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EX-32.2 - EXHIBIT 32.2 - Dresser-Rand Group Inc. | c97645exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Dresser-Rand Group Inc. | c97645exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Dresser-Rand Group Inc. | c97645exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Dresser-Rand Group Inc. | c97645exv32w1.htm |
Table of Contents
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
þ | Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended March 31, 2010
o | Transition Report under Section 13 or 15(d) of the Exchange Act |
For the Transition Period from to
Commission file number 001-32586
Dresser-Rand Group Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-1780492 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
West 8 Tower, Suite 1000 10205 Westheimer Road Houston, TX |
77042 | |
(Address of principal executive offices) | (Zip Code) |
(713) 354-6100
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
The number of shares of common stock, $.01 par value, outstanding as of April 23, 2010, was
82,530,716.
DRESSER-RAND GROUP INC.
TABLE OF CONTENTS
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Exhibits |
||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Page 2 of 26
Table of Contents
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DRESSER-RAND GROUP INC.
CONSOLIDATED STATEMENT OF INCOME
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited; $ in millions, except | ||||||||
per share amounts) | ||||||||
Net sales of products |
$ | 398.5 | $ | 410.9 | ||||
Net sales of services |
103.6 | 98.0 | ||||||
Total revenues |
502.1 | 508.9 | ||||||
Cost of products sold |
287.1 | 304.3 | ||||||
Cost of services sold |
72.9 | 67.5 | ||||||
Total cost of sales |
360.0 | 371.8 | ||||||
Gross profit |
142.1 | 137.1 | ||||||
Selling and administrative expenses |
71.4 | 67.6 | ||||||
Research and development expenses |
6.3 | 4.0 | ||||||
Plan settlement |
| 1.3 | ||||||
Income from operations |
64.4 | 64.2 | ||||||
Interest expense, net |
(8.2 | ) | (7.0 | ) | ||||
Other expense, net |
(16.2 | ) | (4.3 | ) | ||||
Income before income taxes |
40.0 | 52.9 | ||||||
Provision for income taxes |
17.7 | 18.4 | ||||||
Net income |
$ | 22.3 | $ | 34.5 | ||||
Net income per share |
||||||||
Basic |
$ | 0.27 | $ | 0.42 | ||||
Diluted |
$ | 0.27 | $ | 0.42 | ||||
Weighted average shares outstanding (in thousands) |
||||||||
Basic |
81,865 | 81,573 | ||||||
Diluted |
82,243 | 81,607 | ||||||
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 26
Table of Contents
DRESSER-RAND GROUP INC.
CONSOLIDATED BALANCE SHEET
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited; $ in millions, except | ||||||||
share amounts) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 178.9 | $ | 223.2 | ||||
Accounts receivable, less allowance for losses of $15.3 at 2010 and $14.4 at 2009 |
259.9 | 289.8 | ||||||
Inventories, net |
321.8 | 353.0 | ||||||
Prepaid expenses and other |
31.2 | 24.9 | ||||||
Deferred income taxes, net |
44.0 | 45.4 | ||||||
Total current assets |
835.8 | 936.3 | ||||||
Property, plant and equipment, net |
272.3 | 268.9 | ||||||
Goodwill |
482.8 | 486.0 | ||||||
Intangible assets, net |
432.1 | 430.9 | ||||||
Other assets |
27.0 | 28.1 | ||||||
Total assets |
$ | 2,050.0 | $ | 2,150.2 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Accounts payable and accruals |
$ | 340.4 | $ | 412.0 | ||||
Customer advance payments |
130.7 | 165.2 | ||||||
Accrued income taxes payable |
12.1 | 8.1 | ||||||
Loans payable |
| 0.1 | ||||||
Total current liabilities |
483.2 | 585.4 | ||||||
Deferred income taxes, net |
37.9 | 38.5 | ||||||
Postemployment and other employee benefit liabilities |
105.5 | 109.9 | ||||||
Long-term debt |
370.0 | 370.0 | ||||||
Other noncurrent liabilities |
36.3 | 33.8 | ||||||
Total liabilities |
1,032.9 | 1,137.6 | ||||||
Commitments and contingencies (Notes 8 through 12) |
||||||||
Stockholders equity |
||||||||
Common stock, $0.01 par value, 250,000,000 shares authorized;
and 82,510,715 and 82,513,744 shares issued and
outstanding, respectively |
0.8 | 0.8 | ||||||
Additional paid-in capital |
398.8 | 396.6 | ||||||
Retained earnings |
660.4 | 638.1 | ||||||
Accumulated other comprehensive loss |
(42.9 | ) | (22.9 | ) | ||||
Total stockholders equity |
1,017.1 | 1,012.6 | ||||||
Total liabilities and stockholders equity |
$ | 2,050.0 | $ | 2,150.2 | ||||
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 26
Table of Contents
DRESSER-RAND GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited; $ in millions) | ||||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 22.3 | $ | 34.5 | ||||
Adjustments to arrive at net cash provided by operating activities |
||||||||
Depreciation and amortization |
13.2 | 12.3 | ||||||
Deferred income taxes |
0.5 | (0.4 | ) | |||||
Stock-based compensation |
1.6 | 1.9 | ||||||
Excess tax benefits from share-based compensation |
(0.6 | ) | | |||||
Amortization of debt financing costs |
0.8 | 0.8 | ||||||
Provision for losses on inventory |
1.2 | 0.9 | ||||||
Plan settlement |
| (0.2 | ) | |||||
Loss on sale of property, plant and equipment |
0.2 | 0.2 | ||||||
Net income from equity investment |
(0.1 | ) | | |||||
Working capital and other, net of acquisitions |
||||||||
Accounts receivable |
31.1 | 63.6 | ||||||
Inventories |
26.8 | (37.1 | ) | |||||
Accounts payable and accruals |
(42.3 | ) | (38.3 | ) | ||||
Customer advances |
(30.2 | ) | 8.0 | |||||
Other |
(0.5 | ) | (22.8 | ) | ||||
Net cash provided by operating activities |
24.0 | 23.4 | ||||||
Cash flows from investing activities |
||||||||
Capital expenditures |
(5.0 | ) | (7.0 | ) | ||||
Proceeds from sales of property, plant and equipment |
0.1 | 1.0 | ||||||
Acquisitions, net of cash |
(58.3 | ) | | |||||
Net cash used in investing activities |
(63.2 | ) | (6.0 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from exercise of stock options |
0.1 | | ||||||
Excess tax benefits from share-based compensation |
0.6 | | ||||||
Payments of long-term debt |
(0.1 | ) | (0.1 | ) | ||||
Net cash provided by (used in)
financing activities |
0.6 | (0.1 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
(5.7 | ) | (4.4 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(44.3 | ) | 12.9 | |||||
Cash and cash equivalents, beginning of the period |
223.2 | 147.1 | ||||||
Cash and cash equivalents, end of period |
$ | 178.9 | $ | 160.0 | ||||
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 26
Table of Contents
DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share amounts)
1. Basis of presentation
Unless the context otherwise indicates, the terms we, our, us, the Company and
similar terms, refer to Dresser-Rand Group Inc. and its consolidated subsidiaries.
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial
information. Accordingly, they do not include all of the information and notes required by such
principles applicable to annual financial statements. These financial statements are unaudited
but, in the opinion of management, contain all adjustments (including normal recurring
adjustments) considered necessary for a fair presentation of our financial position and results of
operations. These financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2009, and our other filings with the Securities and
Exchange Commission. Operating results for the 2010 period presented are not necessarily
indicative of the results that may be expected for the year ending December 31, 2010.
2. New accounting standards
In October 2009, Accounting Standards Update (ASU) 2009-13, Revenue Recognition, was issued.
ASU 2009-13 replaces the concept of fair market value with selling price when determining how to
allocate the total contract sales price in a multiple-deliverable revenue arrangement. This
amendment establishes a hierarchy process for determining the selling price of a given deliverable
to be used in the allocation. The order of the selling price determination hierarchy is (a) vendor
specific objective evidence; (b) third party evidence, if vendor specific objective evidence is not
available; or (c) estimated selling price, if neither vendor specific objective evidence nor third
party evidence is available. This amendment could significantly expand the disclosures related to
the Companys sales arrangements should it be determined that it results in a material change to
the current practice. ASU 2009-13 will be effective for the Companys fiscal year beginning
January 1, 2011. The Company is currently evaluating the impact of the adoption of ASU 2009-13 on
its consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2009-16, which codifies Statement No. 166,
Accounting for Transfers of Financial Assets, issued in June 2009 and revises the former guidance
under Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. ASU 2009-16 requires more information about transfers of financial
assets, including securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets. ASU 2009-16 also eliminates the concept of
qualified special-purpose entity, changes the requirements for derecognizing financial assets,
and requires additional disclosures. The adoption of ASU 2009-16 did not have a material impact on
our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2009-17, which codifies Statement No. 167,
Amendments to FASB Interpretation No. 46(R) issued in June 2009. ASU 2009-17 requires a qualitative
approach to identifying a controlling financial interest in a variable interest entity (VIE), and
requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes
the holder the primary beneficiary of the VIE. The adoption of ASU 2009-17 did not have a material
impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2010-6, Improving Disclosures About Fair Value
Measurements, which requires reporting entities to make new disclosures about recurring or
nonrecurring fair-value measurements including significant transfers into and out of the standards
Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and
settlements on a gross basis for Level 3 fair-value measurements. ASU 2010-6 is effective for
annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation
disclosures which are effective for annual periods beginning after December 15, 2010. The adoption
of ASU 2010-6 did not have a material impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2010-09, Subsequent Events Amendments to Certain
Recognition and Disclosure Requirements, which amends Accounting Standards Codification (ASC)
Topic 855, Subsequent Events, so that SEC filers no longer are required to disclose the date
through which subsequent events have been evaluated in originally issued and revised financial
statements. The adoption of ASU 2010-09 did not have a material impact on our consolidated
financial statements.
