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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
OR
¨ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the
transition period from to
Commission File Number 333-60778
DRESSER, INC.
(Exact name of registrant as
specified in its charter)
| Delaware |
|
75-2795365 |
| (State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer Identification
No.) |
15455 Dallas Parkway, Suite 1100
Addison, Texas 75001
(Address of principal executive offices) (zip code)
(972) 361-9800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No ¨
The
number of shares outstanding of common stock (par value $0.01 per share) as of November 11, 2002 was 1,000.
INDEX
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Page No.
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| |
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PART I. FINANCIAL INFORMATION |
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| |
| Item 1. |
|
Financial Statements |
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| |
|
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|
3 |
| |
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|
4 |
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5 |
| |
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6 |
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| Item 2. |
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|
23 |
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| Item 3. |
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|
43 |
| |
| Item 4. |
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|
|
45 |
| |
| |
|
PART II. OTHER INFORMATION |
|
|
| |
| Item 1. |
|
|
|
45 |
| |
| Item 2. |
|
|
|
45 |
| |
| Item 4. |
|
|
|
45 |
| |
| Item 6. |
|
Exhibits and Reports on Form 8-K: |
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|
| |
| |
|
|
|
46 |
| |
|
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|
46 |
| |
| |
|
47 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(in millions)
(unaudited)
| |
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| |
| Revenues |
|
$ |
407.0 |
|
|
$ |
403.3 |
|
|
$ |
1,207.3 |
|
|
$ |
1,138.2 |
|
| |
| Cost of revenues |
|
|
306.8 |
|
|
|
280.6 |
|
|
|
882.9 |
|
|
|
788.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
100.2 |
|
|
|
122.7 |
|
|
|
324.4 |
|
|
|
350.0 |
|
| |
| Selling, engineering, administrative and general expenses and general expenses |
|
|
78.7 |
|
|
|
77.6 |
|
|
|
235.6 |
|
|
|
224.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
21.5 |
|
|
|
45.1 |
|
|
|
88.8 |
|
|
|
125.3 |
|
| |
| Interest expense |
|
|
(22.0 |
) |
|
|
(25.9 |
) |
|
|
(80.1 |
) |
|
|
(46.4 |
) |
| Interest income |
|
|
0.9 |
|
|
|
1.6 |
|
|
|
2.0 |
|
|
|
3.0 |
|
| Other (deductions) income, net |
|
|
(1.8 |
) |
|
|
3.2 |
|
|
|
— |
|
|
|
(0.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (Loss) income before taxes |
|
|
(1.4 |
) |
|
|
24.0 |
|
|
|
10.7 |
|
|
|
81.6 |
|
| |
| Provision for income taxes |
|
|
— |
|
|
|
(12.9 |
) |
|
|
(4.6 |
) |
|
|
(32.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Net (loss) income |
|
$ |
(1.4 |
) |
|
$ |
11.1 |
|
|
$ |
6.1 |
|
|
$ |
49.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
3
Condensed Consolidated Balance Sheets
(in millions, except share information)
(unaudited)
| ASSETS
|
|
September 30, 2002
|
|
|
December 31, 2001
|
|
| |
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and equivalents |
|
$ |
92.6 |
|
|
$ |
97.2 |
|
| Receivables, net |
|
|
320.3 |
|
|
|
316.2 |
|
| Inventories, net |
|
|
304.1 |
|
|
|
328.3 |
|
| Other current assets |
|
|
14.7 |
|
|
|
10.4 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
731.7 |
|
|
|
752.1 |
|
| |
| Property, plant and equipment, net |
|
|
215.2 |
|
|
|
235.9 |
|
| Investments in unconsolidated subsidiaries |
|
|
7.5 |
|
|
|
4.8 |
|
| Long-term receivables and other assets |
|
|
66.0 |
|
|
|
86.8 |
|
| Deferred tax assets |
|
|
96.9 |
|
|
|
95.6 |
|
| Goodwill, net |
|
|
428.3 |
|
|
|
408.7 |
|
| Intangibles, net |
|
|
6.2 |
|
|
|
5.8 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
1,551.8 |
|
|
$ |
1,589.7 |
|
| |
|
|
|
|
|
|
|
|
| |
| LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts and notes payable |
|
$ |
210.2 |
|
|
$ |
245.3 |
|
| Contract advances |
|
|
5.5 |
|
|
|
10.5 |
|
| Accrued expenses |
|
|
160.3 |
|
|
|
137.2 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
376.0 |
|
|
|
393.0 |
|
| |
| Pension and other retiree benefits |
|
|
195.6 |
|
|
|
214.3 |
|
| Long-term debt |
|
|
964.8 |
|
|
|
1,000.0 |
|
| Other liabilities |
|
|
33.1 |
|
|
|
26.0 |
|
| Commitments and contingencies |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
1,569.5 |
|
|
|
1,633.3 |
|
| |
| Shareholders’ deficit: |
|
|
|
|
|
|
|
|
| Common stock, $0.01 par value; issued and outstanding: 1,000 in 2002 (See Note 2) |
|
|
— |
|
|
|
— |
|
| Common stock, $0.001 par value; issued and outstanding: 10,488,222 class A and 909,486 class B in 2001 |
|
|
— |
|
|
|
— |
|
| Capital in excess of par value |
|
|
455.1 |
|
|
|
455.9 |
|
| Accumulated deficit |
|
|
(451.6 |
) |
|
|
(466.9 |
) |
| Accumulated other comprehensive loss |
|
|
(21.2 |
) |
|
|
(32.6 |
) |
| |
|
|
|
|
|
|
|
|
| Total shareholders’ deficit |
|
|
(17.7 |
) |
|
|
(43.6 |
) |
| |
|
|
|
|
|
|
|
|
| Total liabilities and shareholders’ deficit |
|
$ |
1,551.8 |
|
|
$ |
1,589.7 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
4
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
| |
|
Nine Months Ended September
30,
|
|
| |
|
2002
|
|
|
2001
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| Net income |
|
$ |
6.1 |
|
|
$ |
49.3 |
|
| Adjustments to reconcile net income to cash flow provided by operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
32.7 |
|
|
|
40.6 |
|
| Equity earnings of unconsolidated affiliates |
|
|
(2.5 |
) |
|
|
(1.4 |
) |
| Loss on repayment of debt |
|
|
15.4 |
|
|
|
— |
|
| |
| Other changes, net |
|
|
|
|
|
|
|
|
| Receivables |
|
|
(1.8 |
) |
|
|
(64.1 |
) |
| Inventories |
|
|
37.8 |
|
|
|
(63.1 |
) |
| Accounts payable |
|
|
2.1 |
|
|
|
57.8 |
|
| Other, net |
|
|
3.2 |
|
|
|
76.3 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
93.0 |
|
|
|
95.4 |
|
| |
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| Capital expenditures |
|
|
(11.0 |
) |
|
|
(24.4 |
) |
| Business acquisitions |
|
|
(21.4 |
) |
|
|
(1,326.7 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(32.4 |
) |
|
|
(1,351.1 |
) |
| |
|
|
|
|
|
|
|
|
| |
| Cash flow from financing activities: |
|
|
|
|
|
|
|
|
| Changes in intercompany activities |
|
|
— |
|
|
|
(109.2 |
) |
| Proceeds from the issuance of long-term debt |
|
|
256.3 |
|
|
|
998.5 |
|
| Repayment of long-term debt (including current portion) |
|
|
(313.6 |
) |
|
|
— |
|
| (Decrease) increase in short-term notes payable |
|
|
(6.8 |
) |
|
|
45.3 |
|
| Payment of deferred financing fees |
|
|
(8.3 |
) |
|
|
— |
|
| Proceeds from the issuance of stock |
|
|
10.0 |
|
|
|
369.6 |
|
| Cash overdrafts |
|
|
— |
|
|
|
12.3 |
|
| |
|
|
|
|
|
|
|
|
| Net cash (used in) provided by financing activities |
|
|
(62.4 |
) |
|
|
1,316.5 |
|
| |
|
|
|
|
|
|
|
|
| Effect of translation adjustments on cash |
|
|
(2.8 |
) |
|
|
2.0 |
|
| |
|
|
|
|
|
|
|
|
| |
| Net (decrease) increase in cash and equivalents |
|
|
(4.6 |
) |
|
|
62.8 |
|
| |
| Cash and equivalents, beginning of period |
|
|
97.2 |
|
|
|
19.7 |
|
| |
|
|
|
|
|
|
|
|
| |
| Cash and equivalents, end of period |
|
$ |
92.6 |
|
|
$ |
82.5 |
|
| |
|
|
|
|
|
|
|
|
| |
| Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
| Cash payments during the period for: |
|
|
|
|
|
|
|
|
| Interest |
|
$ |
43.3 |
|
|
$ |
14.5 |
|
| Income taxes |
|
|
16.0 |
|
|
|
17.7 |
|
See accompanying notes to condensed consolidated financial statements
5
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Organization and Basis of
Presentation
Dresser, Inc. was originally incorporated in 1998, under the name of Dresser Equipment Group,
Inc. under the laws of the state of Delaware. The certificate of incorporation was amended and restated on April 9, 2001 and again on July 3, 2002. As used in this report, the terms “Dresser,” “the Company,” “we” or
“us” refer to Dresser, Inc. and its subsidiaries and affiliates unless the context indicates otherwise.
In January 2001, Halliburton Company (“Halliburton”), together with its wholly owned subsidiary Dresser B.V. signed an Agreement and Plan of Recapitalization (the “Agreement”) with DEG Acquisitions, LLC, to effect
the sale of its businesses relating to, among other things, the design, manufacture and marketing of three business segments known as flow control, measurement systems and compression and power systems for customers primarily in the energy industry.
Halliburton originally acquired the businesses as part of its acquisition of Dresser Industries, Inc. (“Dresser Industries”) in 1998. Dresser Industries’ operations consisted of the Company’s businesses and certain other
operating units retained by Halliburton following the consummation of the recapitalization transactions. In order to accomplish this transaction, Halliburton effected the reorganization of various legal entities that comprised the Dresser Equipment
Group (“DEG”) business segment of Halliburton.
In connection with the recapitalization in April 2001,
Dresser made payments to Halliburton Company of approximately $1,300 million to redeem common equity and purchase the stock of foreign subsidiaries. The recapitalization transactions and related expenses were financed through the issuance of $300
million of senior subordinated debt (the “2001 notes”), $720 million of borrowings under the credit facility, and approximately $400 million of common equity contributed by DEG Acquisitions LLC, an entity owned by First Reserve Corporation
and Odyssey Investment Partners Fund, LP.
On July 3, 2002, Dresser modified its corporate structure by forming a
Delaware holding company and two Bermuda holding companies between the existing shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc., a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the 100%
holder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation, is the 100% holder of Dresser Holdings, Ltd. The former direct shareholders of Dresser collectively hold all of the shares of Dresser, Ltd. in proportion to their prior
direct ownership interests in Dresser. These holding companies have no assets or liabilities, other than common stock holdings of Dresser, conduct no operations outside of Dresser and have no transactions to date other than those incidental to their
formation.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the consolidated financial statements and
footnotes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2001.
Certain prior
year amounts have been reclassified to conform to the current year presentation. These changes had no impact on previously reported net income or shareholders’ deficit.
The consolidated financial information of the Company for periods prior to March 31, 2001 has been prepared by management on a carve-out basis and reflects the consolidated
financial position, results of operations and cash flows of Dresser in accordance with accounting principles generally accepted in the United States. The consolidated financial statements exclude certain items, which were not transferred as a result
of the Agreement and any financial
6
DRESSER, INC.
Notes to
Condensed Consolidated Financial Statements – (Continued)
(unaudited)
effects from Halliburton’s decision to discontinue this business segment. In addition, certain amounts in the financial statements have been estimated, allocated and pushed down from Halliburton
in a consistent manner in order to depict the financial position, results of operations and cash flows of Dresser on a stand-alone basis. However, the financial position, results of operations and cash flows may not be indicative of what would have
been reported if Dresser had been a stand-alone entity or had been operated in accordance with the Agreement during the periods prior to March 31, 2001.
Note 2. Corporate Reorganization
Effective July 3, 2002, Dresser,
entered into an agreement and plan of merger (“Merger Agreement”) with Dresser, Ltd., a Bermuda company, and Dresser Mergerco Inc., a Delaware Corporation and a wholly owned indirect subsidiary of Dresser and Dresser, Ltd. Dresser Mergerco
merged with and into Dresser, with Dresser being the surviving corporation.
Upon the terms of the Merger
Agreement, each outstanding share of Dresser common stock was cancelled and the holders received one class A common share of Dresser Ltd., for each share of Dresser class A common stock, and one class B common share of Dresser Ltd. for each share of
Dresser class B common stock, respectively, held by each shareholder. The reorganization has been accounted for as a reorganization of entities under common control, and accordingly, it did not result in any changes to the consolidated amounts of
assets, liabilities, and shareholder’s deficit.
In addition, the certification of incorporation was amended.
The total number of shares of stock, which Dresser shall have the authority to issue, is 10,000 having a par value of $0.01 per share of common stock.
Note 3. Restructuring and Other Exit Activities
During the third
quarter, we initiated restructuring programs affecting several business units in an effort to obtain manufacturing efficiencies and cost savings. In connection with these activities, we have elected early application of Statement of Financial
Accounting Standards (“SFAS”) No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and have recognized costs associated with exit or disposal activities as incurred rather than at the date of a commitment to
an exit or disposal plan.
During the third quarter of 2002, we decided to: (1) consolidate manufacturing of our
standard design rotary blower products at our Houston, Texas manufacturing plant and downsize our Connersville, Indiana facility (2) cease manufacturing fuel dispensers at a Canadian manufacturing facility and consolidate North American fuel
dispenser manufacturing in our Austin, Texas facility and (3) discontinue several small product lines. We incurred charges of approximately $3.9 million for inventory markdowns associated with these activities. These costs have been reflected in
costs of revenues in our condensed consolidated statements of operations.
In connection with these activities, as
described above, we incurred certain restructuring charges related to termination benefits as we terminated 93 employees. We also impaired certain assets, related to machinery, goodwill, and capitalized designs. These costs have been reflected in
selling, engineering, general and administrative costs. The restructuring charges are detailed below:
| Description
|
|
Restructuring Charge
|
|
Cash Payments
|
|
Non-Cash Charges
|
|
Reserved at 9/30/2002
|
| |
|
(in millions)
|
| Termination benefits |
|
$ |
1.6 |
|
$ |
0.1 |
|
$
|
—
|
|
$ |
1.5 |
| Write-down of other assets |
|
|
0.5 |
|
|
— |
|
|
0.5 |
|
|
— |
| Write-down of machinery assets |
|
|
0.2 |
|
|
— |
|
|
0.2 |
|
|
— |
| Write-down of goodwill |
|
|
0.2 |
|
|
— |
|
|
0.2 |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
2.5 |
|
$ |
0.1 |
|
$ |
0.9 |
|
$ |
1.5 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
7
DRESSER, INC.
Notes to
Condensed Consolidated Financial Statements – (Continued)
(unaudited)
Note 4. Business Segment Information
We operate under three reportable segments: flow control, measurement systems and compression and power systems. The business segments are organized around the products and services provided to the customers each serves. During the
second quarter of 2002, we made changes to our internal corporate structure with the reorganization of certain of our operating units. We believe these changes will better serve our customers. Although we still report under three reportable
segments, the operating units that comprise each reportable segment have changed. Flow control consists of all of the previous valve and actuator product lines with the addition of the instruments, meters, regulators, and piping specialties product
lines. Measurement systems will now primarily have the results of the retail fueling product line. Compression and power systems components have not changed and the segment will continue to report the results of the natural gas and blower product
lines.
Flow Control. The flow control segment designs, manufactures and markets
valves and actuators. These products are used to start, stop and control the flow of liquids and gases and to protect process equipment from excessive pressure. In addition, it is a leading supplier of natural gas meters, regulators, digital and
analog pressure and temperature gauges, transducers, and piping specialties such as couplings and conductors. These systems and other products are used to monitor liquids and gases.
Measurement Systems. The measurement systems segment is a leading supplier of fuel dispensers, pumps, peripherals and point-of-sale systems
and software for the retail fueling industry.
Compression and Power Systems. The
compression and power systems segment designs, manufactures and markets natural gas fueled engines used primarily in natural gas compression and power generation applications and rotary blowers and vacuum pumps.
