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DRC > SEC Filings for DRC > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for DRESSER-RAND GROUP INC.

Form 10-K for DRESSER-RAND GROUP INC.


14-Mar-2014

Annual Report


ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ($ in millions)

"Safe Harbor" Statement Under Private Securities Litigation Reform Act of 1995

This Form 10-K includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this Form 10-K, the words "anticipates," "believes," "estimates," "expects," "intends" and similar expressions identify such forward-looking statements. Although we believe that such statements are based on reasonable assumptions, these forward-looking statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. These factors, risks and uncertainties include, among others, the following:

•economic or industry downturns;

• volatility and disruption of the credit markets;

•our ability to implement our business strategy;

• delivery delays by third-party suppliers;

• the risk of cost overruns on fixed price contracts;

• our ability to comply with local content requirements;

• payment and administrative delays of certain of our national oil company customers;

•our ability to generate cash and access capital on reasonable terms;

• competition in our markets;

•the variability of bookings and revenues due to volatile market conditions, client subjectivity in placing orders, potential preference for bundling and timing of large orders;

•failure to integrate, or achieve the expected benefits from, acquisitions, joint ventures or strategic investments;

• economic, political and other risks associated with our international sales and operations;

• fluctuations in currency values and exchange rates;

•loss of our senior management or other key personnel;

• environmental compliance costs and liabilities and responses to concerns regarding climate change;

• new regulations relating to "conflict minerals";

• failure to maintain safety performance acceptable to our clients;

• failure to negotiate new collective bargaining agreements;

• information systems security threats and computer crime;

•unexpected product claims or regulations;

• infringement of our intellectual property rights or our infringement of others' intellectual property rights;

• difficulties implementing an Oracle-based information management system;

• certain covenants in our principal debt instruments impose restrictions that may limit our operating and financial flexibility;

• our brand name may be confused with others;

•our pension expenses and funding requirements;

•feed-in tariffs and regulations in our energy generating business; and

• other factors described in this Form 10-K.

Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what the impact would be on our results of operations and financial condition. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, except as required by


applicable law. Further discussion of these and other risk considerations is provided in Item 1A, Risk Factors, in this Form 10-K.

Basis of Presentation

The accompanying consolidated financial statements and notes to consolidated financial statements included herein in Item 15, Exhibits, Financial Statements and Schedules, have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and include the accounts of Dresser-Rand Group Inc. and its consolidated subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Unless the context otherwise indicates, the terms "we," "our," "us," the "Company" and similar terms, refer to Dresser-Rand Group Inc. and its consolidated subsidiaries.

Overview

We have been serving the energy markets since 1840. For over 170 years, the Company has been able to build on the legacy of innovation and technology from companies that include many of the most respected names in the industry - Dresser-Clark, Ingersoll Rand, Worthington, Turbodyne, Terry, Nadrowski, Coppus, Murray, Gimpel, Peter Brotherhood, Arrow Industries, Enginuity, Compressor Renewal Services, Grupo Guascor, S.L., Leading Edge Turbine Technologies, Turbo Machines Field Services and Synchrony. During that time, we have amassed the largest installed base of equipment in our class, which we believe would be very difficult for competitors to replicate.

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 high-speed rotating equipment is also supplied to the environmental solutions market space within energy infrastructure.

Our products are used for applications that include oil and gas production and gas lift; high-pressure gas injection and other applications for enhanced oil recovery; natural gas production and processing; gas liquefaction; gas gathering, transmission and storage; hydrogen, wet and coker gas, synthesis gas, carbon dioxide and many other applications for the refining, fertilizer and petrochemical markets; several applications for the armed forces; as well as varied applications for general industrial markets such as paper, steel, sugar and distributed power generation. 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. We service our installed base, and that of other suppliers, around the world through the provision of parts, repairs, overhauls, operation and maintenance, upgrades, revamps, applied technology solutions, coatings, field services, technical support and other extended services. In addition, see Item 1, Business, in this Form 10-K for a description of the markets we serve.