Page 6 of 26
Table of Contents
DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
3. Acquisitions and other investments
On January 18, 2010, the Company acquired certain assets of Leading Edge Turbine Technologies,
Inc. (such business being referred to as LETT), located in Houston, TX for $34.2. The
acquisition allows the Company to expand its service offering in its current market and provides
the Company with access to adjacent markets. LETT is a provider of turbine technologies
specializing in industrial gas turbines, steam turbines and compressor repair. The purchase
agreement includes the potential for additional cash consideration based on achieving certain
revenue and earnings before interest, tax, depreciation, and amortization (EBITDA) targets over a
three-year period ending on December 31, 2012. The additional consideration is up to a maximum of
$5.5 depending upon the achievement of such targets. The estimated fair value of the additional
consideration for the LETT acquisition has been included as a liability in the financial
statements. Changes in the fair value will be recognized immediately in the applicable
consolidated statements of income until the contingency is resolved.
Goodwill is comprised primarily of expected synergies from combining operations of LETT and
the Company. The entire amount of goodwill from the acquisition is attributable to the Aftermarket
Parts and Services segment.
For tax purposes the amortization of goodwill is deductible over 15 years.
The acquisition price was allocated to the fair values of assets acquired and liabilities
assumed as follows:
2010 | ||||
Accounts receivable, net |
$ | 3.5 | ||
Inventory, net |
2.2 | |||
Total current assets |
5.7 | |||
Property, plant and equipment |
10.8 | |||
Amortizable intangible assets |
9.3 | |||
Goodwill |
13.5 | |||
Total assets acquired |
39.3 | |||
Accounts payable and accruals |
1.3 | |||
Total liabilities assumed |
1.3 | |||
Purchase
price |
38.0 | |||
Fair value
of contingent consideration (non-cash) |
(3.8 | ) | ||
Cash paid |
$ | 34.2 | ||
Pro forma financial information, assuming this acquisition occurred at the beginning of
each income statement period, has not been presented because the effect on our results for each of
those periods is not considered material. The results of the acquisition have been included in our
consolidated financial results since the date of the acquisition, and were not material to the
results of operations for the three months ended March 31, 2010.
In addition to the cash paid for acquisitions discussed above, on January 22, 2010, the
Company paid $24.1 of additional cash consideration in connection with its 2008 acquisition of
certain assets of Peter Brotherhood Ltd.
Other Investments
In 2008, the Company entered into an agreement by which it acquired a non-controlling interest
in Ramgen Power Systems, LLC (Ramgen), a privately held development stage company that is
developing compressor technology that applies proven supersonic aircraft technology to ground-based
air and gas compressors. In addition to receiving a non-controlling interest, the Company received
an option to acquire the business of Ramgen at a price of $25.0 and a royalty commitment. The
option is exercisable at any time through October 28, 2012. Pursuant to the agreement, an initial
investment of $5.0 was made in November 2008, and our final contractually obligated investment of
$5.0 was made in May 2009. The Company also made an optional investment in November 2009 of $5.0
which resulted in an aggregate non-controlling interest of 23.7%. The agreement allows the Company
to make additional optional investments of $9.0 through October 2012. The Companys maximum
exposure to loss on its investment in Ramgen is limited to the amounts invested. In determining
whether the Company should consolidate Ramgen, the Company considered
that its Board participation,
ownership interest and the option would not give the Company the ability to direct the activities
of Ramgen, and consequently, would not result in the Company being the primary beneficiary. The
investment in Ramgen is being accounted for under the equity method of accounting.
Page 7 of 26
Table of Contents
DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
In April 2009, an affiliate of the Company and Al Rushaid Petroleum Investment Company
(ARPIC) executed and delivered a Business Venture Agreement to form a joint venture, Dresser-Rand
Arabia LLC (D-R Arabia). D-R Arabia will be a center of excellence in the Kingdom of Saudi Arabia
for manufacturing, repairs, service, technical expertise and training. The affiliate will own
approximately 50% of D-R Arabia. The affiliate is making a cash contribution of approximately $0.3
and will license D-R Arabia to use certain intellectual property. ARPIC will own approximately 50%
of the Joint Venture and is making a cash contribution of approximately $0.3. In determining
whether the Company should consolidate D-R Arabia, the Company considered that its ownership and
Board participation would give the Company the ability to direct the activities of
D-R Arabia which
would result in the Company being the primary beneficiary. Consequently, D-R Arabia is consolidated
in the financial results of the Company.
4. Intangible assets and goodwill
The cost and related accumulated amortization of intangible assets were:
March 31, 2010 | Weighted | December 31, 2009 | ||||||||||||||||||
Accumulated | Average | Accumulated | ||||||||||||||||||
Cost | Amortization | Useful Lives | Cost | Amortization | ||||||||||||||||
Trade names |
$ | 94.1 | $ | 12.2 | 39 years | $ | 93.1 | $ | 11.6 | |||||||||||
Customer relationships |
263.3 | 36.2 | 37 years | 258.6 | 34.5 | |||||||||||||||
Software |
30.6 | 16.5 | 10 years | 30.6 | 15.8 | |||||||||||||||
Existing technology |
136.8 | 29.4 | 24 years | 137.1 | 27.9 | |||||||||||||||
Non-compete agreements |
2.6 | 1.0 | 4 years | 2.1 | 0.8 | |||||||||||||||
Total amortizable intangible assets |
$ | 527.4 | $ | 95.3 | $ | 521.5 | $ | 90.6 | ||||||||||||
Intangible asset amortization expense was $5.1 for the three months ended March 31,
2010, and $4.8 for the three ended March 31, 2009, respectively.
The following table represents the changes in goodwill:
Aftermarket | ||||||||||||
New units | parts and services | Total | ||||||||||
Balance, December 31, 2009 |
$ | 157.0 | $ | 329.0 | $ | 486.0 | ||||||
Acquisitions |
| 13.5 | 13.5 | |||||||||
Foreign currency adjustments |
(6.6 | ) | (10.1 | ) | (16.7 | ) | ||||||
Balance, March 31, 2010 |
$ | 150.4 | $ | 332.4 | $ | 482.8 | ||||||
Page 8 of 26
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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
5. Inventories
Inventories were as follows:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials and supplies |
$ | 133.4 | $ | 132.6 | ||||
Work-in-process and finished goods |
395.0 | 485.0 | ||||||
528.4 | 617.6 | |||||||
Less: Progress payments |
(206.6 | ) | (264.6 | ) | ||||
Total inventories |
$ | 321.8 | $ | 353.0 | ||||
Progress payments represent payments from customers based on milestone completion
schedules. Any payments received in excess of the related inventory investment are classified as
Customer Advance Payments in the current liabilities section of the balance sheet.
6. Property, plant and equipment
Property, plant and equipment was comprised of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Cost: |
||||||||
Land |
$ | 16.2 | $ | 15.3 | ||||
Buildings and improvements |
117.5 | 113.9 | ||||||
Machinery and equipment |
290.4 | 285.3 | ||||||
424.1 | 414.5 | |||||||
Less: Accumulated depreciation |
(151.8 | ) | (145.6 | ) | ||||
Property, plant and equipment, net |
$ | 272.3 | $ | 268.9 | ||||
7.
Financial Instruments ( in millions)
The Company manages exposure to changes in foreign currency exchange rates through its normal
operating and financing activities as well as through the use of financial instruments, principally
forward exchange contracts.
The purpose of the Companys foreign currency hedging activities is to mitigate the economic
impact of changes in foreign currency exchange rates. The Company attempts to hedge transaction
exposures through natural offsets. To the extent that this is not practicable, the Company may
enter into forward exchange contracts. Major exposure areas considered for hedging include foreign
currency denominated receivables and payables, firm committed transactions and forecast sales and
purchases.
The Companys foreign currency derivative financial instruments are not designated as hedges
for accounting purposes. The Company recognizes all derivatives as assets or liabilities on the
balance sheet and measures them at fair value. Changes in the fair values of derivatives are
immediately recognized in the consolidated statement of income as foreign currency income or loss
in other income (expense).
The Company has entered into an interest rate swap agreement to minimize the economic impact
of unexpected fluctuations in interest rates on the lease of its compressor testing facility in
France. The interest rate swap has a notional amount of 18.0 (approximately $24.3) and
effectively converts substantially all of the interest component of the lease from
a variable rate of interest to a fixed rate of interest. The interest rate swap has been
designated as a cash flow hedge for accounting purposes, and unrealized gains and losses are
recognized in other comprehensive income. The fair value of the interest rate swap and the related
unrealized loss are not material to the consolidated financial statements.
Page 9 of 26
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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
The following table sets forth the Companys financial assets and liabilities that were
accounted for at fair value on a recurring basis:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Foreign currency exchange contracts assets |
$ | 5.0 | $ | 5.9 | ||||
Foreign currency exchange contracts liabilities |
$ | 6.0 | $ | 7.2 | ||||
The net foreign currency loss recognized for currency transactions, forward currency
contracts and re-measuring monetary assets and liabilities was $16.1 for the three months ended
March 31, 2010, compared to $4.3 for the three months ended
March 31, 2009. The
Venezuelan government has devalued the bolivar a number of times, including a devaluation on
January 8, 2010. During the three months ended March 31, 2010, the Company recorded a loss of
approximately $13.6 as a result of this devaluation.