The table below presents revenues and operating income by segment. The prior period information has been restated to conform to the
current year presentation.
| |
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September
30,
|
|
| |
|
(in millions)
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Flow Control |
|
$ |
255.7 |
|
|
|
231.1 |
|
|
$ |
774.8 |
|
|
$ |
639.8 |
|
| Measurement Systems |
|
|
79.1 |
|
|
|
82.2 |
|
|
|
222.3 |
|
|
|
234.5 |
|
| Compression and Power Systems |
|
|
73.1 |
|
|
|
91.3 |
|
|
|
213.0 |
|
|
|
268.1 |
|
| Eliminations |
|
|
(0.9 |
) |
|
|
(1.3 |
) |
|
|
(2.8 |
) |
|
|
(4.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
407.0 |
|
|
$ |
403.3 |
|
|
$ |
1,207.3 |
|
|
$ |
1,138.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Flow Control |
|
$ |
13.6 |
|
|
$ |
23.1 |
|
|
$ |
69.8 |
|
|
$ |
74.9 |
|
| Measurement Systems |
|
|
6.5 |
|
|
|
10.2 |
|
|
|
15.7 |
|
|
|
15.4 |
|
| Compression and Power Systems |
|
|
4.8 |
|
|
|
15.7 |
|
|
|
14.2 |
|
|
|
44.6 |
|
| Corporate |
|
|
(3.4 |
) |
|
|
(3.9 |
) |
|
|
(10.9 |
) |
|
|
(9.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
21.5 |
|
|
$ |
45.1 |
|
|
$ |
88.8 |
|
|
$ |
125.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Receivables
Accounts receivable are stated at their estimated net realizable value. Included in receivables are notes receivable of $10.6 million and
$7.6 million as of September 30, 2002 and December 31, 2001, respectively.
8
DRESSER, INC.
Notes to
Condensed Consolidated Financial Statements – (Continued)
(unaudited)
Allowances for doubtful accounts of $6.8 million and $5.4 million as of September 30, 2002 and December 31, 2001, respectively, are netted in the receivable balance.
Note 6. Inventories
Inventories are stated at the lower of cost or market. A portion of the United States inventory costs is determined using the last-in, first-out (LIFO) method. All other inventories are valued on a first-in, first-out (FIFO)
basis.
Inventories on a LIFO method represented $68.6 million and $91.0 million of our inventories as of
September 30, 2002 and December 31, 2001, respectively. The excess of FIFO over LIFO costs as of September 30, 2002 and December 31, 2001, were $68.3 million and $72.2 million, respectively. Inventories are summarized as follows:
| |
|
September 30, 2002
|
|
|
December 31, 2001
|
|
| |
|
(in millions) |
|
| |
| Finished products and parts |
|
$ |
210.6 |
|
|
$ |
203.0 |
|
| In-process products and parts |
|
|
100.6 |
|
|
|
105.4 |
|
| Raw materials and supplies |
|
|
73.1 |
|
|
|
89.8 |
|
| |
|
|
|
|
|
|
|
|
| Total inventory |
|
$ |
384.3 |
|
|
$ |
398.2 |
|
| |
| Less: |
|
|
|
|
|
|
|
|
| LIFO reserve and full absorption |
|
|
(66.2 |
) |
|
|
(67.9 |
) |
| Progress payments on contracts |
|
|
(14.0 |
) |
|
|
(2.0 |
) |
| |
|
|
|
|
|
|
|
|
| Inventories, net |
|
$ |
304.1 |
|
|
$ |
328.3 |
|
| |
|
|
|
|
|
|
|
|
In connection with certain restructuring activities, as discussed
in Note 3, we decided to exit from certain product lines. As a result, we incurred charges of $3.9 million associated with the markdown of inventory related to these products. In addition, we recorded additional reserves for excess and obsolete
inventory and write-downs for inventory shrinkage of $5.7 million. These charges have been reflected in cost of revenues in our condensed consolidated statements of operations.
Note 7. Acquisitions
On April 5,
2002, we acquired the net assets of Modern Supply Company, Inc., Ponca Fabricators, Inc. and Quality Fabricators, Inc. (the “Modern Acquisition”). The results of the operations for the Modern Acquisition have been included in the condensed
consolidated financial statements since that date. The businesses of the Modern Acquisition were principally engaged in the business of distributing, repairing and servicing our small diameter ball valve, gate valve, check valve and actuation
products in the United States market. With the Modern Acquisition, we established a more direct control of the distribution and marketing channel for small valves and spare parts. It is consistent with our strategy of expanding and developing the
service and aftermarket business of our flow control segment. The purchase price was approximately $28.0 million. We paid cash of $21.4 million, including $0.5 million of closing costs, and assumed $7.1 million in debt.
Additionally, in April 2002, we issued 250,000 shares of class B common stock to DEG Acquisitions, LLC for $10.0 million. The proceeds
were used to finance the purchase of the Modern Acquisition.
The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the date of acquisition.
9
DRESSER, INC.
Notes to
Condensed Consolidated Financial Statements – (Continued)
(unaudited)
| |
|
April 5, 2002
|
|
| |
|
(in millions) |
|
| |
|
|
|
|
| Current assets |
|
$ |
17.1 |
|
| Property, plant, and equipment |
|
|
0.2 |
|
| Goodwill |
|
|
14.9 |
|
| |
|
|
|
|
| Total assets acquired |
|
$ |
32.2 |
|
| |
| Current liabilities |
|
|
(3.7 |
) |
| Long-term debt |
|
|
(7.1 |
) |
| |
|
|
|
|
| Total liabilities assumed |
|
|
(10.8 |
) |
| |
|
|
|
|
| Net assets acquired |
|
$ |
21.4 |
|
| |
|
|
|
|
The goodwill was assigned to our flow control segment. Of the
goodwill recorded, the total amount is expected to be deductible for tax purposes.
Note 8. Goodwill
Effective January 1, 2002, we adopted SFAS No. 142 “Goodwill and Other Intangibles.” SFAS No. 142
supercedes APB No. 17, “Intangible Assets,” and eliminates the requirement to amortize goodwill and intangible assets with indefinite useful lives, addresses the amortization of intangible assets with defined lives and requires that
goodwill and intangible assets with indefinite useful lives be tested for impairment at least on an annual basis. Accordingly, as of January 1, 2002, we no longer amortize goodwill. During the second quarter of 2002, we completed the transitional
goodwill test prescribed in SFAS No. 142 with respect to our existing goodwill as of January 1, 2002. The transitional goodwill impairment tests involved a comparison of the fair value of each of our reporting units, as defined under SFAS No. 142,
with its carrying amount. Based on the transitional impairment test, we determined there was no impairment of our goodwill.
The following table provides comparative net income information had goodwill amortization been excluded for the three and nine months ended September 30, 2002 and 2001, respectively.
| |
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
| |
|
(in millions)
|
| |
|
2002
|
|
|
2001
|
|
2002
|
|
2001
|
| Net (loss) income |
|
$ |
(1.4 |
) |
|
$ |
11.1 |
|
$ |
6.1 |
|
$ |
49.3 |
| Goodwill amortization, net of tax |
|
|
— |
|
|
|
1.6 |
|
|
— |
|
|
4.2 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted net income |
|
$ |
(1.4 |
) |
|
$ |
12.7 |
|
$ |
6.1 |
|
$ |
53.5 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9. Debt
In March 2002, we issued an additional $250.0 million of 9 3/8% senior subordinated notes due 2011 under the indenture that governs the
2001 notes. The notes were issued at 102.5% of their principal amounts plus accrued interest from October 15, 2001. We recorded a $6.3 million premium, which is amortized over the term of the notes, and recorded as a reduction to interest expense.
The net proceeds were used to repay existing indebtedness under the Tranche A term loans of the credit facility. As a result of the repayment of debt under the Tranche A term loans, we recorded a loss of $12.9 million during the first quarter of
2002, which represented the write-off of an allocable
10
DRESSER, INC.
Notes to
Condensed Consolidated Financial Statements – (Continued)
(unaudited)
portion of debt issuance costs associated with the Tranche A term loans. This loss has been reflected as interest expense in our condensed consolidated statements of operations.
In March 2002, we also obtained an amendment to the credit facility. The amendment revised certain financial covenants to
provide us with greater financial flexibility. The amendment also increased from $95.0 million to $195.0 million, the amount by which the Tranche B term loan of the credit facility can be increased. Fees paid in connection with the issuance of the
notes and the amendment were $5.5 million and $1.0 million, respectively, at the time of closing. The deferred financing fees are amortized to interest expense on a straight-line basis (which approximates the effective interest method) over the
terms of the respective debt. In June 2002, we obtained a second amendment to the credit facility, which allowed for the modification of our corporate structure. See Note 2.
In June 2002, we made a voluntary prepayment of $30.0 million on our credit facility, which extinguished our Tranche A term loans and repaid a portion of our Tranche B term
loan. As a result of the early extinguishment of debt we recorded a loss of $0.3 million, which represented the write-off of the remaining unamortized debt issuance costs associated with the Tranche A term loans. In September 2002, we made an
additional voluntary prepayment of $23.0 million on our credit facility, which was applied to our Tranche B term loan. As a result of these voluntary prepayments, we recorded a loss of $2.2 million, which represented the write-off of a portion of
the unamortized debt issuance costs. These losses have been reflected as interest expense in our condensed consolidated statements of operations. As of September 30, 2002, we had $404.1 million outstanding under the credit facility.
In connection with the Modern Acquisition, we assumed $7.1 million of debt in the form of two notes. The first note had a
principal balance of $4.5 million, an interest rate of 9.75% and matured August 31, 2002. The second note had a principal balance of $2.6 million, an interest rate of the prime rate plus 2.0% and matured January 2008. The notes are collateralized by
the accounts receivable and inventory of Modern Supply Company, Inc. Both of the notes were repaid in August 2002.
Note
10. Derivative Instruments
In March 2002, the principal balance of our Euro Tranche A
term loan was significantly reduced with the use of proceeds from the note offering. Subsequently, the loan was extinguished in June 2002. As a result of the principal reduction in March 2002, an interest rate swap, which was designated as a hedge
on the Euro Tranche A, was no longer eligible to receive accounting treatment as a hedge. As a result, changes in the fair market value of the interest rate swap were recorded through earnings rather than accumulated other comprehensive income. The
unrealized loss was reclassified from accumulated other comprehensive income and we recorded a charge to earnings of $0.6 million during the first quarter of 2002, which is reflected in interest expense in our condensed consolidated statements of
operations. This swap was terminated in April 2002.
In April 2002, we entered into a fair value interest rate
swap, which was not eligible to receive accounting treatment as a hedge. The interest rate swap has a notional amount of $100.0 million and matures in October 2003. We receive a fixed rate interest of 9.375% and pay a variable interest rate of LIBOR
plus 6.20% (7.99% at September 30, 2002). At September 30, 2002, the interest rate swap had a fair market value of $1.9 million. This amount has been reflected as a reduction to interest expense in our condensed consolidated statements of
operations.
Note 11. Comprehensive Income
The following table sets forth the components of comprehensive income, net of income tax expense:
11
DRESSER, INC.
Notes to
Condensed Consolidated Financial Statements – (Continued)
(unaudited)
| |
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
| |
|
(in millions)
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
2001
|
|
| Net (loss) income |
|
$ |
(1.4 |
) |
|
$ |
11.1 |
|
|
$ |
6.1 |
|
$ |
49.3 |
|
| Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign currency translation adjustment |
|
|
4.4 |
|
|
|
(4.2 |
) |
|
|
9.3 |
|
|
(14.7 |
) |
| Unrealized (loss) gain on derivative instruments nts |
|
|
(1.5 |
) |
|
|
6.0 |
|
|
|
2.1 |
|
|
2.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income |
|
$ |
1.5 |
|
|
$ |
12.9 |
|
|
$ |
17.5 |
|
$ |
36.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Commitments and Contingencies
Halliburton Indemnifications
In accordance with the Agreement, Halliburton has agreed to indemnify the Company for certain items. The indemnification items generally include any product liability claim or product warranty claim arising out of any
products relating to any discontinued product or service line of the Company. In addition, Halliburton has generally agreed to indemnify the Company for any product liability claim made prior to closing the Agreement, any environmental liability
claim against the Company, any loss, liability, damage or expense from any legal proceeding initiated prior to closing of the Agreement, any loss, liability, damage or expense relating to worker’s compensation, general liability, and automobile
liability arising out of events or occurrences prior to the closing as to which the Company notifies Halliburton prior to the third anniversary of the closing date. The maximum aggregate amount of losses indemnifiable by Halliburton pursuant to the
recapitalization agreement is $950.0 million. Based on these indemnity rights, only liabilities related to exposures not specifically covered above have been included in the consolidated financial statements.
Environmental
The
Company’s businesses and some of the Company’s products are subject to regulation under various and changing federal, state, local and foreign laws and regulations relating to the environment and to employee safety and health. These
environmental laws and regulations govern the generation, storage, transportation, handling, disposal and emission of various substances.
These environmental laws also impose liability for personal injury or property damage related to releases of hazardous substances. Permits are required for operation of the Company’s businesses, and these permits are
subject to renewal, modification and, in certain circumstances, revocation. The Company believes it is substantially in compliance with these laws and permitting requirements. The Company’s businesses also are subject to regulation under
substantial, various and changing federal, state, local and foreign laws and regulations which allow regulatory authorities and private parties to compel (or seek reimbursement for) cleanup of environmental contamination at sites now or formerly
owned or operated by the Company’s businesses and at facilities where their waste is or has been disposed. Going forward, the Company expects to incur ongoing capital and operating costs for investigation and remediation and to maintain
compliance with currently applicable environmental laws and regulations; however, the Company does not expect those costs, in the aggregate, to be material.
In April 2001, the Company completed the recapitalization transaction. Halliburton originally acquired the Company’s businesses as part of its acquisition of Dresser Industries in 1998. Dresser
Industries’ operations consisted of the Company’s businesses, as well as other operating units. As Halliburton has publicly disclosed, it has been subject to numerous lawsuits involving asbestos claims associated with, among other things,
the operating units of Dresser Industries that were retained by Halliburton or disposed of by Dresser Industries or Halliburton prior to the recapitalization transaction. These lawsuits have resulted in significant expense for Halliburton.
12
DRESSER, INC.
Notes to
Condensed Consolidated Financial Statements – (Continued)
(unaudited)
The Company has not historically incurred, and in the future the Company does not believe that it will incur, any material liability as a result of the past use of asbestos
in products manufactured by the units of Dresser Industries retained by Halliburton, or as a result of the past use of asbestos in products manufactured by the businesses currently owned by the Company or any predecessor entities of those
businesses.
Pursuant to the recapitalization agreement, all liabilities related to asbestos claims arising out of
events occurring prior to the consummation of the recapitalization transaction, are defined to be “excluded liabilities,” whether they resulted from activities of Halliburton, Dresser Industries or any predecessor entities of any of the
Company’s businesses. The recapitalization agreement further provides, subject to certain limitations and exceptions, that Halliburton will indemnify the Company and hold it harmless against losses and liabilities that the Company actually
incurs which arise out of or result from “excluded liabilities,” as well as certain other liabilities in existence as of the closing of the recapitalization transaction. The maximum aggregate amount of losses indemnifiable by Halliburton
pursuant to the recapitalization agreement is $950.0 million. All indemnification claims are subject to notice and procedural requirements that may result in Halliburton denying indemnification claims for some losses.
The Company is responsible for evaluating and addressing the environmental impact of sites where the Company is operating or has
maintained operations. As a result, the Company spends money each year assessing and remediating contaminated properties to avoid future liabilities, to comply with legal and regulatory requirements, or to respond to claims by third parties.
Note 13. Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143
will be effective for financial statements issued for fiscal years beginning after June 15, 2002. An entity shall recognize the cumulative effect of adoption of SFAS No. 143 as a change in accounting principle. We are still evaluating the impact
this statement may have on our results of operations and financial position.
In October 2001, the FASB issued
SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” SFAS No. 144 supercedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS No. 144
primarily addresses significant issues relating to the implementation of SFAS No. 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. The provisions of SFAS No. 144
were effective for fiscal years beginning after December 15, 2001. We adopted this statement on January 1, 2002. There was no impact to our results of operations or financial position as a result of adopting this standard.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendments of FASB No. 13 and Technical
Corrections.” SFAS No. 145 rescinds SFAS No. 4 “Reporting Gains and Losses from Extinguishment of Debt,” which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item. This statement
also amends SFAS No. 13, “Accounting for Leases” and requires that certain lease modifications that have the economic effects similar to the sale-leaseback transaction be accounted for in the same manner as a sale-leaseback transaction.
