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DRC > SEC Filings for DRC > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for DRESSER-RAND GROUP INC.

Form 10-Q for DRESSER-RAND GROUP INC.


4-Aug-2014

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 in 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 enhanced oil 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 or gas turbine mechanical drives or power generation packages for floating production, storage and offloading ("FPSO") vessels and offshore platforms as well as for a variety of compression and pumping applications in various segments of 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 farm 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 response features for grid management. 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, Brazil and India.

In addition to our products and services, we provide complete, turnkey compression and power generation solutions to our clients in the oil, gas and environmental markets we serve. These solutions typically incorporate one or more of our products and services into the compression or power generation facility, which may include process equipment, such as coolers, vessels, gas dehydration systems, process and utility piping and valves, process instrumentation, transformers and switch gears, and facility controls, as well as civil works and structures. We manage the complete project, including engineering, project controls, procurement, construction, installation, commissioning and start-up of the facility.

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.

Our solutions-based service offering combines our industry-leading technology, extensive worldwide service center network, deep product expertise, project management capabilities and a culture of safety (which we believe to be industry-leading), compliance 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 the provision of new units and/or parts and services. We offer our clients a dedicated team, advanced business

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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 require 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 LNG; international regulatory and environmental initiatives, including clean fuel legislation and stricter emission controls; the aging installed base of our class of equipment 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 installed base of Dresser-Rand equipment;

· Expanding sales of aftermarket parts and services 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;

· Improving 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, 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.

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Results of Operations

Three months ended June 30, 2014, compared to the three months ended June 30, 2013:

                               Three Months Ended       Three Months Ended       Period to Period Change
                                  June 30, 2014            June 30, 2013       2013 to 2014      % Change
Consolidated Statement of
Operations Data:
Revenues                      $    628.4    100.0%     $    805.3    100.0%    $     (176.9)        (22.0)%
Cost of sales                      449.9      71.6          607.1      75.4          (157.2)        (25.9)%
Gross profit                       178.5      28.4          198.2      24.6           (19.7)         (9.9)%
Selling and administrative
expenses                           105.1      16.7           98.4      12.2             6.7           6.8%
Research and development
expenses                             7.1       1.1           12.6       1.6            (5.5)        (43.7)%
Income from operations              66.3      10.6           87.2      10.8           (20.9)        (24.0)%
Interest expense, net              (12.6)     (2.0)         (13.4)     (1.7)            0.8          (6.0)%
Other (expense) income, net         (3.8)     (0.6)           2.0       0.3            (5.8)       (290.0)%
Income before income taxes          49.9       7.9           75.8       9.4           (25.9)        (34.2)%
Provision for income taxes          21.1       3.4           21.4       2.6            (0.3)         (1.4)%
Net income                          28.8       4.6           54.4       6.8           (25.6)        (47.1)%
Net loss (income)
attributable to
noncontrolling interest              0.3       0.0           (1.1)     (0.2)            1.4        (127.3)%
Net income attributable to
Dresser-Rand                  $     29.1      4.6%     $     53.3      6.6%    $      (24.2)        (45.4)%
Bookings                      $    691.0               $    868.4              $     (177.4)        (20.4)%
Backlog - ending              $  2,782.6               $  2,945.4              $     (162.8)         (5.5)%

Revenues. Revenues were $628.4 for the three months ended June 30, 2014, compared to $805.3 for the three months ended June 30, 2013, a decrease of $176.9 or 22.0%. 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 decreased due to lower volume during the three months ended June 30, 2014 as a result of the timing issues discussed above. Specifically, we have been impacted by previous delays by the Company's end-user clients in placing equipment orders for major projects, mostly for upstream applications. Revenues were also negatively impacted by our six cogeneration facilities in Spain. The Spanish government published a ministerial order on June 20, 2014, that reflects an approximate 38% reduction in the tariffs payable to such facilities. In connection with the order being issued and the reduction of the tariffs and the suspension of operations at the facilities, revenues for the three months ended June 30, 2014 are lower by approximately $35.4. The decrease in revenues for the three months ended June 30, 2014, is also partially attributable to a reduction in shipments to one Latin American national oil company as the Company works collaboratively with this client to reduce outstanding receivables. The decrease in revenue on extended scope projects, which are accounted for under the percentage of completion method of accounting, was $43.2 for the three months ended June 30, 2014.