The carrying values of cash, accounts receivable, short-term borrowings and accounts payable
are reasonable estimates of their fair values due to the short-term nature of these instruments.
The fair value of debt obligations as of March 31, 2010, was
approximately $373.9.
Under accounting principles generally accepted in the United States of America, fair value for
all financial instruments is defined as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date (exit price). The inputs used to measure fair value are based on the following hierarchy:
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities | |||
Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability | |||
Level 3 | Unobservable inputs for the asset or liability |
Input levels used for fair value measurements are as follows:
Description | Disclosure | Input Level | Inputs | |||
Long-term debt (note disclosure only)
|
Note 7 | Level 1 | Quoted market prices | |||
Financial derivatives
|
Note 7 | Level 2 | Quoted market prices of similar instruments |
8. Income taxes
We operate in numerous countries and tax jurisdictions around the world and many of the tax
returns we have filed have not been audited. Accordingly, we could be exposed to additional income
and other taxes.
Our estimated income tax provision for the three months ended March 31, 2010, and 2009, resulted in
effective rates that differ from the U.S. federal statutory rate of 35% because of
certain expenses that are not tax deductible, state and local taxes, different tax rates in foreign
jurisdictions and deductions and credits for income tax purposes only. Additionally, in 2009, we
executed a corporate restructuring to facilitate our global cash management, the effect of which
reduced our effective tax rate by approximately 2.6 percentage points in the three months ended
March 31, 2010, compared to the three months ended March 31, 2009. As a result of the devaluation
of the Venezuelan bolivar on January 8, 2010, the Company recorded a non-deductible foreign
exchange loss in its Consolidated Income Statement of approximately $13.6
million in the three months ended March 31, 2010. This resulted in a 11.3 percentage point increase
in our effective tax rate for the three months ended March 31, 2010.
Page 10 of 26
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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
9. Pension plans
The components of net pension expense were as follows:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Service cost |
$ | 1.9 | $ | 1.5 | ||||
Interest cost |
5.2 | 4.9 | ||||||
Expected return on plan assets |
(5.2 | ) | (4.5 | ) | ||||
Amortization of prior service cost |
0.3 | 0.2 | ||||||
Amortization of net actuarial loss |
0.7 | 1.0 | ||||||
Plan settlement |
| 1.3 | ||||||
Net pension expense |
$ | 2.9 | $ | 4.4 | ||||
In 2008, the Company amended its Canadian defined benefit pension plan to discontinue the
benefits. Accounting principles generally accepted in the United States of America require a
portion of any prior service cost recognized in comprehensive income to be recognized in the
statement of income when a curtailment occurs. These amounts were not material to the consolidated
financial statements in 2008. During the three months ended March 31, 2009, the Company converted
the plan to a defined contribution plan, which was considered a plan settlement. The plan
settlement required the Company to recognize a $1.3 settlement charge in the consolidated statement
of income for the three months ended March 31, 2009. The settlement charge included approximately
$0.4 of net actuarial losses previously recorded in accumulated other comprehensive income. The
cash payment required to effect the plan conversion was $1.5.
10. Postretirement benefits other than pensions
The components of net periodic postretirement benefits income for such plans were as follows:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Interest cost |
$ | 0.2 | $ | 0.3 | ||||
Amortization of prior service credit |
(2.3 | ) | (2.0 | ) | ||||
Amortization of net actuarial loss |
0.4 | 0.2 | ||||||
Net
post-retirement benefits income |
$ | (1.7 | ) | $ | (1.5 | ) | ||
11. Commitments and contingencies (£ in millions)
We are involved in various litigation, claims and administrative proceedings arising in the
normal course of business. Amounts recorded for identified contingent liabilities are estimates,
which are regularly reviewed and adjusted to reflect additional information when it becomes
available. We are indemnified by our former owner, Ingersoll Rand Company Limited, for certain of
these matters as part of Ingersoll Rands sale of the Company. While adverse decisions in certain
of these litigation matters, claims and administrative proceedings could have a material effect on
a particular quarters or years results of operations, subject to the uncertainties inherent in
estimating future costs for contingent liabilities and the benefit of the indemnity from Ingersoll
Rand, management believes that any future accruals, with respect to these currently known
contingencies, would not have a material effect on the financial condition, liquidity or cash flows
of the Company.
Of the litigation pending, a tort claim has been brought against the Company in 2008 in the
Prakhanong Provincial court, Thailand by Kaona Power Supply Co. Ltd., alleging, among other
matters, defects and negligence in connection with the manufacture, testing, installation and
commissioning of a new unit and claiming damages in the aggregate of approximately $9.0 plus
pre-judgment interest and costs. While damages are a possibility, the Company shall vigorously
defend this lawsuit, including by asserting its contractual limitation of liability and agreement
to exclude consequential damages. Moreover, the Company is asserting rights it believes it has to
insurance coverage with respect to this claim.
In
a case between Talisman Energy, Inc. and the Company that was
previously reported in which the claimant was seeking damages of
approximately $21.0, the Company settled the case for an immaterial
amount.
Page 11 of 26
Table of Contents
DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
In November 2007, Local 313 of IUE-CWA, the union that represents certain employees at the
Companys Painted Post facility (the IUE) made an offer to have its striking members return to
work under the terms of the previously expired union agreement. The Company rejected that offer
and a lockout of the represented employees commenced. Approximately one week later, after reaching
an impasse in negotiations, the Company exercised its right to implement the terms of its last
contract offer, ended the lockout, and the employees represented by the IUE agreed to return to
work under the implemented terms. Subsequently, the IUE filed several unfair labor practice
(ULP) charges against the Company
with Region 3 of the National Labor Relations Board (NLRB), asserting multiple allegations
arising from the protracted labor dispute, its termination, contract negotiations and related
matters.
Region 3 of the NLRB decided to proceed to complaint on only one-third of the ULP allegations
asserted by the IUE, while the remaining claims were dismissed. Notably, the NLRB found that many
of the critical aspects of the Companys negotiations with the IUE were handled appropriately,
including, that the unions strike was not an unfair labor practice strike and
the Companys declaration of impasse and its unilateral implementation of its last offer were
lawful.
The claims that proceeded to complaint before the NLRB included the Companys handling of the
one week lockout, the negotiation of the recall process used to return employees to the facility
after reaching impasse and lifting the lockout, and the termination of two employees who engaged in
misconduct on the picket line during the strike. The trial of this matter took place before a NLRB
Administrative Law Judge (the ALJ) in Elmira and Painted Post, N.Y. during the summer of 2009.
On January 29, 2010, the ALJ issued his decision in which he
found in favor of the union on some
issues and upheld the Companys position on others. The Company continues to believe it complied
with the law with respect to the allegations that led to the adverse ALJ ruling, and it has
appealed these rulings to the NLRB in Washington, D.C. While the Company believes it should
ultimately prevail with respect to these ULP allegations, several levels of appeal may be
necessary. The Company anticipates that any impact arising from the ULP allegations will not have
a material adverse effect on the Companys financial condition. The appellate process could
reasonably take 3 to 5 years and potentially even longer to resolve with finality.
During the three months ended September 30, 2009, the Company received notification from the
current plan trustees of one of its subsidiaries pension plans in the United Kingdom that the plan
may not have been properly amended to achieve sex equalization. The third-party trustee at the time
action was taken believes that it had taken the appropriate steps to
properly amend the plan.
If it is determined that sex equalization was not achieved, certain benefits would be recalculated
by reference to a normal retirement date of 60 for both men and women, which we believe could
result in a potential liability of up to approximately £4.0 ($6.1).
12. Warranty accruals
We maintain a product warranty liability that represents estimated future claims for
equipment, parts and services covered during a warranty period. A warranty liability is provided
at the time of revenue recognition based on historical experience and adjusted as required.
The following table represents the changes in the product warranty liability:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Beginning balance |
$ | 39.2 | $ | 37.0 | ||||
Provisions for warranties issued during the period |
3.8 | 4.3 | ||||||
Adjustments to warranties issued in prior periods |
0.3 | | ||||||
Payments during period |
(5.1 | ) | (3.3 | ) | ||||
Foreign currency adjustments |
(0.9 | ) | (0.9 | ) | ||||
Ending balance |
$ | 37.3 | $ | 37.1 | ||||
Page 12 of 26
Table of Contents
DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
13. Segment information
We have two reportable segments based on the engineering and production processes, and the
products and services provided by each segment as follows:
1) | New units are highly engineered solutions to new requests from customers. The segment includes engineering, manufacturing, sales and administrative support. |
2) | Aftermarket parts and services consist of support solutions for the existing population of installed equipment. The segment includes engineering, manufacturing, sales and administrative support. |
Unallocated amounts represent expenses and assets that cannot be assigned directly to either
reportable segment because of their nature. Unallocated net expenses include certain corporate
expenses, research and development expenses and the plan settlement. Assets that are directly
assigned to the two reportable segments are trade accounts receivable, net
inventories, and goodwill. Unallocated assets include cash, prepaid expenses and other,
deferred taxes, property, plant and equipment, and intangible assets.