This statement also makes technical corrections to existing pronouncements. The statement is effective for fiscal years beginning after May 15, 2002. We have elected early application of this statement. During 2002, we extinguished our Tranche A
term loans, and as a result, we recorded a loss of $13.2 million, which represented the write-off of unamortized debt issuance costs. We have also made voluntary prepayments on our Tranche B term loan and have recorded a loss of $2.2 million, which
represented the write-off of a portion of the unamortized debt issuance costs. These costs have been reflected as interest expense in our condensed consolidated statements of operations, and have not been classified as an extraordinary item.
13
DRESSER, INC.
Notes to
Condensed Consolidated Financial Statements – (Continued)
(unaudited)
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 supersedes guidance provided by EITF
Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We have elected
early application of this statement; see Note 3.
Note 14. Supplemental Guarantor
Information
In connection with our senior subordinated notes due 2011 (the “Notes”), certain of our
subsidiaries (“Subsidiary Guarantors”) guaranteed, jointly and severally, our obligation to pay principal and interest on the Notes on a full and unconditional basis. The guarantors of the Notes will include only our wholly owned domestic
subsidiaries. The following supplemental consolidating condensed financial information presents the balance sheet as of September 30, 2002 and December 31, 2001 and the statements of operations and cash flows for the three and nine months ended
September 30, 2002 and 2001, respectively. In the consolidating condensed financial statements, the investments in wholly-owned subsidiaries are accounted for using the equity method. Certain prior year information has been reclassified to conform
to the current year presentation.
14
DRESSER, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
September 30, 2002
(in millions)
(unaudited)
| |
|
Parent
|
|
|
Subsidiary Guarantors
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total Consolidated
|
|
| ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and equivalents |
|
$ |
44.6 |
|
|
$ |
0.2 |
|
$ |
47.8 |
|
|
$ |
— |
|
|
$ |
92.6 |
|
| Receivables, net |
|
|
137.9 |
|
|
|
4.7 |
|
|
177.7 |
|
|
|
— |
|
|
|
320.3 |
|
| Inventories, net |
|
|
145.3 |
|
|
|
20.9 |
|
|
137.9 |
|
|
|
— |
|
|
|
304.1 |
|
| Other current assets |
|
|
5.1 |
|
|
|
0.1 |
|
|
9.5 |
|
|
|
|
|
|
|
14.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
|
332.9 |
|
|
|
25.9 |
|
|
372.9 |
|
|
|
— |
|
|
|
731.7 |
|
| |
| Property, plant and equipment, net |
|
|
145.9 |
|
|
|
0.2 |
|
|
69.1 |
|
|
|
— |
|
|
|
215.2 |
|
| Investments in consolidated subsidiaries |
|
|
582.9 |
|
|
|
534.4 |
|
|
— |
|
|
|
(1,117.3 |
) |
|
|
— |
|
| Investment in unconsolidated subsidiaries |
|
|
0.3 |
|
|
|
— |
|
|
7.2 |
|
|
|
— |
|
|
|
7.5 |
|
| Long-term receivables and other assets |
|
|
48.6 |
|
|
|
— |
|
|
17.4 |
|
|
|
— |
|
|
|
66.0 |
|
| Deferred tax assets |
|
|
95.6 |
|
|
|
— |
|
|
1.3 |
|
|
|
— |
|
|
|
96.9 |
|
| Goodwill, net |
|
|
114.1 |
|
|
|
23.8 |
|
|
290.4 |
|
|
|
— |
|
|
|
428.3 |
|
| Intangibles, net |
|
|
2.2 |
|
|
|
— |
|
|
4.0 |
|
|
|
— |
|
|
|
6.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
1,322.5 |
|
|
$ |
584.3 |
|
$ |
762.3 |
|
|
$ |
(1,117.3 |
) |
|
$ |
1,551.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY |
| |
| Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts and notes payable |
|
$ |
80.0 |
|
|
$ |
0.8 |
|
$ |
129.4 |
|
|
$ |
— |
|
|
$ |
210.2 |
|
| Contract advances |
|
|
4.1 |
|
|
|
— |
|
|
1.4 |
|
|
|
— |
|
|
|
5.5 |
|
| Accrued expenses |
|
|
67.0 |
|
|
|
0.6 |
|
|
92.7 |
|
|
|
— |
|
|
|
160.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
151.1 |
|
|
|
1.4 |
|
|
223.5 |
|
|
|
— |
|
|
|
376.0 |
|
| |
| Pension and other retiree benefits |
|
|
211.3 |
|
|
|
— |
|
|
(15.7 |
) |
|
|
— |
|
|
|
195.6 |
|
| Long-term debt |
|
|
960.0 |
|
|
|
— |
|
|
4.8 |
|
|
|
— |
|
|
|
964.8 |
|
| Other liabilities |
|
|
17.8 |
|
|
|
— |
|
|
15.3 |
|
|
|
— |
|
|
|
33.1 |
|
| Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
1,340.2 |
|
|
|
1.4 |
|
|
227.9 |
|
|
|
— |
|
|
|
1,569.5 |
|
| |
| Shareholders’ (deficit) equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shareholders’ (deficit) equity, net |
|
|
(42.9 |
) |
|
|
582.9 |
|
|
622.1 |
|
|
|
(1,158.6 |
) |
|
|
3.5 |
|
| Accumulated other comprehensive income (loss) |
|
|
25.2 |
|
|
|
— |
|
|
(87.7 |
) |
|
|
41.3 |
|
|
|
(21.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total shareholders’ (deficit) equity |
|
|
(17.7 |
) |
|
|
582.9 |
|
|
534.4 |
|
|
|
(1,117.3 |
) |
|
|
(17.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities and shareholders’ (deficit) equity |
|
$ |
1,322.5 |
|
|
$ |
584.3 |
|
$ |
762.3 |
|
|
$ |
(1,117.3 |
) |
|
$ |
1,551.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
DRESSER, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2001
(in millions)
| |
|
Parent
|
|
|
Subsidiary Guarantors
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total Consolidated
|
|
| |
|
(unaudited) |
|
|
(unaudited) |
|
(unaudited) |
|
|
(unaudited) |
|
|
|
|
| ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and equivalents |
|
$ |
30.9 |
|
|
$ |
— |
|
$ |
66.3 |
|
|
$ |
— |
|
|
$ |
97.2 |
|
| Receivables, net |
|
|
143.5 |
|
|
|
— |
|
|
172.7 |
|
|
|
— |
|
|
|
316.2 |
|
| Inventories, net |
|
|
171.3 |
|
|
|
— |
|
|
157.0 |
|
|
|
— |
|
|
|
328.3 |
|
| Other current assets |
|
|
2.9 |
|
|
|
— |
|
|
7.5 |
|
|
|
— |
|
|
|
10.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
|
348.6 |
|
|
|
— |
|
|
403.5 |
|
|
|
— |
|
|
|
752.1 |
|
| |
| Property, plant and equipment, net |
|
|
159.8 |
|
|
|
— |
|
|
76.1 |
|
|
|
— |
|
|
|
235.9 |
|
| Investments in consolidated subsidiaries |
|
|
437.8 |
|
|
|
428.5 |
|
|
— |
|
|
|
(866.3 |
) |
|
|
— |
|
| Investment in unconsolidated subsidiaries |
|
|
0.4 |
|
|
|
— |
|
|
4.4 |
|
|
|
— |
|
|
|
4.8 |
|
| Long-term receivables and other assets |
|
|
67.5 |
|
|
|
— |
|
|
19.3 |
|
|
|
— |
|
|
|
86.8 |
|
| Deferred tax assets |
|
|
95.6 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
95.6 |
|
| Goodwill, net |
|
|
114.2 |
|
|
|
9.3 |
|
|
285.2 |
|
|
|
— |
|
|
|
408.7 |
|
| Intangibles, net |
|
|
2.6 |
|
|
|
— |
|
|
3.2 |
|
|
|
— |
|
|
|
5.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
1,226.5 |
|
|
$ |
437.8 |
|
$ |
791.7 |
|
|
$ |
(866.3 |
) |
|
$ |
1,589.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY |
| |
| Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts and notes payable |
|
$ |
74.9 |
|
|
$ |
— |
|
$ |
170.4 |
|
|
$ |
— |
|
|
$ |
245.3 |
|
| Contract advances |
|
|
4.4 |
|
|
|
— |
|
|
6.1 |
|
|
|
— |
|
|
|
10.5 |
|
| Accrued expenses |
|
|
44.2 |
|
|
|
— |
|
|
93.0 |
|
|
|
— |
|
|
|
137.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
123.5 |
|
|
|
— |
|
|
269.5 |
|
|
|
— |
|
|
|
393.0 |
|
| |
| Pension and other retiree benefits |
|
|
214.3 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
214.3 |
|
| Long-term debt |
|
|
913.6 |
|
|
|
— |
|
|
86.4 |
|
|
|
— |
|
|
|
1,000.0 |
|
| Other liabilities |
|
|
18.7 |
|
|
|
— |
|
|
7.3 |
|
|
|
— |
|
|
|
26.0 |
|
| Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
1,270.1 |
|
|
|
— |
|
|
363.2 |
|
|
|
— |
|
|
|
1,633.3 |
|
| |
| Shareholders’ (deficit) equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shareholders’ (deficit) equity, net |
|
|
(47.9 |
) |
|
|
437.8 |
|
|
506.7 |
|
|
|
(907.6 |
) |
|
|
(11.0 |
) |
| Accumulated other comprehensive income (loss) |
|
|
4.3 |
|
|
|
— |
|
|
(78.2 |
) |
|
|
41.3 |
|
|
|
(32.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total shareholders’ (deficit) equity |
|
|
(43.6 |
) |
|
|
437.8 |
|
|
428.5 |
|
|
|
(866.3 |
) |
|
|
(43.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities and shareholders’ (deficit) equity |
|
$ |
1,226.5 |
|
|
$ |
437.8 |
|
$ |
791.7 |
|
|
$ |
(866.3 |
) |
|
$ |
1,589.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2002
(in millions)
(unaudited)
| |
|
Parent
|
|
|
Subsidiary Guarantors
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total Consolidated
|
|
| Revenues |
|
$ |
254.4 |
|
|
$ |
11.6 |
|
|
$ |
141.0 |
|
|
$ |
— |
|
|
$ |
407.0 |
|
| Cost of revenues |
|
|
192.3 |
|
|
|
9.6 |
|
|
|
104.9 |
|
|
|
— |
|
|
|
306.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
62.1 |
|
|
|
2.0 |
|
|
|
36.1 |
|
|
|
— |
|
|
|
100.2 |
|
| Selling, engineering, administrative and general expenses |
|
|
46.8 |
|
|
|
0.7 |
|
|
|
31.2 |
|
|
|
— |
|
|
|
78.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
15.3 |
|
|
|
1.3 |
|
|
|
4.9 |
|
|
|
— |
|
|
|
21.5 |
|
| Equity income of consolidated subsidiaries |
|
|
4.0 |
|
|
|
3.3 |
|
|
|
— |
|
|
|
(7.3 |
) |
|
|
— |
|
| Interest expense |
|
|
(23.2 |
) |
|
|
(0.1 |
) |
|
|
1.3 |
|
|
|
— |
|
|
|
(22.0 |
) |
| Interest income |
|
|
0.2 |
|
|
|
— |
|
|
|
0.7 |
|
|
|
— |
|
|
|
0.9 |
|
| Other deductions, net |
|
|
(0.2 |
) |
|
|
— |
|
|
|
(1.6 |
) |
|
|
— |
|
|
|
(1.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Loss) income before taxes |
|
|
(3.9 |
) |
|
|
4.5 |
|
|
|
5.3 |
|
|
|
(7.3 |
) |
|
|
(1.4 |
) |
| Benefit (provision) for income taxes |
|
|
2.5 |
|
|
|
(0.5 |
) |
|
|
(2.0 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net (loss) income |
|
$ |
(1.4 |
) |
|
$ |
4.0 |
|
|
$ |
3.3 |
|
|
$ |
(7.3 |
) |
|
$ |
(1.4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2001
(in millions)
(unaudited)
| |
|
Parent
|
|
|
Subsidiary Guarantors
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total Consolidated
|
|
| Revenues |
|
$ |
258.3 |
|
|
$ |
— |
|
$ |
172.9 |
|
|
$ |
(27.9 |
) |
|
$ |
403.3 |
|
| Cost of revenues |
|
|
186.2 |
|
|
|
— |
|
|
121.9 |
|
|
|
(27.5 |
) |
|
|
280.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
72.1 |
|
|
|
— |
|
|
51.0 |
|
|
|
(0.4 |
) |
|
|
122.7 |
|
| Selling, engineering, administrative and general expenses |
|
|
46.8 |
|
|
|
— |
|
|
31.2 |
|
|
|
(0.4 |
) |
|
|
77.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
25.3 |
|
|
|
— |
|
|
19.8 |
|
|
|
— |
|
|
|
45.1 |
|
| Equity income of consolidated subsidiaries |
|
|
5.7 |
|
|
|
5.7 |
|
|
— |
|
|
|
(11.4 |
) |
|
|
— |
|
| Interest expense |
|
|
(22.3 |
) |
|
|
— |
|
|
(3.6 |
) |
|
|
— |
|
|
|
(25.9 |
) |
| Interest income |
|
|
0.3 |
|
|
|
— |
|
|
1.3 |
|
|
|
— |
|
|
|
1.6 |
|
| Other income (deductions), net |
|
|
5.4 |
|
|
|
— |
|
|
(2.2 |
) |
|
|
— |
|
|
|
3.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before taxes |
|
|
14.4 |
|
|
|
5.7 |
|
|
15.3 |
|
|
|
(11.4 |
) |
|
|
24.0 |
|
| Provision for income taxes |
|
|
(3.3 |
) |
|
|
— |
|
|
(9.6 |
) |
|
|
— |
|
|
|
(12.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
11.1 |
|
|
$ |
5.7 |
|
$ |
5.7 |
|
|
$ |
(11.4 |
) |
|
$ |
11.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2002
(in millions)
(unaudited)
| |
|
Parent
|
|
|
Subsidiary Guarantors
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total Consolidated
|
|
| Revenues |
|
$ |
757.3 |
|
|
$ |
19.7 |
|
|
$ |
495.8 |
|
|
$ |
(65.5 |
) |
|
$ |
1,207.3 |
|
| Cost of revenues |
|
|
564.1 |
|
|
|
16.2 |
|
|
|
367.9 |
|
|
|
(65.3 |
) |
|
|
882.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
193.2 |
|
|
|
3.5 |
|
|
|
127.9 |
|
|
|
(0.2 |
) |
|
|
324.4 |
|
| Selling, engineering, administrative and general expenses |
|
|
144.2 |
|
|
|
1.2 |
|
|
|
90.4 |
|
|
|
(0.2 |
) |
|
|
235.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
49.0 |
|
|
|
2.3 |
|
|
|
37.5 |
|
|
|
— |
|
|
|
88.8 |
|
| Equity income of consolidated subsidiaries |
|
|
23.0 |
|
|
|
21.8 |
|
|
|
— |
|
|
|
(44.8 |
) |
|
|
— |
|
| Interest expense |
|
|
(76.1 |
) |
|
|
(0.3 |
) |
|
|
(3.7 |
) |
|
|
— |
|
|
|
(80.1 |
) |
| Interest income |
|
|
0.6 |
|
|
|
— |
|
|
|
1.4 |
|
|
|
— |
|
|
|
2.0 |
|
| Other (deductions) income, net |
|
|
(0.2 |
) |
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Loss) income before taxes |
|
|
(3.7 |
) |
|
|
23.8 |
|
|
|
35.4 |
|
|
|
(44.8 |
) |
|
|
10.7 |
|
| Benefit (provision) for income taxes |
|
|
9.8 |
|
|
|
(0.8 |
) |
|
|
(13.6 |
) |
|
|
— |
|
|
|
(4.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
6.1 |
|
|
$ |
23.0 |
|
|
$ |
21.8 |
|
|
$ |
(44.8 |
) |
|
$ |
6.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
DRESSER, INC.
