemical plants; gas gathering, export, lift and re-injection of natural gas or carbon dioxide ("CO2") to meet regulatory requirements or for oil field enhanced recovery in the upstream market; gas processing, main refrigeration compression and a variety of other duties required in the production of liquefied natural gas ("LNG"); gas processing duties, storage and pipeline transmission compression for the midstream market; synthetic fuels; and steam turbine power generation for floating production, storage and offloading ("FPSO") vessels as well as power generation or mechanical drive duties for a variety of compression and pumping applications in the oil and gas market. We are also a supplier of diesel and gas engines that provides 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. These applications use renewable energy sources, reduce carbon footprint, recover energy and/or increase energy efficiency. These products include, among others, compression technologies for carbon capture and sequestration ("CCS"); hot gas turbo-expanders for energy recovery in refineries and certain chemical facilities; co- and tri-generation combined heat and power ("CHP") 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 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. A CAES plant makes use of our classes of axial compressors, centrifugal compressors, gas expanders, controls and rotating equipment system integration capabilities. These applications are environmentally-friendly and provide unique grid management features. 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 74 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 (which we believe to be industry-leading) 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 rotating equipment, minimize adverse environmental impact and maximize returns on their production and processing equipment. We believe our business model and alliance-based approach built 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 a third party.

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 advancement of shale gas technologies which requires compression for both transmission and gas processing activities; 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:

Page 23 of 35


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

• Expanding aftermarket parts and services business to non-Dresser-Rand equipment in our class;

• Growing alliances;

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

• Introducing new and innovative products and technologies;

• Continuing to improve profitability; and

• Selectively pursuing acquisitions.

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 predominately highly engineered solutions to new requests from clients. New units also include standardized equipment such as engines and single stage steam turbines. The segment includes engineering, manufacturing, packaging, testing, 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. The segment includes engineering, manufacturing, installation, commissioning, start-up and other field services, repairs, overhauls, refurbishment, 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. There are no significant intercompany transactions between our reportable segments.

Results of Operations

Three months ended March 31, 2013, compared to the three months ended March 31,
2012:



                                        Three Months Ended           Three Months Ended             Period to Period Change
                                          March 31, 2013               March 31, 2012            2012 to 2013         % Change
Consolidated Statement of
Operations Data:
Revenues                              $    766.4        100.0 %    $    661.8        100.0 %    $        104.6             15.8 %
Cost of sales                              594.4         77.6           516.9         78.1                77.5             15.0 %

Gross profit                               172.0         22.4           144.9         21.9                27.1             18.7 %
Selling and administrative expenses         96.2         12.6            88.7         13.4                 7.5              8.5 %
Research and development expenses           10.3          1.3             4.5          0.7                 5.8            128.9 %

Income from operations                      65.5          8.5            51.7          7.8                13.8             26.7 %
Interest expense, net                      (14.3 )       (1.9 )         (16.3 )       (2.5 )               2.0            (12.3 )%
Other (expense) income, net                 (1.0 )       (0.0 )           0.1          0.0                (1.1 )        (1100.0 )%

Income before income taxes                  50.2          6.6            35.5          5.3                14.7             41.4 %
Provision for income taxes                  15.8          2.1            11.2          1.7                 4.6             41.1 %

Net income                                  34.4          4.5            24.3          3.6                10.1             41.6 %
Net income attributable to
noncontrolling interest                     (1.5 )       (0.2 )          (0.7 )       (0.1 )              (0.8 )          114.3 %

Net income attributable to
Dresser-Rand                          $     32.9          4.3 %    $     23.6          3.5 %    $          9.3             39.4 %

Bookings                              $    667.8                   $    827.0                   $       (159.2 )          (19.3 )%

Backlog-ending                        $  2,863.7                   $  2,746.8                   $        116.9              4.3 %

Page 24 of 35


Table of Contents

Revenues. Revenues were $766.4 for the three months ended March 31, 2013, compared to $661.8 for the three months ended March 31, 2012, an increase of $104.6 or 15.8%. 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 direct correlation of short-term volatility in these 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. This occurs because our equipment, in many cases, is used in very large capital projects that take years to plan and execute, and such projects do not occur on a regular or consistent basis due to their size, location and long-term relationship to global energy supply and demand. While a change in these factors at a macroeconomic level will tend to have a corresponding overall effect on our revenue, the timing of such effect on our quarterly or even annual revenues is not directly correlated because of the very long lead times required to evaluate the macroeconomic landscape and then plan and execute the projects. 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 increased due to higher volume during the three months ended March 31, 2013 that resulted from the timing issues discussed above. Additionally, the Company entered into three extended scope construction-type contracts near the end of 2012 which are accounted for on a percentage-of-completion basis and contributed approximately $40.0 of revenues. Price increases also contributed incremental revenues, albeit to a much lesser extent. An adverse translation impact of foreign currency fluctuations of approximately $5.0 resulting from a stronger U.S. dollar partially offset the increase in revenues.