Segment results for the three months ended March 31, 2010, and 2009 were as follows:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenues |
||||||||
New units |
$ | 285.1 | $ | 278.4 | ||||
Aftermarket parts and services |
217.0 | 230.5 | ||||||
Total revenues |
$ | 502.1 | $ | 508.9 | ||||
Operating Income |
||||||||
New units |
$ | 40.3 | $ | 25.2 | ||||
Aftermarket parts and services |
45.9 | 58.9 | ||||||
Unallocated |
(21.8 | ) | (19.9 | ) | ||||
Total operating income |
$ | 64.4 | $ | 64.2 | ||||
Depreciation and Amortization |
||||||||
New units |
$ | 7.4 | $ | 6.8 | ||||
Aftermarket parts and services |
5.8 | 5.5 | ||||||
Total depreciation and amortization |
$ | 13.2 | $ | 12.3 | ||||
Assets (including Goodwill) |
||||||||
New units |
$ | 320.5 | $ | 333.2 | ||||
Aftermarket parts and services |
743.8 | 736.0 | ||||||
Unallocated |
985.7 | 935.9 | ||||||
Total assets |
$ | 2,050.0 | $ | 2,005.1 | ||||
14. Stockholders equity
Changes in stockholders equity for three months ended March 31, 2010, were:
Accumulated | ||||||||||||||||||||
Other | ||||||||||||||||||||
Common | Additional | Retained | Comprehensive | |||||||||||||||||
Stock | Paid-in Capital | Earnings | (Loss) Income | Total | ||||||||||||||||
At December 31, 2009 |
$ | 0.8 | $ | 396.6 | $ | 638.1 | $ | (22.9 | ) | $ | 1,012.6 | |||||||||
Stock-based employee compensation |
| 2.2 | | | 2.2 | |||||||||||||||
Net income |
| | 22.3 | | 22.3 | |||||||||||||||
Other comprehensive income (loss) |
||||||||||||||||||||
Foreign currency adjustments |
| | | (19.2 | ) | (19.2 | ) | |||||||||||||
Unrealized loss on derivatives, net of $0.1 tax |
| | | (0.2 | ) | (0.2 | ) | |||||||||||||
Pension and other postretirement benefit plans net of
$0.3 tax: |
||||||||||||||||||||
Benefit plans amortization |
| | | (0.6 | ) | (0.6 | ) | |||||||||||||
At March 31, 2010 |
$ | 0.8 | $ | 398.8 | $ | 660.4 | $ | (42.9 | ) | $ | 1,017.1 | |||||||||
Page 13 of 26
Table of Contents
DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
The components of total comprehensive income were as follows:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Net income |
$ | 22.3 | $ | 34.5 | ||||
Other comprehensive income |
||||||||
Foreign currency adjustments |
(19.2 | ) | (12.4 | ) | ||||
Unrealized loss on derivatives, net of $0.1 tax |
(0.2 | ) | | |||||
Pension and other postretirement benefit plans net of $0.3 tax |
||||||||
Benefit plans amortization |
(0.6 | ) | (0.4 | ) | ||||
Plan settlement |
| 0.3 | ||||||
Total comprehensive income |
$ | 2.3 | $ | 22.0 | ||||
During the three months ended March 31, 2010, the Compensation Committee of the Board of
Directors approved grants of options and appreciation rights involving 237,603 shares of common
stock and granted a total of 366,687 shares of time-vested restricted stock units to employees
under the Dresser-Rand Group Inc. Stock Incentive Plan. Additionally, the compensation committee
approved the issuance of performance based restricted stock units with a target grant amount of
82,236 restricted shares. These stock compensation arrangements vest over three year periods.
Additionally, Directors were granted 17,940 shares of restricted stock which will vest over one
year.
15. Supplemental guarantor financial information
The following wholly owned subsidiaries have guaranteed the Companys senior subordinated
notes on a full, unconditional and joint and several basis: Dresser-Rand LLC, Dresser-Rand Power
LLC, Dresser-Rand Company, D-R Steam LLC and Dresser-Rand Global Services, Inc. (Subsidiary
Guarantors).
The
Companys U.S. income tax liabilities are accounted for by the Issuer (Dresser-Rand Group
Inc.). Each quarter, the Company recognizes an income tax expense and related income tax
liability for the Subsidiary Guarantors and Subsidiary
Non-Guarantors portion of U.S. pre-tax earnings. Periodically, the income tax liability
balances are transferred to an intercompany account. The amounts transferred for the three months
ended March 31, 2010 and 2009 were $119.0 and $107.1, respectively.
The following condensed consolidated financial information of the Issuer, Subsidiary
Guarantors and Subsidiary Non-Guarantors, presents statements of income for the three months ended
March 31, 2010, and 2009, balance sheets at March 31, 2010, and December 31, 2009, and statements
of cash flows for the three months ended March 31, 2010, and 2009.
Page 14 of 26
Table of Contents
DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended March 31, 2010
For the three months ended March 31, 2010
Subsidiary | ||||||||||||||||||||
Subsidiary | Non- | Consolidating | ||||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Total | ||||||||||||||||
Net sales |
$ | | $ | 247.2 | $ | 301.6 | $ | (46.7 | ) | $ | 502.1 | |||||||||
Cost of sales |
| 180.7 | 217.0 | (37.7 | ) | 360.0 | ||||||||||||||
Gross profit |
| 66.5 | 84.6 | (9.0 | ) | 142.1 | ||||||||||||||
Selling and administrative expenses |
35.2 | 12.7 | 31.3 | (7.8 | ) | 71.4 | ||||||||||||||
Research and development expenses |
| 5.2 | 1.1 | | 6.3 | |||||||||||||||
(Loss) income from operations |
(35.2 | ) | 48.6 | 52.2 | (1.2 | ) | 64.4 | |||||||||||||
Equity earnings in affiliates |
39.9 | 3.7 | | (43.6 | ) | | ||||||||||||||
Interest expense, net |
(7.8 | ) | | (0.4 | ) | | (8.2 | ) | ||||||||||||
Intercompany interest and fees |
14.2 | (1.9 | ) | (12.3 | ) | | | |||||||||||||
Other income (expense), net |
2.0 | | (18.2 | ) | | (16.2 | ) | |||||||||||||
Income before income taxes |
13.1 | 50.4 | 21.3 | (44.8 | ) | 40.0 | ||||||||||||||
(Benefit) provision for income taxes |
(9.2 | ) | 17.2 | 9.7 | | 17.7 | ||||||||||||||
Net income |
$ | 22.3 | $ | 33.2 | $ | 11.6 | $ | (44.8 | ) | $ | 22.3 | |||||||||
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended March 31, 2009
For the three months ended March 31, 2009
Subsidiary | ||||||||||||||||||||
Subsidiary | Non- | Consolidating | ||||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Total | ||||||||||||||||
Net sales |
$ | | $ | 316.4 | $ | 235.0 | $ | (42.5 | ) | $ | 508.9 | |||||||||
Cost of sales |
| 227.0 | 179.1 | (34.3 | ) | 371.8 | ||||||||||||||
Gross profit |
| 89.4 | 55.9 | (8.2 | ) | 137.1 | ||||||||||||||
Selling and administrative
expenses |
32.0 | 15.0 | 27.4 | (6.8 | ) | 67.6 | ||||||||||||||
Research and development
expenses |
| 3.6 | 0.4 | | 4.0 | |||||||||||||||
Plan settlement |
| | 1.3 | | 1.3 | |||||||||||||||
(Loss) income from operations |
(32.0 | ) | 70.8 | 26.8 | (1.4 | ) | 64.2 | |||||||||||||
Equity earnings in affiliates |
55.6 | 2.4 | | (58.0 | ) | | ||||||||||||||
Interest (expense) income, net |
(7.7 | ) | | 0.7 | | (7.0 | ) | |||||||||||||
Intercompany interest and fees |
4.6 | (0.8 | ) | (3.8 | ) | | | |||||||||||||
Other income (expense), net |
0.8 | (0.8 | ) | (4.3 | ) | | (4.3 | ) | ||||||||||||
Income before income taxes |
21.3 | 71.6 | 19.4 | (59.4 | ) | 52.9 | ||||||||||||||
(Benefit) provision for
income taxes |
(13.2 | ) | 25.6 | 6.0 | | 18.4 | ||||||||||||||
Net income |
$ | 34.5 | $ | 46.0 | $ | 13.4 | $ | (59.4 | ) | $ | 34.5 | |||||||||
Page 15 of 26
Table of Contents
DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2010
March 31, 2010
Subsidiary | Subsidiary Non- |
Consolidating | ||||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Total | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 13.4 | $ | | $ | 165.5 | $ | | $ | 178.9 | ||||||||||
Accounts receivable, net |
| 108.5 | 151.4 | | 259.9 | |||||||||||||||
Inventories, net |
| 188.9 | 143.1 | (10.2 | ) | 321.8 | ||||||||||||||
Prepaid and other expenses and deferred
income taxes |
39.9 | 2.1 | 33.2 | | 75.2 | |||||||||||||||
Total current assets |
53.3 | 299.5 | 493.2 | (10.2 | ) | 835.8 | ||||||||||||||
Investment in affiliates |
1,943.9 | 69.9 | | (2,013.8 | ) | | ||||||||||||||
Property, plant and equipment, net |
| 180.3 | 92.0 | | 272.3 | |||||||||||||||
Intangible assets, net |
| 455.2 | 459.7 | | 914.9 | |||||||||||||||
Other assets |
25.3 | 0.6 | 1.1 | | 27.0 | |||||||||||||||
Total assets |
$ | 2,022.5 | $ | 1,005.5 | $ | 1,046.0 | $ | (2,024.0 | ) | $ | 2,050.0 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Accounts payable and accruals |
$ | 14.4 | $ | 182.8 | $ | 286.0 | $ | | $ | 483.2 | ||||||||||
Total current liabilities |
14.4 | 182.8 | 286.0 | | 483.2 | |||||||||||||||
Long-term debt |
370.0 | | | | 370.0 | |||||||||||||||