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2001
(in millions)
(unaudited)
| |
|
Parent
|
|
|
Subsidiary Guarantors
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total Consolidated
|
|
| Revenues |
|
$ |
768.9 |
|
|
$ |
— |
|
$ |
449.4 |
|
|
$ |
(80.1 |
) |
|
$ |
1,138.2 |
|
| Cost of revenues |
|
|
550.8 |
|
|
|
— |
|
|
316.0 |
|
|
|
(78.6 |
) |
|
|
788.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
218.1 |
|
|
|
— |
|
|
133.4 |
|
|
|
(1.5 |
) |
|
|
350.0 |
|
| Selling, engineering, administrative and general expenses |
|
|
149.5 |
|
|
|
— |
|
|
76.7 |
|
|
|
(1.5 |
) |
|
|
224.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
68.6 |
|
|
|
— |
|
|
56.7 |
|
|
|
— |
|
|
|
125.3 |
|
| Equity income of consolidated subsidiaries |
|
|
30.7 |
|
|
|
30.7 |
|
|
— |
|
|
|
(61.4 |
) |
|
|
— |
|
| Interest expense |
|
|
(39.6 |
) |
|
|
— |
|
|
(6.8 |
) |
|
|
— |
|
|
|
(46.4 |
) |
| Interest income |
|
|
0.9 |
|
|
|
— |
|
|
2.1 |
|
|
|
— |
|
|
|
3.0 |
|
| Other income (deductions), net |
|
|
0.3 |
|
|
|
— |
|
|
(0.6 |
) |
|
|
— |
|
|
|
(0.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before taxes |
|
|
60.9 |
|
|
|
30.7 |
|
|
51.4 |
|
|
|
(61.4 |
) |
|
|
81.6 |
|
| Provision for income taxes |
|
|
(11.6 |
) |
|
|
— |
|
|
(20.7 |
) |
|
|
— |
|
|
|
(32.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
49.3 |
|
|
$ |
30.7 |
|
$ |
30.7 |
|
|
$ |
(61.4 |
) |
|
$ |
49.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2002
(in millions)
(unaudited)
| |
|
Parent
|
|
|
Subsidiary Guarantors
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total Consolidated
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
6.1 |
|
|
$ |
23.0 |
|
|
$ |
21.8 |
|
|
$ |
(44.8 |
) |
|
$ |
6.1 |
|
| Adjustments to reconcile net income (loss) to cash flow provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
21.6 |
|
|
|
— |
|
|
|
11.1 |
|
|
|
— |
|
|
|
32.7 |
|
| Equity earnings of consolidated affiliates |
|
|
(23.0 |
) |
|
|
(21.8 |
) |
|
|
— |
|
|
|
44.8 |
|
|
|
— |
|
| Equity earnings of unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
(2.5 |
) |
|
|
— |
|
|
|
(2.5 |
) |
| Loss on repayment of debt |
|
|
15.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15.4 |
|
| Other changes, net |
|
|
74.6 |
|
|
|
6.1 |
|
|
|
(39.4 |
) |
|
|
— |
|
|
|
41.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by (used in) operating activities |
|
|
94.7 |
|
|
|
7.3 |
|
|
|
(9.0 |
) |
|
|
— |
|
|
|
93.0 |
|
| |
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital expenditures |
|
|
(7.7 |
) |
|
|
— |
|
|
|
(3.3 |
) |
|
|
— |
|
|
|
(11.0 |
) |
| Business acquisitions |
|
|
(21.4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21.4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(29.1 |
) |
|
|
— |
|
|
|
(3.3 |
) |
|
|
— |
|
|
|
(32.4 |
) |
| |
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in intercompany activity |
|
|
(101.8 |
) |
|
|
— |
|
|
|
101.8 |
|
|
|
— |
|
|
|
— |
|
| Proceeds from the issuance of long term debt |
|
|
256.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
256.3 |
|
| Repayment of debt (including current portion) |
|
|
(208.2 |
) |
|
|
(7.1 |
) |
|
|
(98.3 |
) |
|
|
— |
|
|
|
(313.6 |
) |
| Decrease in short-term notes payable |
|
|
— |
|
|
|
— |
|
|
|
(6.8 |
) |
|
|
— |
|
|
|
(6.8 |
) |
| Payment of deferred financing fees |
|
|
(8.2 |
) |
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
(8.3 |
) |
| Proceeds from the issuance of stock |
|
|
10.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in financing activities |
|
|
(51.9 |
) |
|
|
(7.1 |
) |
|
|
(3.4 |
) |
|
|
— |
|
|
|
(62.4 |
) |
| |
| Effect of translation adjustments on cash |
|
|
— |
|
|
|
— |
|
|
|
(2.8 |
) |
|
|
— |
|
|
|
(2.8 |
) |
| Net increase (decrease) in cash and equivalents |
|
|
13.7 |
|
|
|
0.2 |
|
|
|
(18.5 |
) |
|
|
— |
|
|
|
(4.6 |
) |
| Cash and equivalents, beginning of period |
|
|
30.9 |
|
|
|
— |
|
|
|
66.3 |
|
|
|
— |
|
|
|
97.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and equivalents, end of period |
|
$ |
44.6 |
|
|
$ |
0.2 |
|
|
$ |
47.8 |
|
|
$ |
— |
|
|
$ |
92.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2001
(in millions)
(unaudited)
| |
|
Parent
|
|
|
Subsidiary Guarantors
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Total Consolidated
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
49.3 |
|
|
$ |
30.7 |
|
|
$ |
30.7 |
|
|
$ |
(61.4 |
) |
|
$ |
49.3 |
|
| Adjustments to reconcile net income (loss) to cash flow provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
22.8 |
|
|
|
— |
|
|
|
17.8 |
|
|
|
— |
|
|
|
40.6 |
|
| Equity earnings of consolidated affiliates |
|
|
(0.1 |
) |
|
|
— |
|
|
|
(1.3 |
) |
|
|
— |
|
|
|
(1.4 |
) |
| Equity earnings of unconsolidated affiliates |
|
|
(30.7 |
) |
|
|
(30.7 |
) |
|
|
— |
|
|
|
61.4 |
|
|
|
— |
|
| Other changes, net |
|
|
42.8 |
|
|
|
— |
|
|
|
(35.9 |
) |
|
|
|
|
|
|
6.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
84.1 |
|
|
|
— |
|
|
|
11.3 |
|
|
|
— |
|
|
|
95.4 |
|
| |
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital expenditures |
|
|
(18.1 |
) |
|
|
— |
|
|
|
(6.3 |
) |
|
|
— |
|
|
|
(24.4 |
) |
| Business acquisitions |
|
|
(1,212.8 |
) |
|
|
— |
|
|
|
(113.9 |
) |
|
|
— |
|
|
|
(1,326.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(1,230.9 |
) |
|
|
— |
|
|
|
(120.2 |
) |
|
|
— |
|
|
|
(1,351.1 |
) |
| |
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in intercompany activity |
|
|
(125.8 |
) |
|
|
— |
|
|
|
16.6 |
|
|
|
— |
|
|
|
(109.2 |
) |
| Proceeds from the issuance of long-term debt |
|
|
901.9 |
|
|
|
— |
|
|
|
96.6 |
|
|
|
— |
|
|
|
998.5 |
|
| Increase in short-term notes payable |
|
|
14.9 |
|
|
|
— |
|
|
|
30.4 |
|
|
|
— |
|
|
|
45.3 |
|
| Proceeds from the issuance of stock |
|
|
369.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
369.6 |
|
| Cash overdrafts |
|
|
10.7 |
|
|
|
— |
|
|
|
1.6 |
|
|
|
— |
|
|
|
12.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by financing activities: |
|
|
1,171.3 |
|
|
|
— |
|
|
|
145.2 |
|
|
|
— |
|
|
|
1,316.5 |
|
| |
| Effect of translation adjustments on cash |
|
|
— |
|
|
|
— |
|
|
|
2.0 |
|
|
|
— |
|
|
|
2.0 |
|
| Net increase in cash and equivalents |
|
|
24.5 |
|
|
|
— |
|
|
|
38.3 |
|
|
|
— |
|
|
|
62.8 |
|
| Cash and equivalents, beginning of period |
|
|
5.5 |
|
|
|
— |
|
|
|
14.2 |
|
|
|
— |
|
|
|
19.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and equivalents, end of period |
|
$ |
30.0 |
|
|
$ |
— |
|
|
$ |
52.5 |
|
|
$ |
— |
|
|
$ |
82.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Form 10-Q constitute “forward-looking statements” as that term is defined under §21E of the Securities and Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions, which are predictions of or indicate future events and trends and
which do not relate to historical matters identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Although forward-looking statements reflect management’s good faith beliefs, reliance should
not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. These
forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the impact of general economic conditions in the regions in which we do business; general industry conditions, including competition and
product, raw material and energy prices; changes in exchange rates and currency values; capital expenditure requirements; access to capital markets and the risks and uncertainties described in “Certain Risk Factors”.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent liabilities. In our Annual Report on Form 10-K for the year ended
December 31, 2001, we identified and disclosed critical accounting policies, which included revenue recognition, inventory obsolescence, product warranties and income taxes. We reviewed our policies and have determined that those critical policies
remain and have not changed since December 31, 2001.
Overview
We design, manufacture and market highly engineered equipment and services sold primarily to customers in the energy industry. Our primary business segments are flow
control, measurement systems and compression and power systems. We sell our products and services to customers, which include major oil companies, multinational engineering and construction companies and other industrial firms. Our total revenues by
geographic region for the nine months ended September 30, 2002, consisted of North America (52.8%), Europe/Africa (23.5%), Latin America (9.0%), Asia (9.7%) and the Middle East (5.0%). We have pursued a strategy of customer, geographic and product
diversity to mitigate the impact of an economic downturn on our business in any one part of the world or in any single business segment.
For the nine months ended September 30, 2002, we generated revenues of $1,207.3 million, operating income of $88.8 million and net income of $6.1 million.
Market Forces
Our product offerings include valves,
instruments, meters, natural gas fueled engines, retail fuel dispensing systems, blowers and natural gas fueled power generation systems. These products are used to produce, transport, process, store and deliver oil and gas and their related
by-products, and in other general industrial applications.
Long-term demand for energy infrastructure equipment
and services is driven by increases in worldwide energy consumption, which is a function of worldwide population growth, rate of industrialization and the levels of energy consumption per capita. In the short term, demand for our products is
affected by overall worldwide economic conditions and by fluctuations in the level of activity and capital spending by major, national and independent oil and gas companies, gas distribution companies, gas compression companies, pipeline companies,
power generation companies and petrochemical processing plants. Energy demand and the level of oil and gas prices affects all of these activities and is a significant factor in determining our primary customers’ level of cash flow. Our
customer’s
23
cash flow and their outlook for future energy demand and oil and natural gas prices affects their capital spending which drives demand for our
products.
Our customers have reduced their maintenance, repair and capital spending for 2002, and these
reductions have and will continue to negatively impact our business. The significant downturn in the gas compression market from levels in 2001 greatly impacted our compression and power systems segment as we saw sharp declines in the demand for new
gas compression engines throughout 2002 as compared to 2001. We also saw weakness in global demand for fuel dispenser business and retail point of sales systems due to reduced capital spending on retail fuel equipment by our major customers. We have
seen signs of additional decreases in spending which will likely impact the coming quarter. Accordingly, we expect the fourth quarter earnings before interest, taxes, depreciation and amortization (“EBITDA”) to decline by 20% to 30% as
compared to the third quarter of 2002, excluding restructuring and other non-cash charges. As a result, we have implemented certain cost reduction initiatives in an effort to improve business performance in the first quarter of 2003. These estimates
of our future operating results are forward-looking and inherently uncertain. Our actual future results may differ from our current estimates possibly materially. Our future results are subject to general economic conditions and numerous other
factors, some of which are beyond our control. See “Certain Risk Factors” for a discussion of some of the things that might affect our future operating results.
Restructuring and Other Exit Activities
During the third
quarter, we initiated restructuring programs affecting several business units in an effort to obtain manufacturing efficiencies and cost savings. In connection with these activities, we have elected early application of SFAS No. 146 “Accounting
for Costs Associated with Exit or Disposal Activities” and have recognized costs associated with exit or disposal activities as incurred rather than at the date of a commitment to an exit or disposal plan. We have also announced plans to
restructure our European operations that will include the consolidation of dispenser manufacturing in our Malmo, Sweden facility and the associated downsizing of a plant in Germany during 2003. As these costs have not been incurred, no accruals for
these costs have been reflected in our financial statements. It is anticipated that we may incur approximately $5.0 million in costs associated with these activities.
During the third quarter of 2002, we decided to: (1) consolidate manufacturing of our standard design rotary blower products at our Houston, Texas manufacturing plant and
downsize our Connersville, Indiana facility (2) cease manufacturing fuel dispensers at a Canadian manufacturing facility and consolidate North American fuel dispenser manufacturing in our Austin, Texas facility and (3) discontinue several small
product lines. We incurred charges of approximately $3.9 million for inventory markdowns associated with these activities. These costs have been reflected in costs of revenues in our condensed consolidated statements of operations.
In connection with these activities, as described above, we incurred certain restructuring charges related to termination
benefits as we terminated 93 employees. We also impaired certain assets, related to machinery, goodwill, and capitalized designs. These costs have been reflected in selling, engineering, general and administrative costs. The restructuring charges
are detailed below:
| Description
|
|
Restructuring Charge
|
|
Cash Payments
|
|
Non-Cash Charges
|
|
Reserved at 9/30/2002
|
| |
|
(in millions) |
| Termination benefits |
|
$ |
1.6 |
|
$ |
0.1 |
|
$
|
—
|
|
$ |
1.5 |
| Write-down of other assets |
|
|
0.5 |
|
|
— |
|
|
0.5 |
|
|
— |
| Write-down of machinery assets |
|
|
0.2 |
|
|
— |
|
|
0.2 |
|
|
— |
| Write-down of goodwill |
|
|
0.2 |
|
|
— |
|
|
0.2 |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
2.5 |
|
$ |
0.1 |
|
$ |
0.9 |
|
$ |
1.5 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Stand-Alone Company
The condensed consolidated financial information prior to March 31, 2001 has been derived from the consolidated financial statements of the DEG business unit of
Halliburton. The preparation of this information was based on certain assumptions and estimates including allocations of costs from Halliburton, which we believe are
24
reasonable. The condensed consolidated financial statements may not, however, necessarily reflect the results of operations, financial positions
and cash flows that would have occurred if our company had been a separate, stand-alone entity during the periods prior to March 31, 2001.
Results of Operations
The following table presents selected financial information
regarding each of our segments for the three and nine months ended September 30, 2002 and 2001, respectively. During the second quarter of 2002, we made changes to our internal corporate structure with the reorganization of certain of our operating
units. We believe these changes will better serve our customers. Although we still report under three reportable segments, the operating units that comprise each reportable segment have changed. The prior year information has been restated to
conform to the current year presentation.