Cost of sales. Cost of sales was $594.4 for the three months ended March 31, 2013, compared to $516.9 for the three months ended March 31, 2012. As a percentage of revenues, cost of sales was 77.6% for the three months ended March 31, 2013, compared to 78.1% for the three months ended March 31, 2012. The decline in cost of sales as a percentage of revenues from the three months ended March 31, 2012 to the three months ended March 31, 2013 was principally the result of improved operating leverage on fixed costs from higher volumes and to a much lesser extent, the price increases discussed above and mix.

Gross profit. Gross profit was $172.0 for the three months ended March 31, 2013, compared to $144.9 for the three months ended March 31, 2012. As a percentage of revenues, gross profit was 22.4% for the three months ended March 31, 2013, compared to 21.9% for the three months ended March 31, 2012. 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 $96.2 for the three months ended March 31, 2013, compared to $88.7 for the three months ended March 31, 2012. While we were able to achieve greater operating leverage on administrative costs, the increase in selling and administrative expenses was generally the result of increased selling activity and cost inflation. As a percentage of revenues, selling and administrative expenses decreased to 12.6% from 13.4%.

Research and development expenses. Research and development expenses for the three months ended March 31, 2013, were $10.3 compared to $4.5 for the three months ended March 31, 2012. We continue to effectively 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 acquisition of Synchrony is expected to provide synergy through product design integration of active magnetic bearing technologies for DATUM®, DATUM® ICS and subsea compression. The increase in research and development expenses is related to strategic projects that are expected to be demonstrated or launched during 2013. It is typical that projects entering this phase of development incur higher procurement and testing expenses when compared to design related activities that occur earlier in the development lifecycle.

Income from operations. Income from operations was $65.5 for the three months ended March 31, 2013, compared to $51.7 for the three months ended March 31, 2012, an increase of $13.8 or 26.7%. As a percentage of revenues, income from operations for the three months ended March 31, 2013, was 8.5%, compared to 7.8% for the three months ended March 31, 2012. 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 $14.3 for the three months ended March 31, 2013, compared to $16.3 for the three months ended March 31, 2012. Near the end of 2012, we settled a dispute with a former non-controlling equity holder of one of our subsidiaries. For the three months ended March 31, 2012, interest cost associated with the dispute was estimated and accrued at a higher interest rate than the interest rate at which the dispute was ultimately settled. Interest cost for the three months ended March 31, 2013 included the lower negotiated rate resulting in lower interest expense.

Page 25 of 35


Table of Contents

Other (expense) income, net. Other expense, net was $1.0 for the three months ended March 31, 2013, compared to other income, net of $0.1 for the three months ended March 31, 2012. Other (expense) income, 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. The increase in other expense, net is principally the result of the devaluation of the Venezuelan bolivar on February 8, 2013. As a result of this devaluation, the Company recorded a non-deductible foreign exchange loss in its Consolidated Statement of Income of approximately $3.6 for the three months ended March 31, 2013. The remaining change in other expense, net is principally the result of normal foreign currency fluctuations for the three months ended March 31, 2013.

Provision for income taxes. Provision for income taxes was $15.8 for the three months ended March 31, 2013, and $11.2 for the three months ended March 31, 2012. Our estimated income tax provision for the three months ended March 31, 2013 and 2012, 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.

On January 2, 2013, the American Taxpayer Relief Act ("ATRA") of 2012 was signed into law. Some of the provisions were retroactive to January 1, 2012, including the exclusion from U.S. federal taxable income of certain interest, dividends, rents, and royalty income of foreign affiliates, as well as the tax benefits of the credits associated with that income and an extension of the research and experimentation credit. As required by U.S. GAAP, a $4.4 benefit was reflected in the first quarter of 2013 as a discrete event.

As a result of the devaluation of the Venezuelan bolivar on February 8, 2013, the Company recorded a nondeductible foreign exchange loss in its Consolidated Statement of Income of approximately $3.6 for the three months ended March 31, 2013. Had this amount been deductible, our effective tax rate would have been 2.4 percentage points lower for the three months ended March 31, 2013.

Certain foreign subsidiaries in Brazil and India are operating under tax holiday arrangements that will expire during 2013 and 2015, respectively, subject to potential extensions. For the three months ended March 31, 2013 and 2012, the impact of these tax holiday arrangements lowered income tax expense by $1.0 ($0.01 per diluted share) and $0.4 ($0.01 per diluted share), respectively.

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. Bookings for the three months ended March 31, 2013, were $667.8 compared to $827.0 for the three months ended March 31, 2012, a decrease of $159.2 or 19.3%. The decline in bookings is the result of normal timing issues with respect to the new units segment as discussed in the caption titled "Revenues" above. Backlog was $2,863.7 at March 31, 2013, compared to $2,746.8 at March 31, 2012.