Intercompany accounts |
600.4 | (690.3 | ) | 89.9 | | | ||||||||||||||
Other noncurrent liabilities |
20.6 | 91.5 | 67.6 | | 179.7 | |||||||||||||||
Total liabilities |
1,005.4 | (416.0 | ) | 443.5 | | 1,032.9 | ||||||||||||||
Common stock |
0.8 | | | | 0.8 | |||||||||||||||
Other stockholders equity |
1,016.3 | 1,421.5 | 602.5 | (2,024.0 | ) | 1,016.3 | ||||||||||||||
Total stockholders equity |
1,017.1 | 1,421.5 | 602.5 | (2,024.0 | ) | 1,017.1 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 2,022.5 | $ | 1,005.5 | $ | 1,046.0 | $ | (2,024.0 | ) | $ | 2,050.0 | |||||||||
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2009
December 31, 2009
Subsidiary | Subsidiary Non- |
Consolidating | ||||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Total | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 57.6 | $ | | $ | 165.6 | $ | | $ | 223.2 | ||||||||||
Accounts receivables, net |
| 126.4 | 163.4 | | 289.8 | |||||||||||||||
Inventories, net |
| 215.0 | 147.0 | (9.0 | ) | 353.0 | ||||||||||||||
Prepaid and other expenses and deferred
income taxes |
33.4 | 2.2 | 34.7 | | 70.3 | |||||||||||||||
Total current assets |
91.0 | 343.6 | 510.7 | (9.0 | ) | 936.3 | ||||||||||||||
Investment in affiliates |
1,911.9 | 64.6 | | (1,976.5 | ) | | ||||||||||||||
Property, plant and equipment, net |
| 171.2 | 97.7 | | 268.9 | |||||||||||||||
Intangible assets, net |
| 436.5 | 480.4 | | 916.9 | |||||||||||||||
Other assets |
26.1 | 0.7 | 1.3 | | 28.1 | |||||||||||||||
Total assets |
$ | 2,029.0 | $ | 1,016.6 | $ | 1,090.1 | $ | (1,985.5 | ) | $ | 2,150.2 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Accounts payable and accruals |
$ | (90.9 | ) | $ | 306.3 | $ | 369.9 | $ | | $ | 585.3 | |||||||||
Loans payable |
| 0.1 | | | 0.1 | |||||||||||||||
Total current liabilities |
(90.9 | ) | 306.4 | 369.9 | | 585.4 | ||||||||||||||
Long-term debt |
370.0 | | | | 370.0 | |||||||||||||||
Intercompany accounts |
717.0 | (756.7 | ) | 39.7 | | | ||||||||||||||
Other noncurrent liabilities |
20.3 | 86.5 | 75.4 | | 182.2 | |||||||||||||||
Total liabilities |
1,016.4 | (363.8 | ) | 485.0 | | 1,137.6 | ||||||||||||||
Common stock |
0.8 | | | | 0.8 | |||||||||||||||
Other stockholders equity |
1,011.8 | 1,380.4 | 605.1 | (1,985.5 | ) | 1,011.8 | ||||||||||||||
Total stockholders equity |
1,012.6 | 1,380.4 | 605.1 | (1,985.5 | ) | 1,012.6 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 2,029.0 | $ | 1,016.6 | $ | 1,090.1 | $ | (1,985.5 | ) | $ | 2,150.2 | |||||||||
Page 16 of 26
Table of Contents
DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($ in millions, except per share amounts)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 2010
For the three months ended March 31, 2010
Subsidiary | ||||||||||||||||||||
Subsidiary | Non- | Consolidating | ||||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Total | ||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 84.4 | $ | (70.5 | ) | $ | 10.1 | $ | | $ | 24.0 | |||||||||
Cash flows from investing activities |
||||||||||||||||||||
Capital expenditures |
| (3.5 | ) | (1.5 | ) | | (5.0 | ) | ||||||||||||
Proceeds from sale of property, plant and equipment |
| 0.1 | | | 0.1 | |||||||||||||||
Acquisitions, net of cash |
(34.2 | ) | | (24.1 | ) | | (58.3 | ) | ||||||||||||
Net cash used in investing activities |
(34.2 | ) | (3.4 | ) | (25.6 | ) | | (63.2 | ) | |||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Proceeds from exercise of stock options |
0.1 | | | | 0.1 | |||||||||||||||
Excess tax benefits from share-based compensation |
| 0.6 | | | 0.6 | |||||||||||||||
Payment of long-term debt |
| (0.1 | ) | | | (0.1 | ) | |||||||||||||
Change in intercompany accounts |
(94.5 | ) | 73.4 | 21.1 | | | ||||||||||||||
Net cash (used in) provided by financing activities |
(94.4 | ) | 73.9 | 21.1 | | 0.6 | ||||||||||||||
Effect of exchange rate changes |
| | (5.7 | ) | | (5.7 | ) | |||||||||||||
Net decrease in cash and equivalents |
(44.2 | ) | | (0.1 | ) | | (44.3 | ) | ||||||||||||
Cash and cash equivalents, beginning of period |
57.6 | | 165.6 | | 223.2 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 13.4 | $ | | $ | 165.5 | $ | | $ | 178.9 | ||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 2009
For the three months ended March 31, 2009
Subsidiary | ||||||||||||||||||||
Subsidiary | Non- | Consolidating | ||||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Total | ||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net cash provided by (used in) operating
activities |
$ | 55.4 | $ | (64.8 | ) | $ | 32.8 | $ | | $ | 23.4 | |||||||||
Cash flows from investing activities |
||||||||||||||||||||
Capital expenditures |
| (6.6 | ) | (0.4 | ) | | (7.0 | ) | ||||||||||||
Proceeds from sale of property, plant and equipment |
| 1.0 | | | 1.0 | |||||||||||||||
Net cash used in investing activities |
| (5.6 | ) | (0.4 | ) | | (6.0 | ) | ||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Payment of long-term debt |
| (0.1 | ) | | | (0.1 | ) | |||||||||||||
Change in intercompany accounts |
(66.9 | ) | 70.5 | (3.6 | ) | | | |||||||||||||
Net cash (used in) provided by financing activities |
(66.9 | ) | 70.4 | (3.6 | ) | | (0.1 | ) | ||||||||||||
Effect of exchange rate changes |
| | (4.4 | ) | | (4.4 | ) | |||||||||||||
Net (decrease) increase in cash and equivalents |
(11.5 | ) | | 24.4 | | 12.9 | ||||||||||||||
Cash and cash equivalents, beginning of period |
26.5 | | 120.6 | | 147.1 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 15.0 | $ | | $ | 145.0 | $ | | $ | 160.0 | ||||||||||
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ($ in millions)
Overview
We are among the largest global suppliers of custom-engineered rotating equipment solutions
for long-life, critical applications in the oil, gas, petrochemical and process industries. We have
two reportable segments which are based on the engineering and production processes, and the
products and services we provide: (1) new units and (2) aftermarket parts and services. Our
products are used for applications that include oil and gas production; high-pressure gas
injection, gas lift and other applications for enhanced oil recovery; natural gas production and
processing; gas liquefaction; gas gathering, transmission and storage; hydrogen, wet and coker gas,
synthesis gas, carbon dioxide and many other applications for the refining, fertilizer and
petrochemical markets; several applications for the armed forces; as well as varied applications
for general industrial markets such as paper, steel, sugar, and distributed power generation. We
service our installed base, and that of other suppliers, around the world through the provision of
parts, repairs, overhauls, operation and maintenance, upgrades, revamps, applied technology
solutions, coatings, field services, technical support and other extended services.
We operate globally with manufacturing facilities in the United States, France, United
Kingdom, Germany, Norway, China and India. We provide a wide array of products and services to our
worldwide client base in over 140 countries from our global locations (65 sales offices, 38 service
centers and 12 manufacturing locations) in 18 U.S. states and 29 countries.
The energy markets continue to be driven by worldwide supply and demand, production and
processing capacity, and geopolitical risks. Despite the recent financial market turmoil and
global economic slow down, we continue to believe that the longer-term fundamentals affecting the
energy industry will support significant additional investment in energy infrastructure worldwide
as well as the maintenance and upgrade of the existing installed base of rotating equipment.
From a long-term perspective, we believe that the fundamentals driving trends in our industry
remain in place. These include maturing producing oil and gas fields worldwide that require
greater use of compression equipment to maintain production levels; the increase in demand for
natural gas that is driving growth in gas production, storage and transmission infrastructure;
international regulatory and environmental initiatives, including clean fuel legislation and
stricter emission controls; the aging installed base that is increasing demand for aftermarket
parts and services, overhauls and upgrades; and the increased outsourcing of equipment maintenance and operation.