Cost of sales. Cost of sales was $449.9 for the three months ended June 30, 2014, compared to $607.1 for the three months ended June 30, 2013. As a percentage of revenues, cost of sales was 71.6% for the three months ended June 30, 2014, compared to 75.4% for the three months ended June 30, 2013. The decrease in cost of sales as a percentage of revenues from the three months ended June 30, 2013 to the three months ended June 30, 2014 was principally the result of a shift in mix from our new units segment to our aftermarket segment.
A better mix of projects within the new units segment

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also contributed to lower cost of sales as a percentage of revenues. The change in the tariffs reflected in the Spanish ministerial order discussed above contributed approximately 0.9% to the decrease in cost of sales as a percentage of revenues.

Gross profit. Gross profit was $178.5 for the three months ended June 30, 2014, compared to $198.2 for the three months ended June 30, 2013. As a percentage of revenues, gross profit was 28.4% for the three months ended June 30, 2014, compared to 24.6% for the three months ended June 30, 2013. 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 $105.1 for the three months ended June 30, 2014, compared to $98.4 for the three months ended June 30, 2013. The increase in selling and administrative expenses was generally the result of cost inflation and severance cost associated with the suspension of operations at six of our cogeneration facilities in Spain, as well as the planned consolidation of operations in Germany. As a percentage of revenues, selling and administrative expenses increased to 16.7% from 12.2%.

Research and development expenses. Research and development expenses for the three months ended June 30, 2014, were $7.1, compared to $12.6 for the three months ended June 30, 2013. The decline in research and development expenses is the result of changing expenditure profiles within major programs as they near market release. 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.

Income from operations. Income from operations was $66.3 for the three months ended June 30, 2014, compared to $87.2 for the three months ended June 30, 2013, a decrease of $20.9 or 24.0%. As a percentage of revenues, income from operations for the three months ended June 30, 2014 was 10.6% compared to 10.8% for the three months ended June 30, 2013. The decrease 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 $12.6 for the three months ended June 30, 2014, compared to $13.4 for the three months ended June 30, 2013. The decrease is partially due to lower weighted-average debt outstanding. Additionally, we experienced higher interest income for the three months ended June 30, 2014, due to higher average interest-bearing cash balances.

Other (expense) income, net. Other expense, net was $3.8 for the three months ended June 30, 2014, compared to other income, net of $2.0 for the three months ended June 30, 2013. Other (expense) income, net, consists principally of net currency gains and losses and earnings and losses on investments accounted for under the equity method of accounting. The change in other (expense) income, net for the three months ended June 30, 2014 is principally the result of losses on equity method investments and foreign currency fluctuations.

Provision for income taxes. Provision for income taxes was $21.1 for the three months ended June 30, 2014, and $21.4 for the three months ended June 30, 2013. Our estimated income tax provision for the three months ended June 30, 2014 and 2013, 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, 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 if it becomes more-likely-than-not that the benefits of deferred tax assets will not be realized.

The increase in the effective tax rate for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, is principally due to an increased amount of net operating losses in certain foreign countries for which we could not record benefits under U.S. GAAP, thus increasing the effective tax rate by approximately 13.9 percentage points.

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. Therefore, as required by U.S. GAAP, a $4.4 benefit was reflected in the three months ended March 31, 2013 as a discrete event.

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Certain foreign subsidiaries are operating under tax holiday arrangements that will expire during 2014 and 2015, subject to potential extensions. For the three months ended June 30, 2014 and 2013, the impact of these tax holiday arrangements lowered income tax expense by $1.7 ($0.02 per diluted share) and $2.3 ($0.03 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 June 30, 2014, were $691.0 compared to $868.4 for the three months ended June 30, 2013, a decrease of $177.4 or 20.4%. The Company believes that the decrease in bookings is primarily due to delays in major projects, principally upstream, by our end-user clients in an effort to address their escalating capital costs relating to those projects. In addition, due to the change in the tariffs reflected in the Spanish ministerial order discussed above, our 2014 aftermarket bookings are lower by approximately $35.4. The decrease is also attributable to a reduction in bookings for one Latin American national oil company as the Company works collaboratively with this client to reduce outstanding receivables. Backlog was $2,782.6 at June 30, 2014, compared to $2,945.4 at June 30, 2013.