We operate globally with manufacturing facilities in the U.S., France, Spain, UK, Germany, Norway, Brazil 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 through our 73 sales offices, 49 service and support centers, including six engineering and research and development centers, and 14 manufacturing locations.

For the years ended December 31, 2013, 2012 and 2011, the percent of revenues by destination were as follows:

                                   Year Ended December 31,
                                  2013         2012      2011
Revenues by destination
United States                      28  %        30  %    29  %
Canada                              3            3        2
Latin America                      14           16       18
Europe                             26           25       22
Asia-Pacific, Southern Asia        17           15       15
Middle East, Africa                12           11       14
Total revenues                    100  %       100  %   100  %


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, project management, 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, project management, installation, commissioning, start-up and other field services, repairs, overhauls, refurbishment, sales and administrative support.

These functions have been defined as the operating segments of the Company because they are the segments (1) that engage in business activities from which revenues are earned and expenses are incurred; (2) whose operating results are regularly reviewed by the Company's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and (3) for which discrete financial information is available.

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.

Effects of Currency Fluctuations

Our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we or our subsidiaries enter into a purchase or sales transaction using a currency other than the functional currency (usually local) of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant functional currency and then translated into U.S. dollars for inclusion in our consolidated financial statements. Exchange rates between these currencies and U.S. dollars historically have fluctuated significantly and may continue to do so in the future. The most significant component of our revenues and costs is denominated in U.S. dollars. Euro-related revenues and costs are also significant. Historically, we have engaged in hedging strategies from time to time to reduce the effect of currency fluctuations on specific transactions. However, we have not sought to hedge currency translation risk. We expect to continue to engage in foreign currency hedging strategies going forward, but have not attempted to qualify our foreign currency hedges for hedge accounting treatment. Significant declines in the value of the euro relative to the U.S. dollar could have a material adverse effect on our consolidated financial condition and results of operations.

Revenues

Our revenues are primarily generated through the sale of new units and aftermarket parts and services. Revenues are recognized as described in Note 2, Summary of Significant Accounting Policies, in our notes to consolidated financial statements included herein in Item 15, Exhibits, Financial Statements and Schedules.

Cost of Sales

Cost of sales includes raw materials, manufacturing and services related employee and overhead costs, freight and warehousing and product engineering.

Selling and Administrative Expenses

Selling expenses consist of costs associated with marketing and sales. Administrative expenses are primarily management, corporate expenses and legal costs.

Research and Development Expenses

Research and development expenses include payroll, employee benefits, and other labor related costs, depreciation, workstations and software costs associated with product development. These costs are expensed as incurred. Expenses for major projects are carefully evaluated to manage return on investment requirements.


Other Expense, Net

Other expense, net includes those items that are non-operating in nature. Examples of items reported as other expense, net are equity in earnings of certain 50% or less owned affiliates, fair value adjustments of tradable emission allowances, fair value adjustments of contingent consideration, indemnification recoveries and the impact of currency exchange fluctuations.

Depreciation and Amortization

Property, plant and equipment are reported at cost less accumulated depreciation, which is generally provided using the straight-line method over the respective estimated useful lives of the assets. Expenditures for improvements that extend the life of the asset are generally capitalized. Intangible assets primarily consist of amounts allocated to customer relationships, software and technology, trade names and other intangibles. All of the intangible assets are generally amortized using the straight-line method over their respective estimated useful lives.

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 recorded as direct adjustments to backlog with no impact on current period bookings. Contract cancellations in historical periods have not been material to bookings or backlog. The change in policy provides 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 are separately disclosed.

New Units

Bookings represent firm orders placed for a specific scope of supply during the period, whether or not filled. The elapsed time from booking to completion of performance is typically four to fifteen months (and potentially longer for certain major projects). The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of authorization that management has determined are likely to be performed. Although backlog represents business that is considered firm, cancellations or scope adjustments may occur. In certain cases, cancellation of a contract provides us with the opportunity to bill for certain incurred costs and penalties. Backlog is adjusted to reflect currency exchange rates as of the date the backlog is reported.