25
| |
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September
30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| |
|
(in millions) |
|
| Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Flow Control |
|
$ |
255.7 |
|
|
$ |
231.1 |
|
|
$ |
774.8 |
|
|
$ |
639.8 |
|
| Measurement Systems |
|
|
79.1 |
|
|
|
82.2 |
|
|
|
222.3 |
|
|
|
234.5 |
|
| Compression and Power Systems |
|
|
73.1 |
|
|
|
91.3 |
|
|
|
213.0 |
|
|
|
268.1 |
|
| Eliminations |
|
|
(0.9 |
) |
|
|
(1.3 |
) |
|
|
(2.8 |
) |
|
|
(4.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
407.0 |
|
|
$ |
403.3 |
|
|
$ |
1,207.3 |
|
|
$ |
1,138.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Flow Control |
|
$ |
62.6 |
|
|
$ |
71.8 |
|
|
$ |
217.7 |
|
|
$ |
208.3 |
|
| Measurement Systems |
|
|
20.1 |
|
|
|
22.3 |
|
|
|
54.9 |
|
|
|
59.0 |
|
| Compression and Power Systems |
|
|
17.4 |
|
|
|
28.6 |
|
|
|
51.8 |
|
|
|
82.7 |
|
| Eliminations |
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
100.2 |
|
|
$ |
122.7 |
|
|
$ |
324.4 |
|
|
$ |
350.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Selling, engineering, administrative and general expenses: |
|
|
|
|
| Flow Control |
|
$ |
49.0 |
|
|
$ |
48.7 |
|
|
$ |
147.9 |
|
|
$ |
133.4 |
|
| Measurement Systems |
|
|
13.6 |
|
|
|
12.1 |
|
|
|
39.2 |
|
|
|
43.6 |
|
| Compression and Power Systems |
|
|
12.6 |
|
|
|
12.9 |
|
|
|
37.6 |
|
|
|
38.1 |
|
| Corporate |
|
|
3.5 |
|
|
|
3.9 |
|
|
|
10.9 |
|
|
|
9.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
78.7 |
|
|
$ |
77.6 |
|
|
$ |
235.6 |
|
|
$ |
224.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Flow Control |
|
$ |
13.6 |
|
|
$ |
23.1 |
|
|
$ |
69.8 |
|
|
$ |
74.9 |
|
| Measurement Systems |
|
|
6.5 |
|
|
|
10.2 |
|
|
|
15.7 |
|
|
|
15.4 |
|
| Compression and Power Systems |
|
|
4.8 |
|
|
|
15.7 |
|
|
|
14.2 |
|
|
|
44.6 |
|
| Corporate |
|
|
(3.4 |
) |
|
|
(3.9 |
) |
|
|
(10.9 |
) |
|
|
(9.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
21.5 |
|
|
$ |
45.1 |
|
|
$ |
88.8 |
|
|
$ |
125.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Flow Control |
|
$ |
6.8 |
|
|
$ |
9.1 |
|
|
$ |
18.6 |
|
|
$ |
25.3 |
|
| Measurement Systems |
|
|
1.3 |
|
|
|
1.5 |
|
|
|
3.9 |
|
|
|
5.3 |
|
| Compression and Power Systems |
|
|
3.1 |
|
|
|
3.2 |
|
|
|
9.6 |
|
|
|
9.6 |
|
| Corporate |
|
|
0.2 |
|
|
|
— |
|
|
|
0.6 |
|
|
|
0.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
11.4 |
|
|
$ |
13.8 |
|
|
$ |
32.7 |
|
|
$ |
40.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Bookings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Flow Control |
|
$ |
228.2 |
|
|
$ |
249.0 |
|
|
$ |
732.0 |
|
|
$ |
691.5 |
|
| Measurement Systems |
|
|
82.7 |
|
|
|
86.9 |
|
|
|
216.5 |
|
|
|
245.9 |
|
| Compression and Power Systems |
|
|
66.1 |
|
|
|
71.0 |
|
|
|
209.2 |
|
|
|
253.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
377.0 |
|
|
$ |
406.9 |
|
|
$ |
1,157.7 |
|
|
$ |
1,191.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
September 30,
|
|
|
|
|
|
|
|
| |
|
2002
|
|
|
2001
|
|
|
|
|
|
|
|
| |
|
(in millions) |
|
|
|
|
|
|
|
| Backlog: |
|
|
|
|
|
|
|
|
|
|
|
| Flow Control |
|
$ |
279.0 |
|
|
$ |
303.7 |
|
|
|
|
|
|
|
|
|
| Measurement Systems |
|
|
47.9 |
|
|
|
63.5 |
|
|
|
|
|
|
|
|
|
| Compression and Power Systems |
|
|
49.6 |
|
|
|
77.0 |
|
|
|
|
|
|
|
|
|
| Eliminations |
|
|
(3.5 |
) |
|
|
(3.7 |
) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
373.0 |
|
|
$ |
440.5 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Three months ended September 30, 2002 as compared to the three months ended September 30, 2001
Consolidated
Revenues. Revenues were $407.0 million and $403.3 million for the three months ended September 30, 2002 and 2001, respectively. This increase of $3.7 million, or 0.9%, was
primarily attributable to increases in our flow control segment, which offset decreases in our compression and power systems and measurement segment. Our flow control segment benefited from acquisitions in 2001 and 2002 as well as increased sales
volume in our valve product lines. Our compression and power systems segment was negatively impacted by declines in demand for natural gas compression while our measurement systems segment was impacted by reduced purchasing from our major oil
customers.
Cost of revenues. Cost of revenues as a percentage of revenues were
75.4% and 69.6% for the three months ended September 30, 2002 and 2001 respectively. Our costs as a percentage of revenue were impacted by declines in sales of high margin original equipment in our compression and power systems segments and
substantial volume of low margin third-party buyouts associated with large international projects in our flow control segment. In addition, our cost of revenues was impacted by the discontinuation of certain product lines, which resulted in
markdowns of inventory of approximately $3.9 and by non-cash charges of approximately $5.7 million related to inventory shrinkage and additional reserves for excess and obsolete inventory.
Gross Profit. Gross profit was $100.2 million and $122.7 million for the three months ended September 30, 2002 and 2001, respectively. As
a percentage of revenues, gross profit decreased to 24.6% in 2002 from 30.4% in 2001, primarily as a result of the factors discussed above.
Selling, Engineering, Administrative and General Expenses. Selling, engineering, administrative and general expenses were $78.7 million in 2002 and $77.6 million for the
three months ended September 30, 2002 and 2001, respectively. This was in increase of $1.1 million or 1.4%. Increases in selling, engineering, administrative and general expenses were in part attributable to restructuring charges of $2.5 million,
non-cash charges related to the impairment of certain assets of $1.9 million and other non-cash charges of $0.5 million. In 2002, we also had $1.0 million of increased costs attributable to businesses acquired in 2001 and 2002. These costs were in
part offset by cost reductions at our natural gas and power generation business and the suspension of goodwill amortization in 2002. The amortization of goodwill was $2.6 million for the three months ended September 30, 2001. As a percentage of
revenues, these costs rose to 19.3% of revenues in 2002 from 19.2% of revenues in 2001.
Operating
Income. Operating income was $21.5 million and $45.1 million for the three months ended September 30, 2002 and 2001, respectively. The decrease of $23.6 million, or 52.3% was attributable to declines in all three of our
segments. Our compression and power systems segment was impacted by a reduction in gas compression demand reducing our sales of original gas compression equipment. Declines in our measurement systems segment were impacted by a reduction in
purchasing from our major oil customers. Our flow control segment was impacted by costs associated with our decision to discontinue certain products lines and additional reserves for excess and obsolete inventory.
Interest Expense. Interest expense was $22.0 million and $25.9 million for the three months end September
30, 2002 and 2001, respectively. The decrease of $3.9 million or 15.1% was primarily impacted by reductions in long-term debt and reductions in interest rates. Long-term debt was $964.9 million with a weighted average interest rate of 7.61% at
September 30, 2002, as compared to long-term debt of $1,017.0 million with a weighted average interest rate of 7.85% at September 30, 2001. In addition, in the third quarter of 2002, we recorded a $1.1 million reduction to interest expense for the
change in the fair market value of the derivative, which was offset in part by payments on our interest rate swaps of $0.8 million. Reductions in the amortization of debt issuance costs of $1.3 million were offset in part by the write-off of debt
issuance costs of $2.2 million.
Provision for income taxes. Provision for income
taxes was $0.0 million and $12.9 million for the three months ended September 30, 2002 and 2001, respectively. During the third quarter of 2001, we adjusted our provision for
27
certain U.S. subsidiaries, which resulted in a year to date effective tax rate of 39.5%, consistent with our estimate of our full year effective
tax rate. In 2002, our income tax benefit for losses was offset by foreign taxes.
Bookings and
Backlog. Bookings were $377.0 million and $406.9 million for the three months ended September 30, 2002 and 2001, respectively, a decline of 7.3%. Backlog at September 30, 2002 was $373.0 million compared to $440.5 million
at September 30, 2001, a 15.3% decline.
Segment Analysis
Flow Control. Revenues were $255.7 million and $231.1 million for the three months ended September 30, 2002 and 2001, respectively. The
increase of $24.6 million or 10.6% was in part due to acquisitions made during 2001 and 2002 along with increased sales in our valve product lines. Increases in revenue attributable to these acquisitions were approximately $15.0 million, with the
remainder of the increases in revenues attributable to our valve products. However, we did experience declines in our instrument, metering and piping specialty product lines due to weak market conditions.
Gross profit was $62.6 million and $71.8 million for the three months ended September 30, 2002 and 2001, respectively. The decrease of
$9.2 million or 12.8% was as a result of several factors. Although we had positive growth in gross profit of approximately $2.5 million attributable to acquisitions, our metering, piping and instrument product lines experienced a decline in gross
profit of approximately $3.6 million due to weak market conditions. During the third quarter, we decided to exit certain product lines, and as a result, recorded charges of $3.7 million associated with inventory markdowns. Also during the third
quarter, we recorded additional reserves of approximately $5.2 million related to inventory shrinkage and excess and obsolete inventory. In addition, in our on/off valve product line, we had a substantial volume of low margin third-party buyouts
associated with large international projects, also impacting our costs as a percentage of revenues. As a percentage of revenues, gross profit decreased to 24.5% in 2002 from 31.1% in 2001.
Selling, engineering, administrative, and general expenses were $49.0 million and $48.7 million for the three months ended September 30, 2002 and 2001, respectively. The
increase of $0.3 or 0.6% was impacted in part by acquisitions and certain restructuring activities. Increases attributable to acquisitions and restructuring charges were approximately $1.0 million and $1.8 million, respectively. Restructuring
charges included severance costs of $0.9 million and non-cash charges related to the impairment of assets for an additional $0.9 million. We also incurred other non-cash charges of $0.5 million. These increases were offset in part by the suspension
of the amortization of goodwill, which was $2.2 million for the three months ended September 30, 2001. As a percentage of revenue, these costs decreased to 19.2% in 2002 from 21.1% in 2001.
Operating income was $13.6 million and $23.1 million for the three months ended September 30, 2002 and 2001, respectively. This was a decrease of $9.5 million or 41.1%.
Although operating income was positively impacted by $1.5 million attributable to acquisitions, it was negatively impacted by inventory markdowns and restructuring charges as discussed above.
Bookings and Backlog. Bookings were $228.2 million and $249.0 million for the three months ended September 30, 2002 and 2001, respectively, a decline of 8.4%.
Backlog at September 30, 2002 was $279.0 million compared to $303.7 million at September 30, 2001, a decline of 8.1%. The decline in bookings and backlog was primarily attributable to declines in our on/off product lines. Our on/off products were
impacted by the delays in the releases of project orders coupled with weakness in core business bookings in a number of our flow control product lines.
Measurement Systems. Revenues were $79.1 million and $82.2 million for the three months ended September 30, 2002 and 2001, respectively. The decrease of $3.1 million, or
3.8% is primarily a result of reduced purchases from major oil customers and general market weakness in the United States and Canada, which contributed approximately $3.2 million to the decline in revenues. In addition, we saw reductions in Germany
and the United Kingdom, which were offset by higher service revenues of $1.7 million in Scandinavia.
28
Gross profit was $20.1 million and $22.3 million for the three months ended
September 30, 2002 and 2001, respectively. This was a decrease of $2.2 million or 9.9%. Gross profit was impacted by lower sales volume and unfavorable other variable costs and manufacturing costs. In addition, we incurred $0.2 million in inventory
markdowns resulting from our decision to cease manufacturing fuel dispensers at a Canadian manufacturing facility. As a percentage of revenue, gross margins decreased to 25.4% in 2002 from 27.1% in 2001.
Selling, engineering, administrative, and general expenses were $13.6 million and $12.1 million for the three months ended September 30,
2002 and 2001, respectively. This was an increase of $1.5 million or 12.4%. The third quarter of 2001 was impacted by reductions in pension costs of $1.3 million. The third quarter of 2002 was impacted by the suspension of the amortization of
goodwill. Amortization expense for goodwill was $0.4 million for the three months ended September 30, 2001. In addition, the third quarter of 2002 was impacted by a non-cash charge of $0.5 million for the impairment of certain machinery and $0.4
million of severance for the termination of employees associated with restructuring activities. As a percentage of revenue, these costs increased to 17.2% in 2002 from 14.7% in 2001.
Operating income was $6.5 million and $10.2 million for the three months ended September 30, 2002 and 2001, respectively. The decrease of $3.7 million or 36.3% was
primarily a result of the factors discussed above.
Bookings and Backlog. Bookings were $82.7 million and
$86.9 million for the three months ended September 30, 2002 and 2001, respectively, a decline of 4.8%. Backlog at September 30, 2002 was $47.9 million compared to $63.5 million at September 30, 2001, a decline of 24.6%. Weak market conditions in
2002 and an overall decline in the U.S. dispenser market led to lower bookings and backlog in 2002 as compared to the prior year.
Compression and Power Systems. Revenues were $73.1 million and $91.3 million for the three months ended September 30, 2002 and 2001 respectively. This decrease of $18.2 million or 19.9% was in large part
due to a decrease in original equipment sales. Sales of our natural gas engines, in particular our VHP product line, were lower by approximately $16.7 million as compared to the same period in the prior year due to sharply lower gas compression
demand. Aftermarket part sales decreased by approximately $4.6 million primarily attributable to diminished gas compression fleet utilization. However, our power generation business was moderately favorable for the quarter.
Gross profit was $17.4 million and $28.6 million for the three months ended September 30, 2002 and 2001, respectively. This decrease of
$11.2 million or 39.2% was primarily a result of depressed gas compression volume and intense price competition in our power generation business. As a percentage of revenues, gross margins decreased to 23.8% in 2002 from 31.3% in 2001. Margins were
impacted by manufacturing efficiency and rate variances associated with declining production volume, as well as significant price competition in certain of our products. In addition, in the third quarter we recorded an additional $0.5 million of
reserves for excess and obsolete inventory in our blower product lines.
Selling, engineering, administrative, and
general expenses were $12.6 million and $12.9 million for the three months ended September 30, 2002, and 2001, respectively. This was a decrease of $0.3 million or 2.3%. We achieved reductions with lower purchased services of approximately $1.2
million and a reduction of payroll costs of $0.5 million at our natural gas and power generation business. This was offset by higher costs in our blower business, which included a non-cash charge for the impairment of machinery of $1.4 million and
termination benefits of $0.3 million associated with restructuring activities. As a percentage of revenue, these costs increased to 17.2% in 2002 from 14.1% in 2001.
Operating income was $4.8 million and $15.7 million for the three months ended September 30, 2002 and 2001, respectively. The decrease of $10.9 million or 69.4% was
primarily as a result of the factors discussed above.
Bookings and Backlog. Bookings were $66.1 million
and $71.0 million for the three months ended September 30, 2002 and 2001, respectively. This was a decrease of $4.9 million or 6.9%. Backlog was $49.6 million and $77.0 million at September 30, 2002 and 2001, respectively. This was a decrease of
$27.4 million or 35.6%. The decline in the gas compression demand led to a reduction in bookings and backlog.
29
Nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001
Consolidated
Revenues. Revenues were $1,207.3 million and $1,138.2 million for the nine months ended September 30, 2002 and 2001, respectively. The increase of $69.1 million, or 6.1%,
in revenues was attributable to increases in our flow control segment, which offset decreases in both our measurement and compression and power systems segments. Our flow control segment benefited from acquisitions in 2001 and 2002 as well as
increased sales volume in our valve product lines. Our compression and power systems segment was negatively impacted by declines in demand for natural gas compression, as compared to 2001. Our measurement systems segment was negatively impacted by
reduced capital spending on retail fuel equipment.
Cost of revenues. Cost of
revenues as a percentage of revenues increased to 73.1% in 2002 from 69.2% in 2001. During the year, we experienced sharp declines in the sales of our high margin equipment in our compression and power systems segment, which also impacted our costs
as a percentage of revenues. In addition, in our on/off valve product line, we had a substantial volume of low margin third-party buyouts associated with large international projects and higher manufacturing costs related to throughput issues in a
plant in Italy, also impacting our costs as a percentage of revenues. Cost of revenues was also impacted by the discontinuation of certain product lines, which resulted in markdowns of inventory of approximately $3.9 million and approximately $5.7
million related to inventory shrinkage and an additional reserve for excess and obsolete inventory.
Gross Profit. Gross profit was $324.4 million and $350.0 million for the nine months ended September 30, 2002 and 2001, respectively. As a percentage of revenues, gross profit decreased to 26.9% in 2002
from 30.8% in 2001, primarily as a result of the factors discussed above.