Segment Analysis - three months ended June 30, 2014, compared to three months ended June 30, 2013:

                      Three Months Ended        Three Months Ended       Period to Period Change
                         June 30, 2014            June 30, 2013        2013 to 2014    % Change
Revenues
New units            $    302.7     48.2%    $    420.2      52.2%    $      (117.5)       (28.0)%
Aftermarket parts
and services              325.7     51.8%         385.1      47.8%            (59.4)       (15.4)%
Total revenues       $    628.4    100.0%    $    805.3     100.0%    $      (176.9)       (22.0)%
Gross profit
New units            $     56.6              $     54.9               $         1.7          3.1%
Aftermarket parts
and services              121.9                   143.3                       (21.4)       (14.9)%
Total gross profit   $    178.5              $    198.2               $       (19.7)        (9.9)%
Income from
operations
New units            $     27.1              $     25.8               $         1.3          5.0%
Aftermarket parts
and services               70.5                    92.8                       (22.3)       (24.0)%
Unallocated               (31.3)                  (31.4)                        0.1         (0.3)%
Total income from
operations           $     66.3              $     87.2               $       (20.9)       (24.0)%
Bookings
New units            $    342.7              $    432.0               $       (89.3)       (20.7)%
Aftermarket parts
and services              348.3                   436.4                       (88.1)       (20.2)%
Total bookings       $    691.0              $    868.4               $      (177.4)       (20.4)%
Backlog - ending
New units            $  2,056.3              $  2,254.3               $      (198.0)        (8.8)%
Aftermarket parts
and services              726.3                   691.1                        35.2          5.1%
Total backlog        $  2,782.6              $  2,945.4               $      (162.8)        (5.5)%

New Units

Revenues. Revenues for this segment were $302.7 for the three months ended June 30, 2014, compared to $420.2 for the three months ended June 30, 2013, a decrease of $117.5 or 28.0%. The business impact of oil prices, other macroeconomic conditions and the timing and size of orders on this segment is more fully described above in the Revenues caption in the section titled Three months ended June 30, 2014, compared to the three months ended June 30, 2013. Based on factors such as measures of labor hours and purchases from suppliers, volumes decreased during the three months ended June 30, 2014, principally as a result of the timing issues discussed in the section referenced above. Specifically, we have been impacted by previous delays by the Company's end-user clients in placing equipment orders for major projects, mostly for upstream

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applications. The decrease in revenue on extended scope projects, which are accounted for under the percentage of completion method of accounting, was $43.2 for the three months ended June 30, 2014.

Gross profit. Gross profit was $56.6 for the three months ended June 30, 2014, compared to $54.9 for the three months ended June 30, 2013. Gross profit as a percentage of segment revenues, was 18.7% for the three months ended June 30, 2014, compared to 13.1% for the three months ended June 30, 2013. We experienced increased gross profit as a percentage of sales in our new units segment due to a better mix of projects during the period as well as a shift in fixed cost allocations to the aftermarket segment due to changes in the mix of products and volume.

Income from operations. Income from operations was $27.1 for the three months ended June 30, 2014, compared to $25.8 for the three months ended June 30, 2013. As a percentage of segment revenues, income from operations was 9.0% for the three months ended June 30, 2014, compared to 6.1% for the three months ended June 30, 2013. 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 June 30, 2014, were $342.7, compared to $432.0 for the three months ended June 30, 2013.
The Company believes that the decrease in bookings is primarily due to delays in major projects, principally upstream, by our end-user clients in an effort to address their escalating capital costs relating to those projects. Backlog was $2,056.3 at June 30, 2014, compared to $2,254.3 at June 30, 2013.

Aftermarket Parts and Services

Revenues. Revenues for this segment were $325.7 for the three months ended June 30, 2014, compared to $385.1 for the three months ended June 30, 2013, a decrease of $59.4 or 15.4%. 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. The decrease in revenues for the three months ended June 30, 2014, is partially attributable to a reduction in shipments to one Latin American national oil company as the Company works collaboratively with this client to reduce outstanding receivables. Additionally, in connection with the change in the tariffs reflected in the Spanish ministerial order discussed above, our 2014 revenues are lower by approximately $35.4.

Gross profit. Gross profit was $121.9 for the three months ended June 30, 2014, compared to $143.3 for the three months ended June 30, 2013. Gross profit declined because of a shift in cost allocations from the new units segment due to changes in the mix of products and volume, partially offset by a more favorable mix.

Income from operations. Income from operations was $70.5 for the three months ended June 30, 2014, compared to $92.8 for the three months ended June 30, 2013. As a percentage of segment revenues, income from operations decreased to 21.6% for the three months ended June 30, 2014, from 24.1% for the three months ended June 30, 2013. The changes in income from operations and income from operations as a percentage of segment revenues resulted principally from the factors discussed above.

Bookings and backlog. Bookings for the three months ended June 30, 2014, were $348.3, compared to $436.4 for the three months ended June 30, 2013. The . . .

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