Results of Operations
Three months ended March 31, 2010, compared to the three months ended March 31, 2009:
Three months ended | Three months ended | Period to Period Change | ||||||||||||||||||||||
March 31, 2010 | March 31, 2009 | 2009 to 2010 | % Change | |||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||
Total revenues |
$ | 502.1 | 100.0 | % | $ | 508.9 | 100.0 | % | $ | (6.8 | ) | (1.3 | )% | |||||||||||
Cost of sales |
360.0 | 71.7 | 371.8 | 73.1 | (11.8 | ) | (3.2 | )% | ||||||||||||||||
Gross profit |
142.1 | 28.3 | 137.1 | 26.9 | 5.0 | 3.6 | % | |||||||||||||||||
Selling and administrative
expenses |
71.4 | 14.2 | 67.6 | 13.3 | 3.8 | 5.6 | % | |||||||||||||||||
Research and development
expenses |
6.3 | 1.3 | 4.0 | 0.8 | 2.3 | 57.5 | % | |||||||||||||||||
Plan settlement |
| | 1.3 | 0.2 | (1.3 | ) | (100.0 | )% | ||||||||||||||||
Operating income |
64.4 | 12.8 | 64.2 | 12.6 | 0.2 | 0.3 | % | |||||||||||||||||
Interest expense, net |
(8.2 | ) | (1.6 | ) | (7.0 | ) | (1.4 | ) | (1.2 | ) | 17.1 | % | ||||||||||||
Other expense, net |
(16.2 | ) | (3.2 | ) | (4.3 | ) | (0.8 | ) | (11.9 | ) | 276.7 | % | ||||||||||||
Income before income taxes |
40.0 | 8.0 | 52.9 | 10.4 | (12.9 | ) | (24.3 | )% | ||||||||||||||||
Provision for income taxes |
17.7 | 3.5 | 18.4 | 3.6 | (0.7 | ) | (3.8 | )% | ||||||||||||||||
Net income |
$ | 22.3 | 4.5 | % | $ | 34.5 | 6.8 | % | $ | (12.2 | ) | (35.4 | )% | |||||||||||
Bookings |
$ | 565.3 | $ | 355.8 | $ | 209.5 | 58.9 | % | ||||||||||||||||
Backlog ending |
$ | 1,748.1 | $ | 2,087.6 | $ | (339.5 | ) | (16.3 | )% | |||||||||||||||
Total revenues. Total revenues were $502.1 for the three months ended March 31, 2010,
compared to $508.9 for the three months ended March 31, 2009, a decrease of $6.8 or 1.3%. The
highly engineered nature of our worldwide products and services does not easily lend itself to
reasonably measure the impact of price, volume and mix on changes in our total revenues from period
to period. Nevertheless, based on factors such as measures of labor hours and purchases from
suppliers, volume was lower during the three months ended March 31, 2010 than the three months
ended March 31, 2009, in both segments, driven by lower bookings in 2009 as a result of the
economic downturn at the end of 2008 and beginning of 2009.
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Cost of sales. Cost of sales was $360.0 for the three months ended March 31, 2010, compared
to $371.8 for the three months ended March 31, 2009. As a percentage of revenues, cost of sales
was 71.7% for the three months ended March 31, 2010, compared to 73.1% for the three months ended
March 31, 2009. Overall, cost of sales as a percentage of revenue decreased as a result of cost and
productivity improvements. This has been partly offset by a shift in overall segment mix from the
higher margin aftermarket parts and services segment to the lower margin new units segment.
Gross profit. Gross profit was $142.1 for the three months ended March 31, 2010, compared to
$137.1 for the three months ended March 31, 2009. As a percentage of revenues, gross profit was
28.3% for the three months ended March 31, 2010, compared to 26.9% for the three months ended March
31, 2009. The increase in the gross profit percentage resulted from the factors discussed above.
Selling and administrative expenses. Selling and administrative expenses were $71.4 for the
three months ended March 31, 2010, compared to $67.6 for the three months ended March 31, 2009.
The increase in selling and administrative expenses for the three months ended March 31, 2010 is
attributable to additional costs associated with recent acquisitions and the impact of the weaker
US dollar. As a percentage of sales, selling and administrative expenses increased to 14.2% from
13.3%.
Research and development expenses. Research and development expenses for the three months
ended March 31, 2010, were $6.3 compared to $4.0 for the three months ended March 31, 2009.
Research and development expenses increased in the three months ended March 31, 2010 as a result of
executing our strategy to introduce new and innovative products and technologies with a focus on
key new product development initiatives for Integrated Compression Systems (ICS), Liquid Natural
Gas (LNG) and gas turbines, as well as expanding the portfolio of projects focused on product
enhancements.
Plan Settlement.
In 2008, the Company amended its Canadian defined benefit pension plan to
discontinue the benefits. During the three months ended March 31, 2009, the
Company converted the plan to a defined contribution plan which was considered a plan settlement.
The plan settlement required the Company to recognize a $1.3 settlement charge in the consolidated
statement of income for the three months ended March 31, 2009.
Operating income. Operating income was $64.4 for the three months ended March 31, 2010,
compared to $64.2 for the three months ended March 31, 2009, an increase of $0.2. The increase was
primarily attributable to higher gross profit discussed above offset by the increase in selling
expenses. As a percentage of revenues, operating income for the three months ended March 31, 2010
was 12.8%, compared to 12.6% for the three months ended March 31, 2009.
Interest expense, net. Interest expense, net was $8.2 for the three months ended March 31, 2010,
compared to $7.0 for the three months ended March 31, 2009, including approximately $0.8 of
amortization of deferred financing costs for both periods. We experienced lower interest income
in the three months ended March 31, 2010 resulting from lower interest rates and lower interest
bearing cash balances.
Other expense, net. Other expense, net was $16.2 for the three months ended March 31, 2010,
compared to other expense, net of $4.3 for the three months ended March 31, 2009. Other income
(expense), net consists primarily of net currency gains and losses. The increase in other expense,
net is the result of the devaluation of the Venezuelan bolivar on January 8, 2010. As a result of
this devaluation, the Company recorded a non-deductible foreign exchange loss in its Consolidated
Income Statement of approximately $13.6 in the three months ended March 31, 2010.
Provision for income taxes. Provision for income taxes was $17.7 for the three months ended
March 31, 2010, and $18.4 for the three months ended March 31, 2009. Our estimated income tax
provision for the three months ended March 31, 2010 and 2009, results in an effective rate that
differs from the U.S. federal statutory rate of 35% because of different tax rates in
foreign tax jurisdictions and certain deductions and credits allowable for income tax purposes,
partially offset by state and local income taxes and valuation allowances on net operating loss
carryforwards that more likely than not will not be realized. We will adjust valuation allowances
in the future when it becomes more likely than not that the benefits of deferred tax assets will be
realized. In addition to these impacts to the effective tax rate, we experienced a tax benefit in
certain tax jurisdictions which reduced our effective tax rate by approximately 2.6 percentage
points for the three months ended March 31, 2010 as a result of a corporate restructuring executed
to facilitate our global cash management. The devaluation of the Venezuelan bolivar discussed
above resulted in an additional 11.3 percentage point increase in our effective tax rate for the
three months ended March 31, 2010.
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Bookings and backlog. Bookings for the three months ended March 31, 2010, were $565.3
compared to $355.8 for the three months ended March 31, 2009, an increase of $209.5 or 58.9%. New
units segment bookings increased $191.9 and aftermarket parts and services bookings increased
$17.6. The increase in bookings reflects the improvement in market conditions from the economic
downturn experienced at the beginning of 2009. Backlog was $1,748.1 at March 31, 2010, compared to
$2,087.6 at March 31, 2009.
Segment information
We have two reportable segments based on the engineering and production processes, and the
products and services provided by each segment as follows:
1) | New units are highly engineered solutions to new requests from customers. The segment includes engineering, manufacturing, sales and administrative support. |
2) | Aftermarket parts and services consist of support solutions for the existing population of installed equipment. The segment includes engineering, manufacturing, sales and administrative support. |
Unallocated amounts represent expenses and assets that cannot be assigned directly to either
reportable segment because of their nature. Unallocated net expenses include certain corporate
expenses and research and development expenses and the plan settlement. Assets that are directly
assigned to the two reportable segments are trade accounts receivable, net inventories, and
goodwill. Unallocated assets include cash, prepaid expenses and other, deferred taxes, property,
plant and equipment, and intangible assets.
Segment Analysis three months ended March 31, 2010, compared to three months ended March
31, 2009:
Three months ended March 31, | Period to Period Change | |||||||||||||||||||||||
2010 | 2009 | 2009 to 2010 | % Change | |||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
New units |
$ | 285.1 | 56.8 | % | $ | 278.4 | 54.7 | % | $ | 6.7 | 2.4 | % | ||||||||||||
Aftermarket parts and
services |
217.0 | 43.2 | % | 230.5 | 45.3 | % | (13.5 | ) | (5.9 | )% | ||||||||||||||
Total revenues |
$ | 502.1 | 100.0 | % | $ | 508.9 | 100.0 | % | $ | (6.8 | ) | (1.3 | )% | |||||||||||
Gross profit |
||||||||||||||||||||||||
New units |
$ | 63.4 | $ | 47.5 | $ | 15.9 | 33.5 | % | ||||||||||||||||
Aftermarket parts and
services |
78.7 | 89.6 | (10.9 | ) | (12.2 | )% | ||||||||||||||||||
Total gross profit |
$ | 142.1 | $ | 137.1 | $ | 5.0 | 3.6 | % | ||||||||||||||||
Operating income |
||||||||||||||||||||||||
New units |
$ | 40.3 | $ | 25.2 | $ | 15.1 | 59.9 | % | ||||||||||||||||
Aftermarket parts and
services |
45.9 | 58.9 | (13.0 | ) | (22.1 | )% | ||||||||||||||||||
Unallocated |
(21.8 | ) | (19.9 | ) | (1.9 | ) | 9.5 | % | ||||||||||||||||
Total operating income |
$ | 64.4 | $ | 64.2 | $ | 0.2 | 0.3 | % | ||||||||||||||||
Bookings |
||||||||||||||||||||||||
New units |
$ | 301.3 | $ | 109.4 | $ | 191.9 | 175.4 | % | ||||||||||||||||
Aftermarket parts and
services |
264.0 | 246.4 | 17.6 | 7.1 | % | |||||||||||||||||||
Total bookings |
$ | 565.3 | $ | 355.8 | $ | 209.5 | 58.9 | % | ||||||||||||||||
Backlog ending |
||||||||||||||||||||||||
New units |
$ | 1,368.4 | $ | 1,663.4 | $ | (295.0 | ) | (17.7 | )% | |||||||||||||||
Aftermarket parts and
services |
379.7 | 424.2 | (44.5 | ) | (10.5 | )% | ||||||||||||||||||
Total backlog |
$ | 1,748.1 | $ | 2,087.6 | $ | (339.5 | ) | (16.3 | )% | |||||||||||||||
New Units
Revenues. New units revenues were $285.1 for the three months ended March 31, 2010, compared
to $278.4 for the three months ended March 31, 2009, an increase of $6.7 or 2.4%. The highly
engineered nature of new unit products does not easily lend itself to reasonably measure the impact
of price, volume and mix on changes in our new unit revenues from period to period. Nevertheless,
based on factors such as measures of labor hours and purchases from suppliers, new units volume was
lower during the three months ended March 31, 2010, as compared to the three months ended March 31,
2009 driven by a lower level of bookings in 2009. The effect of lower volumes was more than offset
by the effect of a weaker U.S. dollar. Cycle times from order entry to completion for products in
this segment are currently averaging 12 to 15 months.