Selling, Engineering, Administrative
and General Expenses. Selling, engineering, administrative and general expenses were $235.6 million and $224.7 million for the nine months ended September 30, 2002 and 2001, respectively. This was an increase of $10.9
million or 4.9%. Selling, engineering, administrative and general expenses were impacted by higher volume, which includes the impact of acquisitions. In addition, we incurred $2.5 million in expenses related to restructuring activities and $1.9
million related to the impairment of certain assets, and other non-cash charges of $0.5 million. These increases were generally offset by the suspension of goodwill amortization in 2002. For the nine months ended September 30, 2001, selling,
engineering, administrative and general expenses included $6.8 million of amortization of goodwill and $4.0 million of expenses related to the closure of a manufacturing facility. Selling, engineering, administrative and general expenses decreased
as a percentage of revenues, to 19.5% of revenues in 2002 from 19.7% of revenues in 2001.
Operating
Income. Operating income was $88.8 million and $125.3 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease of $36.5 million or 29.1% was primarily a result of declines in our
compression and power systems segment. This segment was impacted by the depressed demand for new gas compression engines. Operating income was also affected by our flow control segment, which was impacted by the decision to exit certain product
lines.
Interest Expense. Interest expense was $80.1 million and $46.4 million for
the nine months ended September 30, 2002 and 2001, respectively. This was an increase of $33.7 million or 72.6%. Interest expense was primarily impacted by the debt incurred as a result of the reorganization in April of 2001 and the write-off of
debt issuance costs in 2002. Prior to the reorganization, as part of Halliburton, no third party debt was allocated to us, except for operational accounts payable. As a result, we did not have any significant interest expense for the three months
ended March 31, 2001. Interest expense was $0.8 million for the three months ended March 31, 2001, as compared to $20.6 million, excluding the write-off of debt issuance costs, for the three months ended March 31, 2002. In addition, during 2002, we
extinguished our Tranche A term loans and repaid a portion of our Tranche B term loan, which resulted in the write-off of $15.4 million in the amortization of debt issuance costs.
Provision for income taxes. Provision for income taxes was $4.6 million and $32.3 million for the nine months ended September 30, 2002 and
2001, respectively. The decrease in the provision was due primarily from a reduction in income before taxes, based on the factor described above. Our effective tax rate was 43.0% and 39.5%
30
for the nine months ended September 30, 2002 and 2001, respectively.
Bookings and Backlog. Bookings during the 2002 period of $1,157.7 million were 2.8% below bookings during the same period in 2001. Increased
bookings in our flow control segment were offset by declines in our measurement and compression and power systems segments. Backlog at September 30, 2002 period was $373.0 million compared to $440.5 million at September 30, 2001, a 15.3% decrease.
Segment Analysis
Flow Control. Revenues were $774.8 million and $639.8 million for the nine months ended September 30, 2002 and 2001, respectively. The increase of $135.0 million or 21.1%
was in part due to acquisitions made during 2001 and 2002 along with increased sales in valve product lines, in particular, our on/off product lines. Increases in revenue attributable to these acquisitions were approximately $64.5 million, with the
remainder of the increases in revenues attributable to our valve products. However, we did experience declines in our instrument and metering and piping product lines due to weak market conditions.
Gross profit was $217.7 million and $208.3 million for the nine months ended September 30, 2002 and 2001, respectively. The increase of
$9.4 million or 4.5% was impacted by several factors. We had positive growth in gross profit from our on/off valves, including growth from our acquisitions, which contributed approximately $11.1 million to the increase. This was offset in part by
declines in gross profit by our instrument, metering and piping specialty product lines, which was affected by weak market conditions. In addition during the third quarter, we decided to exit certain product lines, and as a result, recorded charges
of approximately $3.7 million associated with inventory markdowns. Also during the third quarter, we recorded charges of approximately $5.2 million related to inventory shrinkage and additional reserves for excess and obsolete inventory. As a
percentage of revenue, gross profit was 28.1% and 32.6% for the nine months ended September 30, 2002 and 2001, respectively. Our margins were impacted not only by the inventory markdowns but also by the product mixes in our valve product lines. In
our on/off valve product line, we had a substantial volume of low margin third-party buyouts associated with large international projects and higher manufacturing costs related to throughput issues in a plant in Italy. In the control valve and
pressure relief valve product lines, growth in lower margin original equipment sales for new construction business combined with relatively flat higher margin part sales resulted in overall lower margins.
Selling, engineering, administrative, and general expenses were $147.9 million and $133.4 million for the nine months ended September 30,
2002 and 2001, respectively. The increase of $14.5 million or 10.9% was impacted in by increased volume that includes the impact of acquisitions. Increases attributable to acquisitions were approximately $2.4 million. In addition, we incurred $1.8
million in restructuring charges and $0.5 million in other non-cash charges. These increases were offset in part by the suspension of the amortization of goodwill, which was $5.6 million for the nine months ended September 30, 2001. As a percentage
of revenue, these costs decreased to 19.1% in 2002 from 20.9% in 2001.
Operating income was $69.8 million and
$74.9 million for the nine months ended September 30, 2002 and 2001, respectively. This was a decrease of $5.1 million or 6.8%. Although operating income was positively impacted by $5.2 million attributable to acquisitions, it was negatively
impacted by the inventory markdowns and other factors, as discussed above.
Bookings and Backlog. Bookings were
$732.0 million and $691.5 million for the nine months ended September 30, 2002 and 2001, respectively. This was an increase of $40.5 million or 5.9%. Backlog was $279.0 million and $303.7 million at September 30, 2002 and 2001, respectively, a
decrease of $24.7 million or 8.1%. Increases in bookings were primarily attributable to increases in our valve product lines, with the most significant increase in our on/off product line. However, we also experienced some decline in bookings in our
instrument, metering and piping business due to weakened market conditions.
Measurement
Systems. Revenues were $222.3 million and $234.5 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease of $12.2 million, or 5.2% was in large part attributable to a decline of purchases
by our major oil customers, which contributed to the decline of sales in the United States of
31
approximately $17.1 million. We also saw declines in some of our other foreign markets, such as Germany, South Africa and Canada. Declines were
offset by increased export sales to Africa of approximately $4.6 million and higher service business revenue in Scandinavia.
Gross profit was $54.9 million and $59.0 million for the nine months ended September 30, 2002 and 2001, respectively. This was a decrease of $4.1 million or 6.9%. Gross profit was impacted by a decrease in sales volume, offset in
part by favorable reductions in other variable costs and manufacturing costs. In addition, we incurred $0.2 million in inventory markdowns related resulting from our decision to cease manufacturing fuel dispensers at a Canadian manufacturing
facility. As a percentage of revenue, gross margins decreased to 24.7% in 2002 from 25.2% in 2001.
Selling,
engineering, administrative, and general expenses were $39.2 million and $43.6 million for the nine months ended September 30, 2002 and 2001, respectively. This was a decrease of $4.4 million or 10.1%. As a percentage of revenue, these costs
decreased to 17.6% in 2002 from 18.6% in 2001. However, costs in 2001 were impacted by $4.0 million in expenses related to the closure and relocation of a retail fuel dispenser facility and the suspension of the amortization of goodwill. For the
nine months ended September 30, 2001, selling, engineering, administrative and general expenses included $1.2 million of amortization of goodwill. In 2002, our costs were impacted by a non-cash charge of $0.5 million for the impairment of certain
machinery and $0.4 million as severance for the termination of employees associated with restructuring activities.
Operating income was $15.7 million and $15.4 million for the nine months ended September 30, 2002 and 2001, respectively. The increase of $0.3 million or 1.9% was impacted by the charges related to the closure of a retail fuel
dispenser facility and the suspension of goodwill, as discussed above, which was offset primarily with lower sales volume and charges taken for restructuring activities and the impairment of machinery.
Bookings and Backlog. Bookings were $216.5 million and $245.9 million for the nine months ended September 30, 2002 and 2001, respectively;
a decrease of $29.4 million or 12.0%. Backlog was $47.9 million and $63.5 million for the nine months ended September 30, 2002 and 2001, respectively. Reductions in bookings and backlog were a result of reductions in orders from major oil customers
and high volume retailers as compared to 2001.
Compression and Power
Systems. Revenues were $213.0 million and $268.1 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease of $55.1 million or 20.6% was primarily a result of a reduction in the demand for
gas compression. Our original equipment sales were lower by approximately $40.8 million, with the most significant decline in our VHP line of engines. Our aftermarket part sales also felt the impact of a weakened demand as we saw a decrease of
approximately $13.9 million.
Gross profit was $51.8 million and $82.7 million for the nine months ended September
30, 2002 and 2001, respectively. This was a decrease of $30.9 million or 37.4%. As a percentage of revenue, gross margin decreased to 24.3% in 2002 from 30.8% in 2001. This decrease was primarily a result of lower sales volume and production and
efficiency related variances associated with declining production volume. In addition, in the third quarter, we recorded an additional $0.5 million for reserves for excess and obsolete inventory in our blower product lines.
Selling, engineering, administrative, and general expenses were $37.6 million and $38.1 million for the nine months ended September 30,
2002 and 2001, respectively. The decrease of $0.5 million or 1.3% was primarily a result of reductions in spending of various purchased services and a reduction in product promotion and travel, as well as an increase of $1.0 million related to cost
recoveries from the U.S. Department of Energy. These reductions were offset in part by increases in our blower business, which also included a non-cash charge for the impairment of machinery of $1.4 million and termination benefits of $0.3 million
associated with restructuring activities. As a percentage of revenue, these costs increased to 17.7% in 2002 from 14.2% in 2001. This percentage was impacted by the sharp decrease in revenues, as a result of the factors discussed above.
Operating income was $14.2 million and $44.6 million for the nine months ended September 30, 2002 and 2001,
respectively. The decrease of $30.4 million or 68.2% was primarily impacted by declines in orders for engines used in gas compression, as discussed above.
32
Bookings and Backlog. Bookings were $209.2 million and $253.7 million for the
nine months ended September 30, 2002 and 2001, respectively. This was a decrease of $44.5 million or 17.5%. Backlog was $49.6 million and $77.0 million at September 30, 2002 and 2001, respectively. The decline in gas compression demand led to a
significant reduction in booking and backlog on a year over year comparison.
Liquidity and Capital Resources
Our primary source of cash is from operations. The primary cash uses are to fund principal and interest payments on our debt,
working capital and capital expenditures. We expect to fund these cash needs with operating cash flow and, if necessary, borrowings under the revolving credit portion of our credit facility.
Cash and equivalents were $92.6 million and $82.5 million as of September 30, 2002 and 2001 respectively. A significant portion of our cash and equivalents balances is
utilized in our international operations and may not be immediately available to service debt in the United States.
Net cash flow provided by operating activities was $93.0 million and $95.4 million for the nine months ended September 30, 2002 and 2001, respectively.
Net cash flow used in investing activities was $32.4 million for the nine months ended September 30, 2002. The cash flow used in investing activities resulted from the
Modern Acquisition and capital expenditures. Net cash flow used in investing activities was $1,351.1 million for the nine months ended September 30, 2001 resulting from cash used to complete the recapitalization transaction and other acquisitions of
$1,326.7 million and capital expenditures of $24.4 million.
Net cash flow used in financing activities was $62.4
million for the nine months ended September 30, 2002, resulting primarily from the repayment of debt and deferred financing fees, offset by proceeds from the issuance of additional senior subordinated notes. In addition, we issued an additional
250,000 shares of class B common stock for proceeds of $10.0 million. Net cash flow provided by financing activities was $1,316.5 million for the nine months ended September 30, 2001 resulting from the proceeds of the 2001 notes and borrowings under
the credit facility, along with cash from the investors, which were used to complete the recapitalization transaction and certain other acquisitions.
In March 2002, we issued an additional $250.0 million of 9 3/8% senior subordinated notes due 2011 under the indenture that governs the 2001 notes. The notes were issued at 102.5% of their principal
amounts plus accrued interest from October 15, 2001. We recorded a $6.3 million premium that is amortized over the term of the notes, and recorded as a reduction to interest expense. The net proceeds were used to repay existing indebtedness under
the Tranche A term loans of the credit facility. As a result of the repayment of debt under the Tranche A term loans, we recorded a loss of $12.9 million, which represented the write-off of an allocable portion of debt issuance costs associated with
the Tranche A term loans. Fees paid at closing in connection with the issuance were approximately $5.5 million.
In March 2002, we also obtained an amendment to our credit facility. The amendment revised certain financial covenants to provide us with greater financial flexibility. The amendment also increased from $95.0 million to $195.0
million, the amount by which the Tranche B term loan of the credit facility can be increased. Fees paid in connection with the amendment were approximately $1.0 million. In June 2002, we obtained a second amendment, which allowed us to modify our
corporate structure. As discussed under “Market Forces,” we have experienced weakness in demand for some of our products as a result of general economic and industry conditions. As a result, we expect to seek approval from the lenders
under our credit facility to modify the financial ratios applicable to future periods.
In June 2002, we made a
voluntary prepayment on our credit facility of $30.0 million, which extinguished our Tranche A term loans and repaid a portion of our Tranche B term loan. As a result of the early extinguishment of debt we recorded a loss of $0.3 million, which
represented the write-off of the remaining unamortized debt issuance costs associated with the Tranche A term loans. In September 2002, we made an additional voluntary prepayment
33
of $23.0 million on our credit facility, which was applied to our Tranche B term loan. As a result of these voluntary prepayments, we recorded a
loss of $2.2 million, which represented the write-off of a portion of the unamortized debt issuance costs. These losses have been reflected as interest expense in our condensed consolidated statements of operations.
As of September 30, 2002, we had $555.9 million of senior subordinated notes, including a $5.9 million premium, $404.1 million of debt
consisting of the Tranche B term loan under the credit facility, $3.2 million of other long-term debt, and $1.7 million in capital leases. In addition, we have a $100.0 million revolving credit facility, subject to certain conditions, of which $62.2
million was available and $37.8 million was reserved for letters of credit as of September 30, 2002.
The
following tables set forth the contractual cash commitments for debt and lease obligations as well as commitments for the next several years:
| |
|
Remainder of 2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007 and Thereafter
|
|
Total
|
| |
|
(in millions) |
| Contractual Cash Obligations |
|
|
| Long-Term Debt1 |
|
$ |
0.3 |
|
$ |
0.5 |
|
$ |
2.6 |
|
$ |
4.8 |
|
$ |
4.7 |
|
$ |
944.4 |
|
$ |
957.3 |
| Capital Lease Obligations |
|
|
0.2 |
|
|
0.5 |
|
|
0.3 |
|
|
0.3 |
|
|
0.2 |
|
|
0.2 |
|
|
1.7 |
| Operating Leases |
|
|
3.7 |
|
|
13.1 |
|
|
11.3 |
|
|
9.2 |
|
|
7.9 |
|
|
13.7 |
|
|
58.9 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Contractual Cash Obligations |
|
$ |
4.2 |
|
$ |
14.1 |
|
$ |
14.2 |
|
$ |
14.3 |
|
$ |
12.8 |
|
$ |
958.3 |
|
$ |
1,017.9 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Excludes a $5.9 premium which is being amortized over the term of the notes |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Remainder of 2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007 and Thereafter
|
|
Total
|
| |
|
(in millions) |
| Commitments |
|
|
| Letters of Credit |
|
$ |
5.8 |
|
$ |
30.3 |
|
$ |
1.6 |
|
$ |
— |
|
$ |
— |
|
$ |
0.1 |
|
$ |
37.8 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Commitments |
|
$ |
5.8 |
|
$ |
30.3 |
|
$ |
1.6 |
|
$ |
— |
|
$ |
— |
|
$ |
0.1 |
|
$ |
37.8 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our ability to make payments on and to refinance our indebtedness,
including the notes, and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flow from operations, available cash and available
borrowings under the credit facility will be adequate to meet our future liquidity needs for at least the next few years. We cannot assure you, however, that our business will generate sufficient cash flow from operations, that currently anticipated
cost savings, working capital reductions and operating improvements will be realized on schedule or that future borrowings will be available to us under the revolving credit portion of our credit facility in an amount sufficient to enable us to pay
our indebtedness, including the notes, or to fund our other liquidity needs. Future borrowing under our credit facility are conditioned on our continuing compliance with our financial covenants. If we consummate an acquisition, our debt service
requirements could increase. We may need to refinance all or a portion of our indebtedness, including the notes on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the credit facility and
the notes, on commercially reasonable terms or at all.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of
the long-lived asset. SFAS No. 143 will be effective for financial statements issued for fiscal years beginning after June 15, 2002. An entity shall recognize the cumulative effect of adoption of SFAS No. 143 as a change in accounting principle. We
are still evaluating the impact this statement may have on our results of operations and financial position.