Aftermarket Parts and Services

Bookings represent firm orders placed for a specific scope of supply during the period, whether or not filled. Backlog primarily consists of unfilled parts orders and open repair and field service orders. The elapsed time from order entry to completion can be one day to 12 months depending on the complexity of the order. Backlog is adjusted to reflect currency exchange rates as of the date the backlog is reported.

Letters of Credit, Bank Guarantees and Surety Bonds

In the ordinary course of our business, we make use of letters of credit, bank guarantees and surety bonds. We use both performance bonds, ensuring the performance of our obligations under various contracts to which we are a party, and advance payment bonds, which ensure that clients that place purchase orders with us and make advance payments under such contracts are reimbursed to the extent we fail to deliver under the contract. Under the revolving portion of our Amended Credit Facility, we are entitled to have up to $1,100.0 of letters of credit outstanding at any time, subject to certain conditions. From time to time, we also use letters of credit and bank guarantees issued by banks offering uncommitted lines of credit, which are not limited by the Amended Credit Facility.


Results of Operations

Year ended December 31, 2013, compared to the year ended December 31, 2012:

                                       Year Ended         % of         Year Ended         % of
                                    December 31, 2013    Revenue    December 31, 2012    Revenue
Consolidated Statement of
Operations Data:
Revenues                           $          3,032.6    100.0%    $          2,736.4    100.0%
Cost of sales                                 2,247.3      74.1               2,004.3      73.2
Gross profit                                    785.3      25.9                 732.1      26.8
Selling and administrative
expenses                                        385.5      12.7                 365.8      13.4
Research and development expenses                38.8       1.3                  30.4       1.1
Fixed asset impairment of
cogeneration facilities                          40.0       1.3                      -      0.0
Income from operations                          321.0      10.6                 335.9      12.3
Interest expense, net                           (46.9)     (1.5)                (60.2)     (2.2)
Other expense, net                              (16.6)     (0.5)                     -      0.0
Income before income taxes                      257.5       8.5                 275.7      10.1
Provision for income taxes                       88.2       2.9                  92.8       3.4
Net income                                      169.3       5.6                 182.9       6.7
Net income attributable to
noncontrolling interest                          (0.9)     (0.1)                 (3.9)     (0.1)
Net income attributable to
Dresser-Rand                       $            168.4      5.6%    $            179.0      6.6%
Bookings                           $          2,941.4              $          3,162.8
Backlog - ending                   $          2,849.0              $          2,946.0

Revenues. Revenues were $3,032.6 for the year ended December 31, 2013, compared to $2,736.4 for the year ended December 31, 2012, an increase of $296.2 or 10.8%. 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, technical resources, client capital expenditure constraints 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, permit 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 year ended December 31, 2013 as a result of the timing issues discussed above.
Price increases in the aftermarket parts and services segment also contributed incremental revenues, albeit to a much lesser extent. These increases were partially offset by negative impacts from our six pig manure treatment facilities in Spain which we acquired in our acquisition of Guascor. The Spanish government published a draft regulation at the end of January 2014 that reflects a reduction in the tariffs of approximately 37%, which, if enacted, would be retroactive to July 2013. In connection with the draft regulation being issued, 2013 revenues are lower by approximately $23.7 as a result of the retroactive reduction of the tariffs which partially offsets the overall increase in revenues. An adverse translation impact of foreign currency fluctuations of approximately $28.5, resulting from a stronger U.S. dollar, also partially offset the increase in revenues. The increase in revenue on extended scope projects, which are accounted for under the percentage of completion method of accounting, was $175.7 for the year ended December 31, 2013.

Cost of sales. Cost of sales was $2,247.3 for the year ended December 31, 2013, compared to $2,004.3 for the year ended December 31, 2012. As a percentage of revenues, cost of sales was 74.1% for the year ended December 31, 2013, compared to 73.2% for the year ended December 31, 2012. The increase in cost of sales as a percentage of revenues from the year ended December 31, 2012 to the year ended December 31, 2013 was partially the result of a shift in mix from our aftermarket segment to our new units segment. A shift in the mix of projects within the new units segment also contributed


to higher cost of sales as a percentage of revenues. The proposed change in the tariffs reflected in the draft Spanish regulation discussed above contributed approximately 0.5% to the increase in cost of sales as a percentage of revenues. These factors were partially offset by improved operating leverage on fixed costs from higher volumes.