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Gross profit. Gross profit was $63.4 for the three months ended March 31, 2010, compared to
$47.5 for the three months ended March 31, 2009. Gross profit, as a percentage of segment
revenues, was 22.2% for the three months ended March 31, 2010 compared to 17.1% for the three
months ended March 31, 2009. Gross profit as a percentage of revenues increased as a result of
cost and productivity improvements in the three months ended March 31, 2010.
Operating income. Operating income was $40.3 for the three months ended March 31, 2010,
compared to $25.2 for the three months ended March 31, 2009. As a percentage of segment revenues,
operating income was 14.1% for the three months ended March 31, 2010, compared to 9.1% for the
three months ended March 31, 2009. The increase in operating income, as well as the increase in
operating income as a percentage of segment revenues resulted primarily from the factors discussed
above.
Bookings and Backlog. New units bookings for the three months ended March 31, 2010, were
$301.3 compared to $109.4 for the three months ended March 31, 2009. The increase in new units
bookings reflects the improvement in market conditions from the economic downturn experienced at
the beginning of 2009. The backlog was $1,368.4 at March 31, 2010, compared to $1,663.4 at March
31, 2009.
Aftermarket Parts and Services
Revenues. Aftermarket parts and services revenues were $217.0 for the three months ended
March 31, 2010, compared to $230.5 for the three months ended March 31, 2009, a decrease of $13.5
or 5.9%. The decline in aftermarket parts and services segment revenues was the result of a lower
sales to one national oil company client and reduced maintenance spending by certain other clients,
principally in the North American downstream market. Elapsed time from order entry to completion
in this segment typically ranges from one day to 12 months depending on the nature of the product
or service.
Gross profit. Gross profit was $78.7 for the three months ended March 31, 2010, compared to
$89.6 for the three months ended March 31, 2009. Gross profit as a percentage of segment revenues
was 36.3% for the three months ended March 31, 2010 compared to 38.9% for the three months ended
March 31, 2009. Gross profit as a percentage of revenues decreased primarily due to lower absorption of fixed costs.
Operating income. Operating income was $45.9 for the three months ended March 31, 2010,
compared to $58.9 for the three months ended March 31, 2009. As a percentage of segment revenues,
operating income decreased to 21.2% for the three months ended March 31, 2010, from 25.6% for the
three months ended March 31, 2009. In addition to the reasons discussed above, the changes in
operating income and operating income as a percentage of segment
revenues were also impacted by a less favorable mix.
Bookings and Backlog. Bookings for the three months ended March 31, 2010 were $264.0,
compared to $246.4 for the three months ended March 31, 2009. We believe the increase in bookings
reflects an improvement in market conditions. Backlog was $379.7 as of March 31, 2010, compared to
$424.2 at March 31, 2009.
Liquidity and Capital Resources
Net cash provided by operating activities for the three months ended March 31, 2010, was $24.0
compared to $23.4 for the three months end March 31, 2009. From December 31, 2009, to March 31,
2010, accounts receivable declined as a
result of improved collections, and inventories decreased as a result of lower activity in
certain of our factories. Reductions in these working capital accounts were offset by reductions
in accounts payable and customer advances and progress payments, also resulting from lower activity
in certain of our factories. The decrease in activity in certain of our factories is attributable
to the lower level of bookings in 2009 as a result of the economic downturn.
Net cash used in investing activities was $63.2 for the three months ended March 31, 2010,
compared to $6.0 in the same period of 2009. Cash used in investing activities for the three months
ended March 31, 2010, includes $34.2 related to the acquisition of certain assets of Leading Edge
Turbine Technologies, Inc. and the payment of $24.1 of contingent consideration associated with the
2008 acquisition of Peter Brotherhood Ltd. Capital expenditures were $5.0 for the three months
ended March 31, 2010, compared to $7.0 for the three months ended March 31, 2009.
Net cash provided by financing activities was $0.6 for the three months ended March 31, 2010,
compared to net cash used of $0.1 for the three months ended March 31, 2009.
As of March 31, 2010, we had cash and cash equivalents of $178.9 and the ability to borrow
$356.5 under our $500.0 restated senior secured revolving credit facility, as $143.5 was used for
outstanding letters of credit. In addition to these letters of credit, a total of $99.8 of letters
of credit and bank guarantees were outstanding at March 31, 2010, which were issued by banks
offering uncommitted lines of credit. Although there can be no assurances, based on our current
and anticipated levels of operations and conditions in our markets and industry, we believe that
our cash flow from operations, available cash and available borrowings under the restated senior
secured revolving credit facility will be adequate to meet our working capital, capital
expenditures, interest payments and other funding requirements for the next 12 months and our
long-term future contractual obligations.
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New accounting standards
In October 2009, Accounting Standards Update (ASU) 2009-13, Revenue Recognition, was issued.
ASU 2009-13 replaces the concept of fair market value with selling price when determining how to
allocate the total contract sales price in a multiple-deliverable revenue arrangement. This
amendment establishes a hierarchy process for determining the selling price of a given deliverable
to be used in the allocation. The order of the selling price determination hierarchy is (a) vendor
specific objective evidence; (b) third party evidence, if vendor specific objective evidence is not
available; or (c) estimated selling price, if neither vendor specific objective evidence nor third
party evidence is available. This amendment could significantly expand the disclosures related to
the Companys sales arrangements should it be determined that it results in a material change to
the current practice. ASU 2009-13 will be effective for the Companys fiscal year beginning
January 1, 2011. The Company is currently evaluating the impact of the adoption of ASU 2009-13 on
its consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2009-16, which codifies Statement No. 166,
Accounting for Transfers of Financial Assets, issued in June 2009 and revises the former guidance
under Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. ASU 2009-16 requires more information about transfers of financial
assets, including securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets. ASU 2009-16 also eliminates the concept of
qualified special-purpose entity, changes the requirements for derecognizing financial assets,
and requires additional disclosures. The adoption of ASU 2009-16 did not have a material impact on
our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2009-17, which codifies Statement No. 167,
Amendments to FASB Interpretation No. 46(R) issued in June 2009. ASU 2009-17 requires a qualitative
approach to identifying a controlling financial interest in a variable interest entity (VIE), and
requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes
the holder the primary beneficiary of the VIE. The adoption of ASU 2009-17 did not have a material
impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2010-6, Improving Disclosures About Fair Value
Measurements, which requires reporting entities to make new disclosures about recurring or
nonrecurring fair-value measurements including significant transfers into and out of the standards
Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and
settlements on a gross basis for Level 3 fair-value measurements. ASU 2010-6 is effective for
annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation
disclosures which are effective for annual periods beginning after December 15, 2010. The adoption
of ASU 2010-6 did not have a material impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2010-09, Subsequent Events Amendments to Certain
Recognition and Disclosure Requirements, which amends Accounting Standards Codification (ASC)
Topic 855, Subsequent Events, so that SEC filers no longer are required to disclose the date
through which subsequent events have been evaluated in
originally issued and revised financial statements. The adoption of ASU 2010-09 did not have
a material impact on our consolidated financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements include statements
concerning our plans, objectives, goals, strategies, future events, future revenue or performance,
capital expenditures, financing needs, plans or intentions relating to acquisitions, business
trends and other information that is not historical information. When used in this Form 10-Q, the
words anticipates, believes, expects, intends, appears, outlook, and similar
expressions identify such forward-looking statements. Although we believe that such statements
are based on reasonable assumptions, these forward-looking statements are subject to numerous
factors, risks and uncertainties that could cause actual outcomes and results to be materially
different from those projected. These factors, risks and uncertainties include, among others, the
following:
| economic or industry downturns; |
| volatility and disruption of the credit markets; |
| our inability to implement our business strategy to increase our aftermarket parts and services revenue; |
| our inability to generate cash and access capital on reasonable terms; |
| competition in our markets; |
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| the variability of bookings due to volatile market conditions, client subjectivity in placing orders, and timing of large orders; |
| failure to integrate our acquisitions, or achieve the expected benefits from any future acquisitions; |
| economic, political, currency and other risks associated with our international sales and operations; |
| fluctuations in currency values and exchange rates; |
| loss of our senior management or other key personnel; |
| environmental compliance costs and liabilities; |
| failure to maintain safety performance acceptable to our clients; |
| failure to negotiate new collective bargaining agreements; |
| unexpected product claims or regulations; |
| infringement of our intellectual property rights or our infringement of others intellectual property rights; |
| our pension expenses and funding requirements; and |
| other factors described in this report and as set forth in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. |
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ($
and in millions)
Our results of operations are affected by fluctuations in the value of local currencies in
which we transact business. We record the effect of translating our non-U.S. subsidiaries
financial statements into U.S. dollars using exchange rates as they exist at the end of each month.