34
In October 2001, the FASB issued SFAS No. 144, “Accounting for the
Impairment and Disposal of Long-Lived Assets.” SFAS No. 144 supercedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS No. 144 primarily addresses significant issues
relating to the implementation of SFAS No. 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. The provisions of SFAS No. 144 were effective for fiscal years
beginning after December 15, 2001. We adopted this statement on January 1, 2002. There was no impact to our results of operations and financial position as a result of adopting this standard.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendments of FASB No. 13 and Technical Corrections.” SFAS No.
145 rescinds SFAS No. 4 “Reporting Gains and Losses from Extinguishment of Debt,” which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item. This statement also amends SFAS No. 13,
“Accounting for Leases” and requires that certain lease modifications that have the economic effects similar to the sale-leaseback transaction be accounted for in the same manner as a sale-leaseback transaction. This statement also makes
technical corrections to existing pronouncements. The statement is effective for fiscal years beginning after May 15, 2002. We have elected early application of this statement. During 2002, we extinguished our Tranche A term loans, and as a result,
we recorded a loss of $13.2 million, which represented the write-off of unamortized debt issuance costs. We have also made voluntary prepayments on our Tranche B term loan and have recorded a loss of $2.2 million, which represented the write-off of
a portion of the unamortized debt issuance costs. These costs have been reflected as interest expense in our condensed consolidated statements of operations, and have not been classified as an extraordinary item.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146
supersedes guidance provided by EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The standard requires
companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. We have elected early application of this statement; see Note 3.
CERTAIN RISK FACTORS
Set forth below are important risks and uncertainties that could cause our actual results to differ
materially from those expressed in forward-looking statements made by our management.
Our operating results could be harmed during
economic or industry downturns.
The businesses of most of our customers, particularly oil, gas and
chemical companies, are, to varying degrees, cyclical and have historically experienced periodic downturns. Profitability in those industries is highly sensitive to supply and demand cycles and volatile product prices, and our customers in those
industries historically have tended to delay large capital projects, including expensive maintenance and upgrades, during industry downturns. For example, due to the recent downturn in the energy industry and overall industrial economy, many of our
key customers have reduced their capital spending, which has resulted in reduced demand for our products. These industry downturns have been characterized by diminished product demand, excess manufacturing capacity and subsequent accelerated erosion
of average selling prices. In addition, certain of our customers may experience reduced access to capital during economic downturns. Therefore, any significant downturn in our customers’ markets or in general economic conditions could result in
a reduction in demand for our products and services and could harm our business. In addition, because we only compete in some segments of the energy infrastructure industry, a downturn in the specific segments we serve may affect us more severely
than our competitors who compete in the industry as a whole. See “Management’s Discussion of Financial Condition and Results of Operations—Market Forces.”
35
The loss of one of our large customers, or failure to win, national, regional and global contracts
from an existing customer, could significantly reduce our cash flow, market share and profits.
Some of
our customers contribute a substantial amount to our revenues. For the nine months ended September 30, 2002, our largest customer represented approximately 3.4% of total revenues, and our top ten customers collectively represented approximately
15.9% of total revenues. The loss of any of these customers, or class of customers, or decreases in these customers’ capital expenditures, could decrease our cash flow, market share and profits. As a result of industry consolidation, especially
among natural gas compression and major oil companies, our largest customers have become larger and, as a result, account for a larger percentage of our sales. We could lose a large customer as a result of a merger or consolidation. Recently, major
oil companies and national oil companies have moved toward creating alliances and preferred supplier relationships with suppliers. In addition, these customers are increasingly pursuing arrangements with suppliers that can meet a larger portion of
their needs on a more global basis. Typically, a customer can terminate these arrangements at any time. The loss of a customer, or the award of a contract to a competitor, could significantly reduce our cash flow, market share and profits.
Economic, political and other risks associated with international sales and operations could adversely affect our business.
Since we manufacture and sell our products worldwide, our business is subject to risks associated with
doing business internationally. Our sales outside North America, as a percentage of our total sales, were 47.2% for the nine months ended September 30, 2002. Accordingly, our future results could be harmed by a variety of factors, including:
| |
• |
|
changes in foreign currency exchange rates; |
| |
• |
|
changes in a specific country’s or region’s political or economic conditions, particularly in emerging markets; |
| |
• |
|
tariffs, other trade protection measures and import or export licensing requirements; |
| |
• |
|
potentially negative consequences from changes in tax laws; |
| |
• |
|
difficulty in staffing and managing widespread operations; |
| |
• |
|
differing labor regulations; |
| |
• |
|
requirements relating to withholding taxes on remittances and other payments by subsidiaries; |
| |
• |
|
different regimes controlling the protection of our intellectual property; |
| |
• |
|
restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions; |
| |
• |
|
restrictions on our ability to repatriate dividends from our subsidiaries; and |
| |
• |
|
unexpected changes in regulatory requirements. |
Our international operations are affected by global economic and political conditions. Changes in economic or political conditions in any of the countries in which we operate could result in exchange
rate movement, new
36
currency or exchange controls or other restrictions being imposed on our operations or expropriation. In addition, the financial condition of
foreign customers may not be as strong as that of our current domestic customers.
Fluctuations in the value of
the U.S. dollar may adversely affect our results of operations. Because our consolidated financial results are reported in dollars, if we generate sales or earnings in other currencies the translation of those results into dollars can result in a
significant increase or decrease in the amount of those sales or earnings. In addition, our debt service requirements are primarily in U.S. dollars even though a significant percentage of our cash flow is generated in euros or other foreign
currencies. Significant changes in the value of the euro relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on U.S. dollar denominated debt, including
the notes and borrowings under the credit facility.
In addition to currency translation risks, we incur currency
transaction risk whenever we or one of our subsidiaries enter into either a purchase or a sales transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, we cannot assure you that
we will be able to effectively manage our currency transaction and/or translation risks. It is possible that volatility in currency exchange rates will have a material adverse effect on our financial condition or results of operations. We have in
the past experienced and expect to continue to experience economic loss and a negative impact on earnings as a result of foreign currency exchange rate fluctuations. We expect that the portion of our revenues denominated in non-dollar currencies
will continue to increase in future periods.
Our expansion in emerging markets requires us to respond to rapid
changes in market conditions in these countries. Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions. We cannot assure you that we will continue to succeed in
developing and implementing policies and strategies that are effective in each location where we do business.
If we are not able
to apply new technology and software in our products or develop new products, we may not be able to generate new sales.
Our success depends, in significant part, on our ability to develop products and services that customers will accept. We may not be able to develop successful new products in a timely fashion. Our commitment to customizing products
to address particular needs of our customers could burden our resources or delay the delivery or installation of products. If there is a fundamental change in the energy industry, some of our products could become obsolete and we may need to develop
new products rapidly. Our products may not be marketed properly or satisfy the needs of the worldwide market.
In
addition, there is intense competition to establish proprietary rights to these new products and the related technologies. The technology and software in our products, including electronic components, point-of-sale systems and related products, is
growing increasingly sophisticated and expensive. Several of our competitors have significantly greater financial, technical and marketing resources than we do. These competitors may develop proprietary products that are superior to ours or
integrate new technologies more quickly than we do. We may not be able to obtain rights to this technology. We may also face claims that our products infringe patents that our competitors hold. Any of these factors could harm our relationship with
customers and reduce our sales and profits.
We face intense competition.
We encounter intense competition in all areas of our business. Competition in our primary business segments is based on a number of
considerations including product performance, customer service, product lead times, global reach, brand reputation, breadth of product line, quality of aftermarket service and support and price. Additionally, customers for our products are
attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. Our customers increasingly demand more technologically advanced and integrated products and we must continue to develop our expertise and
technical capabilities in order to manufacture and market these products successfully. To remain competitive, we will need to invest continuously in research and development, manufacturing, marketing, customer service and support and our
distribution networks. We may have to adjust the prices of some of our products to stay competitive. We cannot assure you that we will have sufficient
37
resources to continue to make such investments or that we will maintain our competitive position. Some of our competitors have greater financial
and other resources than we do.
If we lose our senior management, our business may be adversely affected.
The success of our business is largely dependent on our senior managers, as well as on our ability to attract and retain other
qualified personnel. We cannot assure you that we will be able to attract and retain the personnel necessary for the development of our business. The loss of the services of key personnel or the failure to attract additional personnel as required
could have a material adverse effect on our business, financial condition and results of operations. We do not currently maintain “key person” life insurance on any of our key employees.
Environmental compliance costs and liabilities could adversely affect our financial condition.
Our operations and properties are subject to stringent laws and regulations relating to environmental protection, including laws and
regulations governing the investigation and clean up of contaminated properties as well as air emissions, water discharges, waste management, and workplace health and safety. Such laws and regulations affect a significant percentage of our
operations, are constantly changing, are different in every jurisdiction and can impose substantial fines and sanctions for violations. Further, they may require substantial expenditures for the installation of costly pollution control equipment or
operational changes to limit pollution emissions and/or decrease the likelihood of accidental hazardous substance releases. We must conform our operations and properties to these laws, and adapt to regulatory requirements in all jurisdictions as
these requirements change.
We have experienced, and expect to continue to experience, both operating and capital
costs to comply with environmental laws and regulations, including potentially substantial costs for remediation and investigation of some of our properties (many of which are sites of long-standing manufacturing operations). In addition, although
we believe our operations are substantially in compliance and that we will be indemnified by Halliburton for certain contamination and compliance costs (subject to certain exceptions and limitations), new laws and regulations, stricter enforcement
of existing laws and regulations, the discovery of previously unknown contamination, the imposition of new clean-up requirements, new claims for property damage or personal injury arising from environmental matters, or the refusal and/or inability
of Halliburton to meet its indemnification obligations could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations.
See Note 12 to our condensed consolidated financial statements as of September 30, 2002 (unaudited).
Our business could
suffer if we are unsuccessful in negotiating new collective bargaining agreements.
As of September 30,
2002, we had approximately 8,100 employees. Approximately 40% of our U.S. workforce and 41% of our global workforce is represented by labor unions. Of our ten material collective bargaining agreements, one will expire in 2002, six will expire in
2003, one will expire in 2004 and two will expire in 2005. Although we believe that our relations with our employees are good, we cannot assure you that we will be successful in negotiating new collective bargaining agreements, that such
negotiations will not result in significant increases in the cost of labor or that a breakdown in such negotiations will not result in the disruption of our operations.
We are dependent on the availability of raw materials and components.
We require substantial amounts of raw materials that we purchase from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, the supply of, and
demand for, such raw materials, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by raw materials or component parts suppliers, changes in exchange rates and worldwide price levels. Any change in
the supply of, or price for, these raw materials and components could materially affect our operating results.
38
We rely on independent distributors.
In addition to our own direct sales force, we depend on the services of independent distributors to sell our products and provide service and aftermarket support to
our customers. Many of these independent distributors are not bound to us by exclusive distribution contracts and may offer products and services that compete with ours to our customers. In addition, the majority of the distribution contracts we
have with these independent distributors are cancelable by the distributor after a short notice period. The loss of a substantial number of these distributors or the decision by many of these distributors to offer competitors’ products to our
customers could materially reduce our sales and profits.
We are controlled by First Reserve and Odyssey, whose interest may not be
aligned with investors’ interest.
A holding company controlled by First Reserve, Odyssey and their
affiliates owns approximately 92.5% the outstanding common shares of voting stock of our parent company and, therefore, has the power, subject to certain exceptions, to control our affairs and policies. They also control the election of directors,
appointment of management, entering into of mergers, sales of substantially all of our assets and other extraordinary transactions. The directors so elected will have authority, subject to the terms of our debt, to issue additional stock, implement
stock repurchase programs, declare dividends and make other decisions about our capital stock.
The interests of
First Reserve, Odyssey and their affiliates could conflict with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of First Reserve and Odyssey as equity holders might
conflict with interests of holders of our debt securities. Affiliates of First Reserve and Odyssey may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity
investments, even though such transactions might involve risks to investors. In addition, our sponsors or their affiliates currently own, and may in the future own, businesses that directly compete with ours.
Our historical financial information may not be comparable to future periods.
The historical financial information included herein for periods prior to the consummation of the recapitalization transaction may not necessarily reflect our results of
operations, financial position and cash flows in the future or the results of operations, financial position and cash flows that would have occurred if we had been a separate, independent entity during the periods presented. The historical financial
information included in this Form 10-Q for those periods does not fully reflect the many significant changes that occurred in our capital structure, funding and operations as a result of the recapitalization, the credit facility, the notes offering
or the additional costs we expect to incur in operating as an independent company. For example, funds required for working capital and other cash needs for those periods were obtained from Halliburton on an interest-free intercompany basis without
any debt service requirement.
We may be faced with unexpected product claims or regulations.
Because some of our products are used in systems that handle toxic or hazardous substances, a failure of any of our products could have
material adverse consequences, and alleged failures of certain of our products have resulted in, and in the future could result in, claims against us for product liability, including property damage, personal injury damage and consequential damages.
Further, we may be subject to potentially material liabilities relating to claims alleging personal injury as a result of hazardous substances incorporated into our products. Finally, our Dresser Wayne business faces increasingly stringent
regulations in California and elsewhere regarding vapor recovery from gasoline dispensers. Some of Dresser Wayne’s products have been alleged to contain “defects” that adversely affect vapor recovery, requiring retrofits, field
modifications and/or the payment of administrative penalties in connection with the affected products. Although the vapor recovery regulations have not adversely affected us vis-a-vis our competitors to date, there can be no assurance that
changes in these regulations or in California’s proposed Clean Air Plan, or the development of more stringent regulations in other jurisdictions where vapor recovery is required, will not have a material adverse effect on our business,
financial condition or results of operations.
39
Our substantial indebtedness could adversely affect our financial condition.
We are a highly leveraged company. As of September 30, 2002, we had $964.9 million of outstanding long-term indebtedness,
including $1.7 million of capital lease obligations, $32.6 million of short-term notes and a stockholders’ deficit of $17.7 million. This level of indebtedness could have important consequences, including the following:
| |
• |
|
it may limit our ability to borrow money or sell stock to fund our working capital, capital expenditures and debt service requirements;
|
| |
• |
|
it may limit our flexibility in planning for, or reacting to, changes in our business; |
| |
• |
|
we will be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; |
| |
• |
|
it may make us more vulnerable to a downturn in our business or the economy; |
| |
• |
|
a substantial portion of our cash flow from operations could be dedicated to the repayment of our indebtedness and would not be available for other purposes;
and |
| |
• |
|
there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing,
as needed. |
Despite our substantial indebtedness, we may still incur significantly more debt. This could
intensify the risks described above.
The terms of the indenture governing the notes do not prohibit us
from incurring significant additional indebtedness in the future. As of September 30, 2002, we had $62.2 million available for additional borrowing under the revolving credit facility, subject to certain conditions. All borrowings under the credit
facility will be senior to the notes.
Your right to receive payments on the notes will be junior to the borrowings under the
credit facility and possibly all future borrowings.
The notes and the subsidiary guarantees rank behind
all of our and the subsidiary guarantors’ existing senior indebtedness including the credit facilities and will rank behind all of our and their future senior indebtedness, except any future indebtedness that expressly provides that it ranks
equal with, or subordinated in right of payment to, the notes and the guarantees. As a result, upon any distribution to our creditors or the creditors of the subsidiary guarantors in a bankruptcy, liquidation or reorganization or similar proceeding
relating to us or the subsidiary guarantors or our or their property, the holders of our senior indebtedness and senior indebtedness of the subsidiary guarantors will be entitled to be paid in full in cash before any payment may be made with respect
to the notes or the subsidiary guarantees. In addition, the credit facility is secured by substantially all of our assets and the assets of our wholly owned domestic subsidiaries.
In addition, all payments on the notes and the subsidiary guarantees will be blocked in the event of a payment default on senior debt and may be blocked for up to 179
consecutive days in the event of certain nonpayment defaults on senior indebtedness.