Gross profit. Gross profit was $785.3 for the year ended December 31, 2013, compared to $732.1 for the year ended December 31, 2012. As a percentage of revenues, gross profit was 25.9% for the year ended December 31, 2013, compared to 26.8% for the year ended December 31, 2012. We experienced decreased gross profit as a percentage of revenues as a result of the factors discussed above.

Selling and administrative expenses. Selling and administrative expenses were $385.5 for the year ended December 31, 2013, compared to $365.8 for the year ended December 31, 2012. While we were able to achieve greater operating leverage on administrative costs, an 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 12.7% from 13.4%.

Research and development expenses. Research and development expenses for the year ended December 31, 2013, were $38.8 compared to $30.4 for the year ended December 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. The increase in research and development expenses is related to strategic projects that are expected to be in demonstration or launch phases during the next twelve months. 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.

Fixed asset impairment of cogeneration facilities. In view of the proposed change in the tariffs reflected in the draft Spanish regulation discussed above, we have decided to suspend the operations at our six pig manure treatment facilities, although discussions with the Spanish government are ongoing.

The draft regulation is a clarification of a law that was passed in 2013, as the law did not have sufficient specificity to reasonably estimate the tariff at that time. Subsequently, as a result of the proposed tariff we believe an impairment triggering event occurred in 2013 and have recorded an impairment charge of $40.0 in 2013 to reduce the value of the property, plant and equipment. At the time of the acquisition, we did not record any specific intangible assets related to the pig manure treatment facilities.

Income from operations. Income from operations was $321.0 for the year ended December 31, 2013, compared to $335.9 for the year ended December 31, 2012, a decrease of $14.9 or 4.4%. As a percentage of revenues, income from operations for the year ended December 31, 2013, was 10.6%, compared to 12.3% for the year ended December 31, 2012. The decrease in income from operations and income from operations as a percentage of revenues is the result of the factors discussed above. The proposed change in tariffs reflected in the draft Spanish regulation reduced income from operations as a percentage of sales by approximately 0.6%. The fixed asset impairment charge reduced operating income as a percentage of sales by approximately 1.3%.

Interest expense, net. Interest expense, net was $46.9 for the year ended December 31, 2013, compared to $60.2 for the year ended December 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 year ended December 31, 2012, interest cost associated with the dispute was estimated and accrued at a higher interest rate than the interest rate ultimately agreed to be paid over the remaining term of the note. Interest cost for the year ended December 31, 2013, included the lower negotiated rate which lowered interest expense. In addition, as discussed in Note 16 to the consolidated financial statements, included herein in Item 15, Exhibits, Financial Statements and Schedules, Enviroil, an affiliate of the Company, entered into a settlement agreement in September 2013, in which the counterparty agreed to waive sanctions, interest and other related costs that the counterparty had previously claimed, and the Company had previously accrued. Accordingly, upon entering into the settlement agreement, the interest portion of this accrual was reversed in 2013, resulting in a reduction in interest expense of $6.5. The remaining component of the Enviroil settlement was paid by the sellers of Guascor directly to the counterparty pursuant to an indemnification agreement in the three months ended December 31, 2013.

Other expense, net. Other expense, net was $16.6 for the year ended December 31, 2013, compared to other expense, net of $0.0 for the year ended December 31, 2012. Other 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. The change in other expense, net is principally the result of losses on equity method investments and foreign currency fluctuations for the year ended December 31, 2013. Other expense, net was also impacted by 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 $3.1 for the year ended December 31, 2013. A summary of the major components of other expense, net is included in Note 20 to the consolidated financial statements included herein in Item 15, Exhibits, Financial Statements and Schedules.

Provision for income taxes. Provision for income taxes was $88.2 for the year ended December 31, 2013, and $92.8 for the year ended December 31, 2012. The effective tax rate for 2013 was 34.2% compared to 33.7% for 2012. Our estimated . . .

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