Page 26 of 35


Table of Contents

Segment Analysis - three months ended March 31, 2013, compared to three months ended March 31, 2012:

                                         Three Months Ended           Three Months Ended            Period to Period Change
                                           March 31, 2013               March 31, 2012           2012 to 2013         % Change
Revenues
New units                              $    443.2         57.8 %    $    367.7         55.6 %    $        75.5             20.5 %
Aftermarket parts and services              323.2         42.2 %         294.1         44.4 %             29.1              9.9 %

Total revenues                         $    766.4        100.0 %    $    661.8        100.0 %    $       104.6             15.8 %

Gross profit
New units                              $     55.5                   $     46.9                   $         8.6             18.3 %
Aftermarket parts and services              116.5                         98.0                            18.5             18.9 %

Total gross profit                     $    172.0                   $    144.9                   $        27.1             18.7 %

Income from operations
New units                              $     28.6                   $     20.2                   $         8.4             41.6 %
Aftermarket parts and services               66.4                         53.3                            13.1             24.6 %
Unallocated                                 (29.5 )                      (21.8 )                          (7.7 )           35.3 %

Total income from operations           $     65.5                   $     51.7                   $        13.8             26.7 %

Bookings
New units                              $    268.8                   $    442.2                   $      (173.4 )          (39.2 )%
Aftermarket parts and services              399.0                        384.8                            14.2              3.7 %

Total bookings                         $    667.8                   $    827.0                   $      (159.2 )          (19.3 )%

Backlog-ending
New units                              $  2,207.7                   $  2,174.3                   $        33.4              1.5 %
Aftermarket parts and services              656.0                        572.5                            83.5             14.6 %

Total backlog                          $  2,863.7                   $  2,746.8                   $       116.9              4.3 %

New Units

Revenues. Revenues for this segment were $443.2 for the three months ended March 31, 2013, compared to $367.7 for the three months ended March 31, 2012, an increase of $75.5 or 20.5%. 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 direct correlation of short-term volatility in these 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. This occurs because our equipment, in many cases, is used in very large capital projects that take years to plan and execute, and such projects do not occur on a regular or consistent basis due to their size, location and long-term relationship to global energy supply and demand. While a change in these factors at a macroeconomic level will tend to have a corresponding overall effect on our revenue, the timing of such effect on our quarterly or even annual revenues is not directly correlated because of the very long lead times required to evaluate the macroeconomic landscape and then plan and execute the projects. 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, volumes increased during the three months ended March 31, 2013 as a result of the timing issues discussed above. Additionally, the Company entered into three extended scope construction-type contracts near the end of 2012 which are accounted for on a percentage-of-completion basis and contributed approximately $40.0 of revenues.

Gross profit. Gross profit was $55.5 for the three months ended March 31, 2013, compared to $46.9 for the three months ended March 31, 2012. Gross profit, as a percentage of segment revenues, was 12.5% for the three months ended March 31, 2013, compared to 12.8% for the three months ended March 31, 2012. We experienced decreased gross profit as a percentage of sales in our new units segment primarily due to the mix of new unit sales during the period, substantially offset by better operating leverage from higher volumes discussed above.

Page 27 of 35


Table of Contents

Income from operations. Income from operations was $28.6 for the three months ended March 31, 2013, compared to $20.2 for the three months ended March 31, 2012. As a percentage of segment revenues, income from operations was 6.5% for the three months ended March 31, 2013, compared to 5.5% for the three months ended March 31, 2012. Income from operations as a percentage of revenues increased compared to the prior year as a result of the factors discussed above.

Bookings and backlog. New units bookings for the three months ended March 31, 2013, were $268.8 compared to $442.2 for the three months ended March 31, 2012. The decline in bookings is the result of normal timing issues for the reasons discussed in the caption titled "Revenues" above. Backlog was $2,207.7 at March 31, 2013, compared to $2,174.3 at March 31, 2012.

Aftermarket Parts and Services

Revenues. Revenues for this segment were $323.2 for the three months ended March 31, 2013, compared to $294.1 for the three months ended March 31, 2012, an increase of $29.1 or 9.9%. 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, but less so in this segment. On a quarterly or annual basis, however, there is typically not a meaningful correlation of those factors to our periodic financial results. During the three months ended March 31, 2013, the Company has experienced aftermarket growth in most geographic segments, but particularly in the Middle East and Latin America, resulting in higher volumes. Also, to a much lesser extent, price increase contributed to higher revenues. An adverse translation impact of foreign currency fluctuations of approximately $4.8 resulting from a stronger U.S. dollar partially offset the increase in revenues.

Gross profit. Gross profit was $116.5 for the three months ended March 31, 2013, compared to $98.0 for the three months ended March 31, 2012. Gross profit as a percentage of segment revenues for the three months ended March 31, 2013, of 36.0% increased from 33.3% for the three months ended March 31, 2012. Gross profit as a percentage of revenues increased principally due to favorable mix and price increases (approximately 3.3%).

Income from operations. Income from operations was $66.4 for the three months ended March 31, 2013, compared to $53.3 for the three months ended March 31, 2012. As a percentage of segment revenues, income from operations increased to 20.5% for the three months ended March 31, 2013, from 18.1% for the three months ended March 31, 2012. 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. Bookings for the three months ended March 31, 2013, were $399.0, compared to $384.8 for the three months ended March 31, 2012. The Company has experienced aftermarket growth in most geographic segments, but . . .

  Add DRC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for DRC - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.