In the event of a
bankruptcy, liquidation or reorganization or similar proceeding relating to us or the subsidiary guarantors, holders of the notes will participate with trade creditors and all other holders of our senior subordinated indebtedness and the subsidiary
guarantors in the assets remaining after we and the subsidiary guarantors have paid all of the senior indebtedness. However, because the indenture requires that amounts otherwise payable to holders of the notes in a bankruptcy or similar proceeding
be paid to holders of senior indebtedness instead, holders of the notes may receive less, ratably, than holders of trade payables in any such proceeding. In any of these cases, we and
40
the subsidiary guarantors may not have sufficient funds to pay all of our creditors and holders of notes may receive less, ratably, than the
holders of senior indebtedness.
As of September 30, 2002, the notes and the subsidiary guarantees would have been
subordinated to $409.0 million of long-term indebtedness, including $1.7 million in capital lease obligations, $32.6 million of short-term and approximately $62.2 million would have been available for borrowing as additional senior indebtedness
under the credit facility, subject to certain conditions. We will be permitted to borrow substantial additional indebtedness, including senior indebtedness, in the future under the terms of the indenture.
Restrictive covenants in the credit facility and the indenture may restrict our ability to pursue our business strategies.
The credit facility and the indenture limit our ability, among other things, to:
| |
• |
|
incur additional indebtedness or contingent obligations; |
| |
• |
|
pay dividends or make distributions to our stockholders; |
| |
• |
|
repurchase or redeem our stock; |
| |
• |
|
make capital expenditures; |
| |
• |
|
enter into transactions with our stockholders and affiliates; |
| |
• |
|
acquire the assets of, or merge or consolidate with, other companies. |
In addition, the credit facility requires us to maintain financial ratios, and we expect to seek approval from the lenders under our credit facility to modify the financial
ratios applicable to future periods. We may not be able to maintain these ratios. Covenants in the credit facility may also impair our ability to finance future operations or capital needs or to enter into acquisitions or joint ventures or engage in
other favorable business activities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
To service our indebtedness, will require a significant amount of cash. The ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and research and development
efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flow from
operations, available cash and available borrowings under the credit facility will be adequate to meet our future liquidity needs for at least the next few years.
We cannot assure you, however, that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will
be realized on schedule or that future borrowings will be available to us under the credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Future borrowings under our credit facility are
conditioned on our continuing compliance with our financial covenants. If we consummate an acquisition, our debt service requirements could increase. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
41
During the ordinary course of our business, we are from time to time threatened
with, or may become a party to, legal actions and other proceedings. While we are currently involved in a number of legal proceedings, we believe the results of these proceedings will not have a material effect on our business, financial condition
or results of operations. In addition, pursuant to the recapitalization agreement, we are indemnified by Halliburton for up to $950.0 million of losses arising out of all legal actions initiated prior to the closing of the recapitalization
transaction and certain legal actions arising after the closing.
Our businesses and some of our products are
subject to regulation under various and changing federal, state, local and foreign laws and regulations relating to the environment and to employee safety and health.
Certain subsidiaries are not included as subsidiary guarantors.
The guarantors of the notes include our wholly owned domestic subsidiaries. However, the condensed consolidated financial statements include both our wholly owned and non-wholly owned domestic subsidiaries and our foreign
subsidiaries. The aggregate revenues for the nine months ended September 30, 2002 of our subsidiaries that are not guarantors were $495.8 million. As of the nine months ended September 30, 2002, those subsidiaries held 49.1% of our total assets.
Each of the subsidiary guarantors would be released from its guarantee of the notes if we transfer 5% or more of its voting stock to a third party so that it is no longer “wholly owned.” The indenture does not restrict our ability to do
so.
Because a substantial portion of our operations are conducted by foreign and non-wholly owned subsidiaries,
our cash flow and our ability to service debt, including our and the subsidiary guarantors’ ability to pay the interest on and principal of the notes when due, are dependent to a significant extent on interest payments, cash dividends and
distributions and other transfers of cash from our foreign and non-wholly owned subsidiaries. In addition, any payment of interest, dividends, distributions, loans or advances by our foreign and non-wholly owned subsidiaries to us and the subsidiary
guarantors, as applicable, could be subject to taxation or other restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdiction in which
our foreign subsidiaries operate. Moreover, payments to us and the subsidiary guarantors by the foreign and non-wholly owned subsidiaries will be contingent upon these subsidiaries’ earnings.
Our foreign and non-wholly owned subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to
pay any amounts due pursuant to the notes, or to make any funds available therefore, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary guarantors have to receive any assets of any of the foreign
subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of notes to realize proceeds from the sale of any of those subsidiaries’ assets, will be effectively subordinated to the claims of
that subsidiary’s creditors, including trade creditors and holders of debt of that subsidiary.
Federal and state laws permit
a court to void the subsidiary guarantees under certain circumstances.
Under the federal bankruptcy law
and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims with respect to a guarantee could be subordinated to all other debts of that subsidiary guarantor under certain circumstances. While the relevant
laws may vary from state to state, under such laws, the issuance of a guarantee will be a fraudulent conveyance if (1) any of our subsidiaries issued subsidiary guarantees with the intent of hindering, delaying or defrauding creditors or (2) any of
the subsidiary guarantors received less than reasonably equivalent value or fair consideration in return for issuing their respective guarantees, and, in the case of (2) only, one of the following is also true:
| |
• |
|
any of the subsidiary guarantors were insolvent, or became insolvent, when they issued the guarantee; |
| |
• |
|
issuing the guarantees left the applicable subsidiary guarantor with an unreasonably small amount of capital; or |
42
| |
• |
|
the applicable subsidiary guarantor intended to, or believed that it would, be unable to pay debts as they matured. |
If the issuance of any guarantee were a fraudulent conveyance, a court could, among other things, void any of the subsidiary
guarantors’ obligations under their respective guarantees and require the repayment of any amounts paid there under.
Generally, an entity will be considered insolvent if:
| |
• |
|
the sum of its debts is greater than the fair value of its property; |
| |
• |
|
the present fair value of its assets is less than the amount that it will be required to pay on its existing debts as they become due; or
|
| |
• |
|
it cannot pay its debts as they become due. |
We believe, however, that immediately after issuance of the notes and the subsidiary guarantees, we and each of the subsidiary guarantors were solvent, had sufficient capital to carry on our respective
businesses and were able to pay their respective debts as they matured. We cannot be sure, however, as to what standard a court would apply in making such determinations or that a court would reach the same conclusions with regard to these issues.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we use forward exchange contracts to manage our exposures to movements in the value of foreign currencies and interest rates. It is our policy to utilize these financial instruments only where
necessary to manage such exposures. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk and variability to the Company. We do not enter into these transactions for speculative purposes.
We are exposed to foreign currency fluctuation as a result of our international sales, production and investment
activities. Our foreign currency risk management objective is to reduce the variability in the amount of expected future cash flows from sales and purchases that are the result of changes in exchange rates relative to the business unit’s
functional currency. We use forward exchange contracts to hedge certain firm commitments and the related receivables and payables. Generally, all firmly committed and forecasted transactions that are hedged are to be recognized within twelve months.
Our financial performance is also exposed to movements in short-term floating market interest rates. Our
objective in managing this interest rate exposure is to comply with terms of the credit agreement and to limit the impact of interest rate changes on earnings and cash flows, and to reduce overall borrowing costs.
The following tables provide information about our derivative instruments and other financial instruments that are sensitive to foreign
currency exchange rates and changes in interest rates. For foreign currency forward exchange agreements, the table presents the notional amounts and weighted-average exchange rates by expected (contractual) maturity dates. For debt obligations, the
table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on the implied forward rate in the yield curve. For interest rates swaps, the table presents
notional amounts and weighted average interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract.
43
| |
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Thereafter
|
|
|
Total
|
|
Fair Value
|
|
| |
|
(in millions) |
|
| Related forward contracts to sell USD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Japanese Yen |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Amount |
|
$ |
— |
|
|
$ |
0.4 |
|
|
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.4 |
|
$ |
— |
|
| Avg. Contract Rate |
|
|
— |
|
|
|
130.2950 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| Euro |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Amount |
|
|
21.2 |
|
|
|
18.6 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
39.8 |
|
|
1.6 |
|
| Avg. Contract Rate |
|
|
0.9193 |
|
|
|
0.9575 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| Related forward contracts to sell GBP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Euro |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Amount |
|
|
1.4 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.4 |
|
|
— |
|
| Avg. Contract Rate |
|
|
0.6316 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| Related forward contracts to buy USD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| South African Rand |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Amount |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
— |
|
| Avg. Contract Rate |
|
|
11.3530 |
|
|
|
11.1457 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| Euro |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Amount |
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.7 |
|
|
(0.1 |
) |
| Avg. Contract Rate |
|
|
0.9065 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| Related forward contracts to buy EUR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| South African Rand |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Amount |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
|
|
| Avg. Contract Rate |
|
|
10.4900 |
|
|
|
10.9010 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| United States Dollar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Amount |
|
|
0.5 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.5 |
|
|
— |
|
| Avg. Contract Rate |
|
|
.09342 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| Related forward contracts to buy GBP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Euro |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Amount |
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
— |
|
| Avg. Contract Rate |
|
|
0.6402 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Dollar Functional Currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fixed Rate |
|
|
0.1 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
553.0 |
|
|
|
555.9 |
|
|
539.0 |
|
| Average Interest Rate |
|
|
9.28 |
% |
|
|
9.29 |
% |
|
|
9.30 |
% |
|
9.31 |
% |
|
|
9.31 |
% |
|
|
9.35 |
% |
|
|
|
|
|
|
|
| Variable Rate |
|
|
— |
|
|
|
– |
|
|
|
2.1 |
|
|
4.2 |
|
|
|
4.1 |
|
|
|
393.7 |
|
|
|
404.1 |
|
|
404.1 |
|
| Average Interest Rate |
|
|
5.26 |
% |
|
|
6.13 |
% |
|
|
7.26 |
% |
|
7.96 |
% |
|
|
7.92 |
% |
|
|
8.30 |
% |
|
|
|
|
|
|
|
| Euro Functional Currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fixed Rate |
|
|
0.5 |
|
|
|
0.9 |
|
|
|
0.7 |
|
|
0.7 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
4.0 |
|
|
3.9 |
|
| Average Interest Rate |
|
|
4.22 |
% |
|
|
4.32 |
% |
|
|
4.37 |
% |
|
4.46 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
|
| Variable Rate |
|
|
— |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.9 |
|
|
0.9 |
|
| Average Interest Rate |
|
|
2.87 |
% |
|
|
2.72 |
% |
|
|
3.20 |
% |
|
3.68 |
% |
|
|
4.07 |
% |
|
|
4.32 |
% |
|
|
|
|
|
|
|
| Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pay Fixed/Receive Variable |
|
|
— |
|
|
|
115.0 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
115.0 |
|
|
(3.3 |
) |
| Average Pay Rate |
|
|
4.49 |
% |
|
|
4.49 |
% |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| Average Receive Rate |
|
|
1.76 |
% |
|
|
2.11 |
% |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| |
| Pay Variable/Receive Fixed |
|
|
— |
|
|
|
100.0 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
100.0 |
|
|
1.9 |
|
| Average Pay Rate |
|
|
7.96 |
% |
|
|
8.62 |
% |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| Average Receive Rate |
|
|
9.38 |
% |
|
|
9.38 |
% |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
44
Item 4. Controls and Procedures
We maintain disclosure controls
and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Within 90
days prior to the date of this report, our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure control procedures. Based upon their evaluation, they concluded that our disclosure and control procedures
were effective. There were not any significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
The Company is involved in various
legal proceedings, none of which is deemed material for reporting purposes. Information relating to various commitments and contingencies is described in Note 12 of the financial statements in this Form 10-Q.
Item 2. Change in Securities and Use of Proceeds
On July 3,
2002, Dresser modified its corporate structure by forming a Delaware holding company and two Bermuda holding companies between the existing shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc., a Delaware corporation.
Dresser Holdings, Ltd., a Bermuda corporation, is the 100% holder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation, is the 100% holder of Dresser Holdings, Ltd. The former direct shareholders of Dresser collectively hold all of
the shares of Dresser, Ltd. in proportion to their prior direct ownership interests in Dresser.
Upon the terms of
the Merger Agreement, each outstanding share of Dresser common stock was cancelled and the holders thereof received one class A common share of Dresser Ltd., for each share of Dresser class A common stock, and one class B common share of Dresser
Ltd. for each share of Dresser class B common stock, respectively, held by each shareholder.
The certification of
incorporation was amended; the total number of shares of stock, which Dresser shall have the authority to issue, is 10,000 having a par value of $0.01 per shares of common stock. Dresser Holdings, Inc., a Delaware corporation, is the sole
shareholder of Dresser and holds 1,000 shares.
Item 4. Submission of Matters to a Vote of Security Holders
In
July 2002, Dresser modified its corporate structure by forming a Delaware holding company and two Bermuda holding companies between the existing shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc., a Delaware corporation.
Dresser Holdings, Ltd., a Bermuda corporation, is the 100% holder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation, is the 100% holder of Dresser Holdings, Ltd. The former direct shareholders of Dresser collectively hold all of
the shares of Dresser, Ltd. in proportion to their prior direct ownership interests in Dresser. The transaction was approved by unanimous written consent of the stockholders of Dresser, Inc.
45
Item 6. Exhibits and Reports on Form 8-K
| Exhibit No.
|
|
Description of Exhibit
|
| |
| *2.1 |
|
Agreement and Plan of Merger by and among Dresser, Inc., Dresser, Ltd. and Dresser Mergerco, Inc. |
| |
| *4.1 |
|
Consent, Amendment, Assignment and Assumption of the Dresser, Inc. Amended and Restated Investor Rights Agreement |
| |
| *4.2 |
|
Consent, Amendment, Assignment and Assumption of the Dresser, Inc. Sponsor Rights Agreement |
| |
| *10.1 |
|
Executive Employment Agreement and Exhibit dated October 8, 2002 between Dresser and Steven G. Lamb
|
Current Report on Form 8-K of Dresser dated
July 3, 2002 reporting under Item 5. Other Events and FD Disclosure announcing a modification of its corporate structure.
Current Report on Form 8-K of Dresser dated August 14, 2002 reporting under Item 9. Regulation FD Disclosure announcing it had provided to the Securities and Exchange Commission the certifications, as required by 18 U.S.C. §
1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
Current Report on Form 8-K of Dresser dated
August 14, 2002 reporting under Item 9. Regulation FD Disclosure announcing its financial results for the quarter ended June 30, 2002.
Current Report on Form 8-K of Dresser dated October 17, 2002 reporting under Item 9. Regulation FD announcing the appointment of a new president of Dresser, Inc.
Current Report on Form 8-K of Dresser dated October 31, 2002 reporting under Item 9. Regulation FD announcing its restructuring programs.
46
As required by the Securities and Exchange Act of 1934, the registrant
has authorized this report to be signed on behalf of the registrant by the undersigned authorized individuals.
| |
|
|
|
|
|
DRESSER, INC. |
| |
| Date: |
|
November 14, 2002
|
|
|
|
By: |
|
/s/ Patrick M. Murray
|
| |
|
|
|
|
|
|
|
Patrick M. Murray Chief Executive
Officer |
| |
| |
|
|
|
|
|
|
|
/s/ James A. Nattier
|
| |
|
|
|
|
|
|
|
James A. Nattier Executive Vice
President Chief Financial Officer |
| |
| |
|
|
|
|
|
|
|
/s/ Dale B. Mikus
|
| |
|
|
|
|
|
|
|
Dale B. Mikus Vice President –
Finance and Chief Accounting Officer |
47
I, Patrick M. Murray, certify that:
1. |
|
I have reviewed this quarterly report on Form 10Q of Dresser, Inc.; |
2. |
|
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. |
|
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| |
a) |
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| |
b) |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the “Evaluation Date”); and |
| |
c) |
|
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; |
5. |
|
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function): |
| |
a) |
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| |
b) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
6. |
|
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
| Date: November 14, 2002
|
|
|
|
/s/ Patrick M. Murray
|
| |
|
|
|
Patrick M. Murray Chief Executive Officer |
48
I, James A. Nattier, certify that:
1. |
|
I have reviewed this quarterly report on Form 10Q of Dresser, Inc.; |
2. |
|
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. |
|
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| |
a) |
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| |
b) |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the “Evaluation Date”); and |
| |
c) |
|
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; |
5. |
|
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function): |
| |
a) |
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| |
b) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
6. |
|
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
| Date: November 14, 2002
|
|
|
|
/s/ James A. Nattier
|
| |
|
|
|
James A. Nattier Chief Financial Officer |
49