The effect on our results of operations of fluctuations in currency exchange rates depends on
various currency exchange rates and the magnitude of the transactions completed in currencies other
than the U.S. dollar. Generally, weakening of the U.S. dollar improves our reported results when
the local currency financial statements are translated into U.S. dollars for inclusion in our
consolidated financial statements and the strengthening of the U.S. dollar impacts our results
negatively. We enter into financial instruments to mitigate the impact of changes in currency exchange
rates where we deem appropriate. The net foreign currency loss recognized for currency transactions, forward currency
contracts and re-measuring monetary assets and liabilities was $16.1 for the three months ended
March 31, 2010, compared to $4.3 for the three months ended March 31, 2009. The Venezuelan
government has devalued the bolivar a number of times, including a devaluation on January 8, 2010.
Foreign currency losses for the three months ended March 31, 2010 included approximately $13.6 as a
result of this devaluation.
The Company has entered into an interest rate swap agreement to minimize the economic impact
of unexpected fluctuations in interest rates on the lease of its compressor testing facility in
France. The interest rate swap has a notional amount of 18.0 (approximately $24.3) and effectively
converts substantially the entire interest component of the lease from a variable rate of interest
to a fixed rate of interest. The interest rate swap has been designated as a cash flow hedge for
accounting purposes, and unrealized gains and losses are recognized in other comprehensive income.
The fair value of the interest rate swap and the related unrealized loss are not material to the
consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e)
under the Securities and Exchange Act of 1934, as amended (the Exchange Act), as of March 31,
2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of March 31, 2010, our disclosure controls and procedures were effective.
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During the three months ended March 31, 2010, there were no changes in internal control over
financial reporting that have materially affected or are reasonably likely to materially affect our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ($ and £ in millions)
We are involved in various litigation, claims and administrative proceedings arising in the
normal course of business. Amounts recorded for identified contingent liabilities are estimates,
which are regularly reviewed and adjusted to reflect additional information when it becomes
available. We are indemnified by our former owner, Ingersoll Rand Company Limited, for certain of
these matters as part of Ingersoll Rands sale of the Company. While adverse decisions in certain
of these litigation matters, claims and administrative proceedings could have a material effect on
a particular quarters or years results of operations, subject to the uncertainties inherent in
estimating future costs for contingent liabilities and the benefit of the indemnity from Ingersoll
Rand, management believes that any future accruals, with respect to these currently known
contingencies, would not have a material effect on the financial condition, liquidity or cash flows
of the Company.
Of the litigation pending, a tort claim has been brought against the Company in 2008 in the
Prakhanong Provincial court, Thailand by Kaona Power Supply Co. Ltd., alleging, among other
matters, defects and negligence in connection with the manufacture, testing, installation and
commissioning of a new unit and claiming damages in the aggregate of approximately $9.0 plus
pre-judgment interest and costs. While damages are a possibility, the Company shall vigorously
defend this lawsuit, including by asserting its contractual limitation of liability and agreement
to exclude consequential damages. Moreover, the Company is asserting rights it believes it has to
insurance coverage with respect to this claim.
In
a case between Talisman Energy, Inc. and the Company that was
previously reported in which the claimant was seeking damages of
approximately $21.0, the Company settled the case for an immaterial
amount.
In November 2007, Local 313 of IUE-CWA, the union that represents certain employees at the
Companys Painted Post facility (the IUE) made an offer to have its striking members return to
work under the terms of the previously expired union agreement. The Company rejected that offer
and a lockout of the represented employees commenced. Approximately one week later, after reaching
an impasse in negotiations, the Company exercised its right to implement the terms of its last
contract offer, ended the lockout, and the employees represented by the IUE agreed to return to
work under the implemented terms. Subsequently, the IUE filed several unfair labor practice
(ULP) charges against the Company with Region 3 of the National Labor Relations Board (NLRB),
asserting multiple allegations arising from the protracted labor dispute, its termination, contract
negotiations and related matters.
Region 3 of the NLRB decided to proceed to complaint on only one-third of the ULP allegations
asserted by the IUE, while the remaining claims were dismissed. Notably, the NLRB found that many
of the critical aspects of the Companys negotiations with the IUE were handled appropriately,
including, that the unions strike was not an unfair labor practice strike and
the Companys declaration of impasse and its unilateral implementation of its last offer were
lawful.
The claims that proceeded to complaint before the NLRB included the Companys handling of the
one week lockout, the negotiation of the recall process used to return employees to the facility
after reaching impasse and lifting the lockout, and the termination of two employees who engaged in
misconduct on the picket line during the strike. The trial of this matter took place before a NLRB
Administrative Law Judge (the ALJ) in Elmira and Painted Post, N.Y. during the summer of 2009.
On January 29, 2010, the ALJ issued his decision in which he
found in favor of the union on some
issues and upheld
the Companys position on others. The Company continues to believe it complied with the law
with respect to the allegations that led to the adverse ALJ ruling, and it has appealed these
rulings to the NLRB in Washington, D.C. While the Company believes it should ultimately prevail
with respect to these ULP allegations, several levels of appeal may be necessary. The Company
anticipates that any impact arising from the ULP allegations will not have a material adverse
effect on the Companys financial condition. The appellate process could reasonably take 3 to 5
years and potentially even longer to resolve with finality.
During the three months ended September 30, 2009, the Company received notification from the
current plan trustees of one of its subsidiaries pension plans in the United Kingdom that the plan
may not have been properly amended to achieve sex equalization. The third-party trustee at the time
action was taken believes that it had taken the appropriate steps to
properly amend the plan. If it is determined that sex equalization was not achieved, certain benefits would be recalculated
by reference to a normal retirement date of 60 for both men and women, which we believe could
result in a potential liability of up to approximately £4.0 ($6.1).
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Table of Contents
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table contains information about repurchases of our common stock during the
three months ended March 31, 2010:
Total Number | Approximate | |||||||||||||||
of Shares | Dollar Value | |||||||||||||||
Purchased as | of Shares | |||||||||||||||
Part of | That May Yet | |||||||||||||||
Publicly | Be Purchased | |||||||||||||||
Total Number | Average Price | Announced | Under the | |||||||||||||
of Shares | Paid Per | Plans or | Plans or | |||||||||||||
Period | Purchased (1) | Share | Programs | Programs | ||||||||||||
January 2010 |
| $ | | | | |||||||||||
February 2010 |
80,021 | $ | 31.20 | | | |||||||||||
March 2010 |
| $ | | | | |||||||||||
Total |
80,021 | | | |||||||||||||
(1) | These shares were delivered to us as payment of withholding taxes due on the vesting of restricted stock issued under our Stock Incentive Plan. |
ITEM 6. EXHIBITS
The following exhibits are filed with this report:
Exhibit No. | Description | |||
3.1 | Amended and Restated Certificate of Incorporation of
Dresser-Rand Group Inc. (incorporated by reference to Exhibit
3.1 to Dresser-Rand Group Inc.s Registration Statement on
Form S-1/A, filed July 18, 2005, File No. 333-124963). |
|||
3.2 | Amended and Restated By-Laws of Dresser-Rand Group Inc.
(incorporated by reference to Exhibit 3.1 to Dresser-Rand
Group Inc.s Current Report on Form 8-K, filed November 16,
2007, File No. 001-32586). |
|||
10.1 | Dresser-Rand Annual Incentive Program, adopted February 12, 2010
(incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed on February 17, 2010, File
No. 001-32586). |
|||
10.2 | Dresser-Rand Group Inc. Form of Grant Notice and Standard Terms and
Conditions for Performance Restricted Stock Units (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on
March 17, 2010, File No. 001-32586). |
|||
10.3 | Second Amendment to the Dresser-Rand Group Inc. 2008 Stock Incentive
Plan, adopted March 15, 2010 (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on
March 17, 2010, File No. 001-32586). |
|||
31.1 | Certification of the President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of the Executive Vice President and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of the President and Chief Executive Officer
pursuant to Title 18, United States Code, Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith). (This certification is being
furnished and shall not be deemed filed with the SEC for
purposes of Section 18 of the Exchange Act, or otherwise
subject to the liability of that section, and shall not be
deemed to be incorporated by reference into any filing under
the Securities Act or the Exchange Act, except to the extent
that the Registrant specifically incorporates it by
reference). |
|||
32.2 | Certification of the Executive Vice President and Chief
Financial Officer pursuant to Title 18, United States Code,
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith). (This
certification is being furnished and shall not be deemed
filed with the SEC for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of that
section, and shall not be deemed to be incorporated by
reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the Registrant
specifically incorporates it by reference). |
Page 25 of 26
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DRESSER-RAND GROUP INC. |
||||
Date: April 29, 2010 | /s/ Raymond L. Carney Jr. | |||
Raymond L. Carney Jr. | ||||
Vice President, Controller and Chief Accounting Officer |
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